Economic freedom and economic growth


With its usual excellent charts, this broadsheet reported last Wednesday that the Philippines suffered a further decline in its performance on economic freedom, as assessed by the Washington-based conservative Heritage Foundation. Since 2017 we have dropped every year except 2020 with some consolation that our rank remained unchanged at 70and.

Our score of 61.1 relegated us to 80and among 177 countries, quite close to the threshold of 59.9 for the “majorly unfree” group of North Korea, Venezuela, Cuba, Sudan and Zimbabwe. We agree with Foundation for Economic Freedom Chairman Calixto V. Chikiamco that the next ranking in 2023 should see the Philippines rebound after passing key reform measures, including the Trade Liberalization Act. retail business. Our unequivocal participation in the Regional Comprehensive Economic Partnership should also advance our economic freedom.

I regard this latest report as an assessment of the impact of COVID-19 on various aspects of economic freedom, as the coverage of the data clearly corresponds to the period of the viral upsurge, i.e. the second half of 2020. in the first half of 2021.

The 2022 report was correct in observing that public authorities around the world have imposed various restrictions on both personal mobility and business activities in response to COVID-19 infection and mortality. As a result, many economies retreated in 2020 with tentative recoveries in 2021.

The link between economic freedom and several economic and social objectives is of the utmost importance here. For example, the consequent restriction of economic freedom in the name of managing the pandemic has undermined economic growth in many jurisdictions. Jobs have been lost and incomes reduced, amplifying the vulnerability of the poor and other marginalized sectors. What is actually pulling society as a whole down is the cost of public intervention to cushion the impact of the pandemic. With near-zero revenue growth, governments have been forced to embark on excessive deficit spending financed by both domestic and foreign borrowing.

Future generations are expected to repay those bonds, and that shouldn’t be a problem as long as those borrowed funds have actually funded the fight against the virus. Economic recovery is possible with controlled viral spread. With the progress of business activities, economic growth will pay these debts through general appropriations. In this regard, the Heritage Foundation has noted that the erosion of the economic freedom of the United States has in fact resulted in an incredibly excessive budget deficit and debt burden. In many countries, this dual problem can lead to lower productivity growth and economic weakness.

With collateral damage in the policy areas of government transparency, efficiency, openness and effectiveness, the pandemic is unlikely to perpetuate the government’s sweeping powers and emergency assistance, but rather promote economic freedom as the standard of health and economic response. An environment of economic freedom strengthens various political and economic institutions. This is how we produce robust, resilient and inclusive economic growth. Streamlining the tax system, improving the regulatory framework, enhancing market contestability and combating corrupt practices improve economic freedom and prepare the ground for sustainable economic growth.

The 2022 report also argued that the standard of living in terms of per capita income was higher in free or mostly free economies. Residents of these economies enjoy, on average, incomes three times higher than those in other economies and almost seven times higher than those in suppressed economies. It should not surprise us that the series of policy and structural reforms undertaken by the Philippines since 1993 have produced a critical mass of growth engines, resulting in 21 years of uninterrupted growth until the outbreak of the pandemic in 2020. Our Economic managers have been inspired to work for the country’s per capita GDP growth to reach upper-middle income levels. But our inept handling of the pandemic has derailed the campaign and prolonged our economic recovery.

Four components of economic freedom were used to assess all 177 countries, including the Philippines.

First, the rule of law in the Philippines was rated as weak in all three subcomponents. While property rights are certainly recognized in the Philippines, their enforcement has been deemed “weak and fragmented”. Judicial efficiency also scored lower due to inefficient, biased and corrupt courts, while court staff suffered from low salaries, intimidation and impossible procedures. Killings of judicial officers, including judges and tax experts, worked against this component. Government integrity was suspect due to widespread corruption and cronyism.

Second, the size of government was assessed in terms of tax burden, without change; public spending to GDP at 23% and budget deficit to GDP at 2.9%, down; and fiscal health, down with public debt at 47.1% of GDP.

Third, while the regulatory efficiency score was better in all three components, the Heritage Foundation has always rightly considered that our infrastructure is weak, the cost of energy exorbitant, connectivity “shabby” and unpredictable regulations. Our Labor Department is expected to explain why this latest rating found that “minimum wage standards and social security tax, bonus, and overtime payments as stipulated by law are often ignored.” Subsidies to agriculture accounted for almost a third of gross farm receipts.

And fourth, the openness of markets in the Philippines in terms of trade, investment and financial freedom was quite stable during the pandemic. While trade freedom has slipped somewhat, the Heritage Foundation noted that the country has 11 preferential trade agreements in place. The trade-weighted average tariff rate was 5.6% and 285 non-tariff measures are in force. Investments and financial components were not affected by government restrictions related to the pandemic.

So, browsing through the lengthy report suggests that almost every country has been hit hard by the scourge of the pandemic. For the Philippines, it is surprising that our regulatory efficiency has held up somewhat during the pandemic. Going deeper into the index methodology, these three decades of political and structural reforms must have given us some staying power.

Admittedly, various research teams and international financial institutions are now predicting growth rates for 2022 below the government target of 7-9%, but this is mainly due to the uncertainty that continues to weigh on market sentiment. Nomura, for example, explains that “low vaccination rates and the risk of a re-acceleration of new COVID cases could hamper further reopening, which, along with limited fiscal support, could weigh on growth.”

It is good that our economic managers have remained the true adults of this government. Otherwise, economic recovery would have been more elusive as our other authorities failed to manage the pandemic and prioritized peripheral concerns. Having to battle severe economic scars growing positively in 2021 was a feat in and of itself. On the contrary, it should convince us that the promotion of economic freedom reflects our commitment to good governance – it is as essential as defending these hard and soft infrastructures.

What actually drove the Philippines’ overall score on economic freedom down was the substantial deterioration in the rule of law: property rights fell by 10 full points; judicial efficiency, down nine points; and government integrity, down six points. The other setback was the size of government, in particular fiscal health which declined by more than 13 points, which was unavoidable given the challenges posed by the pandemic on public resources. Corruption must be the link here, as the Heritage Foundation points out: “There is little accountability for powerful politicians, big business or wealthy families.

Certainly, we must exercise our freedom to make the national election of May 2022 a real game-changing exercise. We can start by backing the candidate who has a concrete government platform that supports the rule of law, sustainable size of government, no frills regulatory efficiency, and open and contestable markets – entirely free of cronyism. The slogan will not buy our freedom, nor guarantee it.

Diwa C. Guinigundo is the former Deputy Governor of Monetary and Economic Sector of Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. From 2001 to 2003, he was Alternate Executive Director of the International Monetary Fund in Washington, DC. He is the Senior Pastor of Christ Fulness International Ministries in Mandaluyong.


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