The Philippines: Economic Freedom Ranking

Each year, The Heritage Foundation publishes an “Economic Freedom” ranking of 183 countries around the world. In 2009, the Philippines earned a score of 56.8 out of 100 possible points, placing it 104th place in the rankings. A score of 56.8 is generally interpreted as a country that is “Mostly Unfree.” While not a flattering score, it does represent an improvement of nearly 1 point over the year before.

Economic freedom is defined as the right of individuals to control his own labor and property. In an economically free country, individuals are free to work, produce and consume goods, and make investments as they please. That freedom is protected by the government and not constrained by the state.

Why is “economic freedom” of importance to the Philippines?

There is a relationship between economic freedom and the standard of living in a country. Countries with a high degree of economic freedom also have high standards of living with a per capita GDP (gross domestic product) of over $40,000 USD. Countries with a low degree of economic freedom have very low standards of living, with a per capita GDP of under $4,000 USD.

The per capita GDP of the Philippines is $3,153 USD, placing it on the low end of the standard of living scale.

How does the Philippines rank in relation to other Asian countries?

The Economic Freedom score for the Philippines (56.8) is not in the top 10 scores in the Asian region. Hong Kong placed first with a score of 90.0, followed by Singapore (87.1), Australia (82.6), New Zealand (82.0), Japan (72.8), Macau (72.0), Taiwan (69.5), South Korea (68.1), Malaysia (64.6), and Thailand (63.0).

In what ways does the Philippines score well in Economic Freedom?

The Economic Freedom score is based on many other “freedom scores” that are combined to provide one overall score. The Philippines scores above the world average with respect to trade freedom, government size, and monetary freedom.

Trade Freedom:

The Philippines has a relatively low tariff rate (tax on foreign goods) resulting in an above average trade freedom score (78.6). However, it lost a lot of points in the scoring due to non-tariff barriers to trade. These non-tariff barriers include governmental restrictions on imports/exports, licensing requirements, restrictive standards, inconsistent customs valuation, corruption, and weak protection of intellectual property. The theory is that no barriers to trade is best and provides individuals with access to the best goods and freedom to trade.

Government Size:

Government size also scored favorably (90.8) for not consuming too much of the national income and demonstrating progress in reducing debt and increased privatization of industries. The theory is that if the government is too large and costly, it takes too much wealth out of the hands of individuals and does not operate efficiently.

Monetary Freedom:

Monetary freedom was also better than average (77.2) due to a moderate inflation rate of 4.1 percent over the last few years. The score would have been even higher had it not been for some governmental price controls. The theory is that fewer price controls are better, allowing goods and services to be priced at their true value rather than the artificially higher costs of “protected” goods.

In what ways does the Philippines score poorly in Economic Freedom?

The Philippines scores poorly (below the world average) with respect to business freedom, investment freedom, property rights, freedom from corruption, and labor freedom.

Labor Freedom:

Labor freedom is ranked below average (51.4) due to inflexible labor laws that adversely affect productivity and job creation.

Business Freedom:

Business freedom was below average (49.3) due to the length of time required to start a business (58 days compared to a world average of 38 days). In addition, closing a business can be a difficult and drawn out process. Theoretically, start up of a new business should be quick and easy.

Investment Freedom:

Investment freedom was below the world average (40.0) due to restrictions on foreign investment. Major criticisms include inconsistent regulatory requirements, inadequate infrastructure, poor enforcement of contracts, complex dispute resolution and corruption. Theoretically, there should be no barriers to investment (local or foreign) which is needed for growth.

Property Rights:

Property rights also scored below average (30.0). The Heritage Foundation describes the country’s judicial system as weak and subject to delays and uncertainties. Theoretically, the state serves to protect property rights to insure that the rights of individuals and businesses are preserved to permit efficient business operations.

Freedom From Corruption:

Freedom from corruption also scored very low (25.0). The Foundation describes the country as having the broad perception that corruption is widespread throughout government. Without judging whether or not that perception is true, theoretically businesses must have a high degree of confidence in the government to operate effectively.

Economic Freedom in the Philippines: Summary

Despite being ranked 104th in the world with respect to economic freedom, there are signs of progress. The country’s economic freedom score improved since 2008. Low barriers to trade, right-sized government, and low inflation are seen as strengths that foster economic freedom and ultimately economic growth and development.

On the downside, labor and business laws, barriers to foreign investment, weak protection of property rights and corruption were ranked as weaknesses that work against economic freedom and economic progress.

To keep things in perspective however, one should keep in mind that the way the Heritage Foundation measures economic freedom is based on an ideal version of capitalism where free trade, a free market, and no government intervention is considered the highest level of economic freedom. No country has a perfect economic freedom score of 100.

To varying degrees, every country’s government finds it necessary from time to time to regulate trade and to intervene in the market when it is thought desirable for the public good. So for example, even the “capitalistic” USA only has an economic freedom score of 80.7. Nevertheless, the measures used to determine economic freedom are useful indicators to think about if economic progress and development are desired.

(photo by lusi)

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