Economic Freedom as Catalyst for Trade Enhancement: Circularity in Causal Relations

2. Economic Freedom as Catalyst for Trade Enhancement: Circularity in Causal Relations “SAARC Governments commitment to Economic Freedom in South Asia” Dr. Ayub Mehar Director General (R&D) The Federation of Pakistan Chambers of Commerce & Industry (FPCCI) Seminar organized by SAARC Chamber of Commerce & Industry (SCCI) Islamabad 11th August, 2009

3. Economic Freedom in South Asia

4. Economic Freedom: Scope and Limitations • Economic Freedom (asociated with a classical liberal viewpoint): “The freedom to produce, trade and consume any goods and services acquired without the use of force, fraud or theft”. • Another more philosophical perspective emphasizes its context in distributive justice and basic freedoms of all individuals. • This is embodied in the rule of law, property rights and freedom of contract, and characterized by external and internal openness of the markets, the protection of property rights and freedom of economic initiative.

5. Indicators of Economic Freedom • Time dealing with officials of taxation & regulatory authorities as % of management time • Average number of times management met with tax officials • Time required to obtain operating license • Unofficial payments to public officials • Losses due to theft, robbery, vandalism and arson of Sales • Firms that do not report all sales for tax purposes of firms • Firms with female participation in ownership of firms Cont….

6. Indicators of Economic Freedom • Firms using banks to finance investment of firms • Value lost due to electrical outages of Sales • ISO certification ownership of firms • Average time to clear exports through customs days • Firms offering formal training

7. Economic Freedom in Selected SAARC Countries

8. Economic Freedom Index • Indices of economic freedom attempt to measure (free market) economic freedom, and some empirical studies based on some these rankings have found it to be correlated with higher living standards, self-reported happiness, and peace. • One of the leading ‘Economic Freedom Index’ is jointly prepared by the Fraser Institute, Yale Center for Environmental Law and Policy (YCELP), Center for International Earth Science Information Network (CIESIN) at Columbia University, World Economic Forum (WEF) and Joint Research Center (JRC) of European Comission. • The key ingredients of the Economic Freedom Index are:

9. Factors of Economic Freedom Index • Size of Government • Legal System & Property Rights • Sound Money • Freedom to Trade Internationally • Credit Market Regulations • Labor Market Regulations • Business Regulations

10. Economic Freedom in Selected SAARC Countries (Rank: Out of 141 Countries)

11. Regional Trade in South Asia: An overview

12. Merchandise Trade of SAARC Trade Bloc$ Millions

13. Regional Tradeas % of total bloc exports

14. Regional Tradeas % of world exports

15. Indicators of Trade Liberalization and Barriers

16. Enabling Trade Index Scores (1-7) Source: World Economic Forum

17. Enabling Trade Index(Rank out of 121) Source: World Economic Forum

18. Financial Development IndexScore (1-7)

19. Financial Development Index(Rank out of 52)

20. Tariff Barriers

21. Causality Analysis

22. Circularity in Relations Factors of Economic Freedom Trade Enhancement & Liberalization Trade Competitiveness

23. Causal Relations Dependent variable: Goods Market Efficiency Legal System & Property Rights Size of Government Goods Market Efficiency

24. Causal Relations Dependent variable: Labour Market Efficiency Legal System & Property Rights Labour Market Regulations Freedom to Trade Internationally Labour Market Efficiency

25. Causal Relations Dependent variable: Financial Market Sophistication Legal System & Property Rights Freedom to Trade Internationally Credit Market Regulations Sound Money Financial Market Sophistication

26. Causal Relations Dependent variable: Technology Readiness Freedom to Trade Internationally Technology Readiness

27. Causal Relations Dependent variable: Innovation Soft Business Regulations Sound Money Innovation

28. Causal Relations Dependent variable: Institutional Governance Size of Government Institutional Governance

29. Causal Relations Dependent variable: Business Sophistication Soft Business Regulations Sound Money Business Sophistication

30. Simultaneity in International Trade Business Competitiveness Market Size Export of Goods Import of Services GDP Import of Goods Innovations Institutional Governance Export of Services

31. Estimated Parameters: Regression Results

32. Conclusion

33. Causality Analysis • Trade enhancement and liberalization and factors of Economic Freedom are jointly determined through trade competitiveness. • The Factors of Economic Freedom (Legal System, Size of Government, Freedom to Trade Internationally, Sound Money and Regulations) are significant determinants of Trade Competitiveness (Goods Market Efficiency, Labour Market Efficiency, Financial Market Sophistication, Governance, Technology Readiness and innovations). • The factors of Competitiveness (Innovations and Governance etc.) determine the magnitude of regional and international trade. • Without insuring Economic Freedom Trade enhancement cannot be achieved.

34. Trade Barriers in South Asia • Losses due to electrical outages and average time to clear exports through customs are identified as major hurdle in South Asia. • Extremely high non-tariff barriers in South Asia are observed. • Regulatory Environment in South Asia has also been identified as trade barrier.

35. Dependency of Trade Relations on Freedom & Competitiveness • The simultaneous relations show that the commerce departments and their associated institutions are not only responsible for the trade promotional activities. Regulatory framework and competitiveness are the catalysts for enhancement in trade relations. • For trade enhancement and liberalization the role of interior and foreign ministries are also important. Free Trade Agreements, Bilateral Treaties and Monetary Union can not achieve the targeted goals unless the interiors and foreign affairs ministries participate in these agreements. The roles of planning authorities, transportation and communication departments are also important in trade promotion among the nations. • At the time of agreements of the mutual economic relations, the recommendations of the planning commission, interiors and foreign affairs ministries and the concerned departments of the transportation and communication ministries must be incorporated.

36. Thank You....