Economic freedom and human development in the knowledge society.
IntroductionEconomic freedom is a process that takes place in the absence of artificially imposed restrictions. While protectionism must be invented (1), liberalization takes place naturally, as the world states wish to capitalize the exceeding production and get, in exchange, goods and services that, within the domestic economy, cannot be achieved or would suppose too high costs.
The trade freedom is a process meant to stimulate production, to diminish and even eliminate the power of monopolies, to reduce costs and prices, to increase the quality of products and the standard of life.
To see whether there are correlations between liberalization and human development, we will resort to two indexes annually calculated by The Heritage Foundation and the United Nations Development Program (UNDP) (2): the economic freedom index (EFI) and the human development index (HDI), two composite indices able to surprise the evolution of economic freedom and of human development respectively, for most of the world states.
The economic freedom index (EFI) is calculated for 182 countries, according to ten indicators: business freedom, trade freedom, financial freedom, fiscal freedom, investment freedom, labor freedom, monetary freedom, government expenses, property rights and corruption.
Starting with 1990, the level of economic and social development is estimated by calculating the Human Development Index (HDI) according to: life expectancy (including infantile mortality), literacy rate, standard of life (GDP, GDP per capita, income, income per capita).
UNDP calculated, including the year 20082, the HDI for 177 countries. According to the HDI value (between 0.965 for Norway and 0.311 for Niger), the 177 countries were divided in three major groups:
* Countries with high human development (63 states with a HDI between 0.965 and 0.800);
* Countries with middle human development (82 states with a HDI between 0.798 and 0.500);
* Countries with low human development (33 states with a HDI between 0.495 and 0.311).
In 2009, UNDP calculated HDI for 182 countries, and according to its value (between 0.971 for Norway and 0.340 for Niger), UNDP ranked, in 2009, the world states into four groups:
* Countries with very high human development (38 countries with a HDI between 0.971 and 0.902);
* Countries with high human development (45 states with a HDI between 0.895 and 0.803);
* Countries with medium human development (75 states with a HDI between 0.798 and 0.511);
* Countries with low human development (24 states with a HDI between 0.499 and 0.340).
In the present paper we aim at outlining the relationship between the economic freedom and human development, showing, on the basis of statistical indicators, that the states that progressed in the direction of liberalization registered a similar tendency from the standpoint of human development, and that liberalization is one of the human development factors; we do not claim this to be the major factor, but each country's capacity to benefit from the advantages of liberalization at an economic and domestic social level is most important.
Economic freedom and human development
The analysis made by The Heritage Foundation reached the conclusion that the states characterized by the highest degree of economic freedom are the Asian ones. For sixteen years now, Hong Kong is still the most opened world economy, followed by Singapore, Australia and New Zealand. In 2010, compared to the previous year, no significant modifications occurred in the hierarchy of economic freedom among the first seven states (3).
In the hierarchy of economic freedom, each region of the world has at least one country among the first twenty places (4); the same is not valid for the HDI hierarchy, as among the first twenty states with very high human development we cannot find countries from South America and Africa.
In the following, we will present the EFI and HDI values for some of the countries we consider to be representative: USA, Germany, Norway, Japan (industrialized countries), Hong Kong (country oriented towards export, recently included in the group of the new industrialized countries of the world, after having adopted the Japanese model of development), China (Asian communist country, oriented towards export, which has registered significant economic progress over the latest years), Romania and Poland (Central-Eastern European developing countries, which started transition at the same period, but evolved in different rhythms and with different results).
As for human development, every year hierarchy shifts are registered, although a general feature would be the progress one--an optimistic aspect, if we have in view the fact that the developing process is one that generates economic and social, quantitative and especially qualitative changes, that make the national economy increase, in a cumulative and durable manner, its real global product, as well as the population's standard of life.
Analyzing the HDI extreme values (0.340-0.971 in 2007 compared to 0.232-0.874 in 1975), we could asses that, as far as the human development is concerned, real progress has been registered, illustrated by the rise of its extreme values and the diminution of the value proportion. On the other hand, the high level maintaining of the extreme values amplitude reflects the level of disparities existing at the world level. The HDI, a composite index, as we have already mentioned, is calculated starting from a panel of indicators that can be synthesized into three categories: life expectancy at birth, education and incomes; a country could possibly register economic growth, without making any progress in the direction of human development. Between economic-social growth and development there is no relation of direct proportion, the first process being a condition for the second, but the economic progress is not necessarily transposed into social progress (4).
