The cornerstones of economic freedom are personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights, according to the Fraser Institute.
The Fraser Institute’s Economic Freedom of the World (EFW) index is designed to measure the degree to which the institutions and policies of countries are consistent with economic freedom. In order to achieve a high EFW rating, a country must do some things, but refrain from others.
Governments enhance economic freedom when they provide an infrastructure for voluntary exchange and protect individuals and their property from aggressors using violence, coercion, and fraud to seize things that do not belong to them.
Governments must refrain from actions that restrict personal choice, interfere with voluntary exchange, and limit entry into markets. Economic freedom is reduced when taxes, government expenditures, and regulations are substituted for personal choice, voluntary exchange, and market coordination.
To a large degree, a country’s EFW summary rating is a measure of how closely its institutions and policies compare with the idealised structure implied by standard textbook analysis of microeconomics.
According to the 2020 Economic Freedom of the World report recently published by the Fraser Institute (which is based on 2018 data) Zimbabwe falls within the lowest 10 ranked countries in the world.
Hong Kong and Singapore occupy the two top positions of the most-free countries while Zimbabwe is number 155, seven countries above the bottom.
Its companions in the ranking of shame are the Central African Republic, Democratic Republic of Congo, Republic of Congo, Algeria, Iran, Angola, Libya, Sudan, and, lastly, Venezuela.
Of course, a lot has happened since 2018, and Zimbabwe might have gone up in the rankings.
However, on the ground, does it seem like there has been much improvement?
One area that the EFW focuses on is the size of government, where Zimbabwe is ranked number 158.
The size of the Government focuses on how government expenditures and tax rates affect economic freedom. Countries with lower levels of government spending, lower marginal tax rates, and less government investment and state ownership of assets earn the highest ratings in this area.
Since 2018 a lot has changed for Zimbabwe. Few would argue that Zimbabwe has come a long way in cutting its Government spending. From running a perennial budget deficit, funded by treasury bills and increased money supply, the Government is at the moment running what can be safely called a balanced budget. Inflation might have played a role in smoothening things, but the intent was also religiously followed and not resorting to a supplementary budget is a testimony.
The tax side has, however, been a mixed bag. The Intermediated Money Transfer Tax (2 percent tax) has been damaging to incomes for individuals and the private sector. Unlike other taxes such as PAYE, Corporate Tax, and others, which most have learned to live with, given a choice, many would do without the 2 percent tax. Value Added Tax is, however, an appreciated 50 basis points lower.
Efforts are being made to cut back on state ownership of assets. The jury is, however, still out on that one as the pace of privatisation is painstakingly slow while assets such as land are firmly in the hands of Government. The 158 ranking might still be in place if we were to measure again today.
Another area of focus for the EFW is the legal system and property rights. This area focuses on the importance of the legal system as a determinant of economic freedom.
The protection of persons and their rightfully acquired property is a central element of economic freedom. Many would argue that it is the most important function of Government. Under the EFW, key ingredients of a legal system consistent with economic freedom are rule of law, security of property rights, an independent and unbiased judiciary, and impartial and effective enforcement of the law. In 2018, Zimbabwe ranked 132. We are two years down the line with a new Government in place, is the situation any better?
To what extent does the Government’s inaction in reining in SOEs (other than changing the board members from time to time), which leads to an increase in Government debt and the increasing risk of Government guarantees coming to fruition, hamper economic freedom?
There is no measurement for not bringing criminals to trial some more than a year after they were granted bail.
Sound Money, which focuses on the importance of money and relative price stability in the exchange process is the third area looked at under the EFW. Zimbabwe is ranked 157. Since 2018 Zimbabwe has not had a relatively stable purchasing power. In fact, transaction costs have actually gone up due to the 2 percent tax and of course banks leaning on fees and commissions instead of the traditional interest income. The exchange rate has also been largely volatile during this period.
The Government and the central bank have however put in place measures that might lead to low (and stable) exchange and inflation rates. There are still, however, restrictions on who gets to buy foreign currency on the auction. There is a priority list.
Freedom to trade internationally is based on tariffs, regulatory trade barriers, non-tariff trade barriers, black-market exchange rates, financial openness, capital controls and the freedom of foreigners to visit. Zimbabwe is ranked number 138.
The only area where Zimbabwe is ranked in the top 100 at 94 is that of labour market regulations. Labour market regulations are based on hiring regulations and minimum wage, hiring and firing regulations, centralised collective bargaining, work hours regulations and mandated cost of worker dismissal.