Economic Freedom Presupposes Governmental Restraint

This week saw the publication of the 13th consecutive annual issue of the Index of Economic Freedom 2007, published by the Heritage Foundation and the Wall Street Journal. The index covers 157 countries around the world and appraises the degree of economic freedom in ten categories. The Institute for Market Economics is the local partner for Bulgaria of the Index, and, on our invitation, on February 14, 2007, the head of the research team that compiled the Index, Tim Kane, will present in Sofia the results in the last issue.

How is the Index compiled?

The highest score in each of the ten categories is 100, which corresponds to the maximum degree of economic freedom. The total score for each country is calculated by averaging the scores in all ten categories, which puts the country at a particular place in the general ranking. The period for which economic freedom has been assessed is June, 2005-June, 2006, and international sources of information have been used.

Where does Bulgaria stand?

In the 2007 Index, Bulgaria moves two places up, coming in 62nd place overall. This puts us in the group of 65 countries that have improved their position in comparison to last year’s ranking, which is in contrast to the 92 other countries that have seen their positions worsen.

In the assessment of economic freedom by region, Europe comes first with an average score of 67.5%, followed by North America with an average score of 62.3%.

Ten years of reforms in Bulgaria – the result is 15 positions higher in the ranking of the degree of economic freedom.

Reviewing the developments for Bulgaria, regarding economic freedom since 1997, we can draw the following conclusions:

1) For the ten-year period our country has registered an extremely slow increase of the level of economic freedom – from 47.2% in 1997 to 62.2% in 2007. This means that immeasurably many opportunities for the increase of wages and salaries, the decrease of the level of unemployment, the increase of well being of citizens, and for economic growth have been lost.

2) The most important improvement is in the category of Financial freedom – from 46.4% to 75.7%. This can be explained with the introduction of a monetary board in Bulgaria, which has contributed to the decreased levels of inflation. Between 1998 and 2006, inflation has been on average lower than 6% annually. The other component that influences the level of financial freedom is the regulation of prices. Since 1997 in the country the prices of some goods have been liberated, but the fact that still 21.3% (in 2005 according to the EBRD) of goods included in the consumer basket are with regulated prices does not allow for the attainment of a better than the present result.

3) Business freedom in Bulgaria is the second category, which registers the next highest improvement – from 30% in 1997 it reaches 66.9% in 2007. Considering, however, the very low starting point, we cannot be very happy. The freedom to start, operate, and close down a firm, quickly and easily, is of particular importance. The burdening regulations hinder entrepreneurship, and if we are 30% unfree in doing business, this should be a signal to the government. The state should help entrepreneurs, not the opposite.

4) The third greatest development is in the direction of improving the category Fiscal freedom. The decrease in the profit tax in the period 1997-2007 is from 42.5% to just 10% in 2007; the highest rate of the profit tax decreases from 40% in 1998 to 24% in 2007. These developments give Bulgaria a result of 91.3% fiscal freedom. Here, however, it must be noted that the methodology does not include social insurance. We know that if this were the case, it would turn out that we are rather unfree, according to this category.

5) The largest decrease is registered in the category Property rights – in the period 1997-2007, people’s capability of owning private property, which is effectively protected by clear and executable laws, has practically declined. From 50% freedom in 1997 it has decreased to 30% in 2007, as a result of which we fall into the group of unfree countries in this category. A general rule in economics is that if people do not feel secure about their property, they take fewer risks and invest with more difficulty, and they also do not plan long-term due to insecurity, or the costs of obtaining that security (bribes and costs for personal security) increase. All of this halts economic growth, drives foreign investors away, and leads to the losing of opportunities for prosperity and well being of citizens and businesses.

It is important to know why economic freedom is being assessed so thoroughly, diligently, and persistently for 13 years now. Various researches show that economically free countries register:

– high average wages/salaries

– low unemployment

– low levels of corruption

Since every government in Bulgaria declares that it wishes for such developments to occur during their mandates, we recommend that they use the report Index of Economic Freedom 2007 in their agenda.