From Table no.1, we may observe that the analyzed states registered progress from the human development standpoint, an aspect outlined by the evolution of the HDI value, but this did not imply maintaining a similar tendency as far as the place in the world hierarchy was concerned. The HDI value rise does not necessarily imply a higher position in the hierarchy of the world states. Thus, USA, Germany and China went slightly upward, just like Norway, whose second place in 2006 is a relative one, as the first place country, Island, had the same HDI value as Norway--0.968. In 2007, Island came on the 3rd position, with a HDI of 0.969, while Norway took its first place in the hierarchy of human development (5). If, in the case of Germany, the progress is natural, the result of a solid economy and of the focus placed on exportation, in the case of China the evolution is not so natural, and places the whole world in front of significant challenges. A communist country, China understood that autarchy could not be any more the solution for economic and human growth and development. China realized that, in full process of globalization, the economic freedom will bring forth multiple advantages, and that, following the path of economic openness, it manages to register not only significant rates of economic growth, but also visible progress from the standpoint of human development, being the country with the most spectacular evolution of the HDI. The impressive rates of economic growth have significantly influenced development. This is so more spectacular as China registered very high rates of economic growth when the neighboring countries were strongly hit by the financial crisis that affected the Asian region in 1997; and the Chinese economy does not stop here, it continues growing, even if in a slower rhythm, over the crisis that the world economy entered at the end of 2008 and which is now negatively affecting most of the world countries.
The eastern European countries regressed in the HDI hierarchy, although at the index level they joined the general trend, that of progress. The case of Poland is somehow different. Though it opted for market economy almost simultaneously with the other communist states from Central and Eastern Europe, this is undoubtedly the economy with the greatest achievements, occupying a position among the major economic winners and turning into a model for the neighboring countries.
From Table no.2 we may see that between economic freedom and human development there is no direct relation of proportion, like between economic growth and human development (6), for instance. The economic freedom is one of the economic growth factors, but it becomes one of the most important factors of human development, in the context of a correct application of the measures of liberalization and of a correct utilization of the results of this process in the domestic economy--so this is an indirect factor of human development.
Hong Kong, the most liberal state of the world, occupied the 24th place from the standpoint of human development, being one of the newly industrialized countries that opted for economic openness as a strategy of development, starting from Japan's model. The dynamism of liberalization is high; the economic openness allows Hong Kong to progress at a social level as well, the country being included in the group of states with very high human development. Norway, the most developed country of the world, occupied the 37th position from the standpoint of the economic openness, an aspect that confirms the fact that at the basis of the human development lie, besides economic freedom, other factors whose importance cannot be neglected (7). We must have in view that Norway is not an EU member state, it does not observe the common policy and yet it opted for a high rate of liberalization. The limits that the most developed country of the world faces pertain to the high tax rates and the high extent of State implication in the economy.
USA, Germany and Japan are tradition countries as far as liberalization is concerned, adepts of the process who apply it differently. The three states are among the great commercial powers of the world, as well as among the high human development countries. Though maintaining a certain degree of protectionism, especially of a non-tariff nature, it is obvious that liberalization is a major factor of human development.
With a lowest level of freedom, compared to other states, China is the most suggestive example in demonstrating that a correctly achieved and capitalized liberalization allows economic changes in the standard of life as well. China improved its achievements at the level of economic growth and human development once it made the decision in favor of economic freedom and WTO adherence (8).
Romania and Poland started their transition towards the market economy in the 1990s, as former communist states lying in Central Eastern Europe, but, although initially we could speak about some points they had in common, their subsequent evolutions were very different. If Romania opened its frontiers at once; Poland started to liberalize its economy gradually. The decisions of economic policy, the investment level, the slightly different mentality to which other numerous factors can be added made Poland join an ascendant trend from the point of view of growth and economic environment, while Romania's economic evolution is a fluctuant one, with an unstable environment, and an unsustainable growth, aspects that reflect themselves in the low level of human development as well. Romania did not manage to capitalize the opportunities offered by liberalization. The decisions of economic policy have encouraged, over the last two decades, importation, with obvious consequences (for instance, decrease of production, of productivity, of product quality, of employment). Romania's example is a suggestive one in order to state that economic freedom is beneficial, but it depends a lot on the way in which each country manages to transpose it into a factor of human growth and development.
Conclusions
In a world where interdependencies are more and more important, the process of liberalization affects the process of economic growth, a direct proportionality relation existing between the two. Economic growth and liberalization are necessary but not sufficient conditions for human development, which is conditioned by aspects indirectly, correlated to the economic field. We are speaking about first of all qualitative factors, that come to complete the quantitative ones: the degree of civilization and education (schooling and illiteracy rates), the population's health condition (access to medical services, life expectancy at birth, life expectancy), access to infrastructure (running water and utilities, in general), and why not, the capacity to protect the environment. All these factors come to outline, to complete and somehow accomplish the effort towards progress. The economic growth, determined by both liberalization and other factors with direct or indirect influence, is not enough in order to speak about human development, but the latter represents the objective and the motivations of any activity and decision, regardless of their level of manifestation: a local, national, regional or global one. After having entered the recession, the world states react quite differently (9), as some of them continue to focus liberalization, others took protectionist measures at a higher level compared to the period before the crisis, so, that half of the world's great economies reduced their rate of economic freedom (10). The result is an interruption, even a regress, from the point of view of the economic growth, a fact that becomes even more obvious through the negative rates of economic growth registered by most of the world states, but also through the diminution of the medium economic freedom index, which, starting with 2009, is foreseen to diminish (11), for the first time in the modern economic history; the motivation is that the world economy's entering a so significant crisis made many countries take protectionist measures meant to increase their economic and social security. At the level of human development, no regress will be probably registered, only stagnation. Liberalization is regarded as one of the primary factors of recovery from the current crisis, and implicitly of economic growth and human development.
As for development, it is considered that under normal circumstance, no regress can be registered. Only the economic growth is fluctuant, but its decrease cannot be transposed into a tendency similar to that of development, because we speak about social progress that, once occurred, cannot regress (education, civilization, knowledge), unless as a result of disastrous events that would bring forth significant human and infrastructure loss (such as natural phenomena like cataclysms) (12).
Within the framework of the G 20 summits that took place in 2009, there was intense lobby for the avoidance of economic protectionism. States like USA, Great Britain, France or Russia, that used to urge for the maintenance of liberalization were among the first ones to take measures meant to protect their economy (13).
ACKNOWLEDGEMENT. This paper was made within The Knowledge Based Society Project supported by the Sectoral Operational Program Human Resources Development (SOP HRD), financed from the European Social Fund and by the Romanian Government under the contract number POSDRU ID 56815.
REFERENCES
George, H. (1949), Protection or Free Trade. An Examination of the Tariff Question, With Especial Regard to the Interests of Labor. New York: Robert Schalkenbach Foundation.
Haller, A.P. (2008), Exporturile-factor de dezvoltare si crestere economica. Iassy: Performantica Publishing House.
Haller, A.P. (2009), "Aspecte ce predispun la riscuri generate de consolidarea protectionismului comercial in conditii de criza economica," vol. Progrese in teoria deciziilor economice in conditii de risc si incertitudine. Management, strategii si decizii fuzzy. Curente, teorii si practici moderne in economie, vol. IX, Iassy: Tehnopress: 91-102.
Miller, T. and Kim, H. (editors) (2010), "2010 Index of Economic Freedom," The Wall Street Journal.
UNDP (2008), Human Development Indices. A Statistical Update 2008, available at http://hdr.undp.org;
UNDP (2009), Human Development Report 2009. New York: Palgrave MacMillan.
NOTES
(1.) (George Henry, 1949), p. 12
(2.) Both UNDP and The Heritage Foundation calculate the indicators on the basis of the official statistical data at the level of the year 2007.
(3.) In the hierarchy of the first seven most liberalized states of the world, in 2010 only two modifications occurred: Switzerland increased its freedom rate, with a score of 81.1, occupying the 6th place in the world, while USA diminished it to 78, taking the 8th place in the world hierarchy. At the level of human development, both states made slight improvements. HDI for Switzerland amounted to 0.960 from 0.959, going to the 9th place, while USA registered a HDI of 0.959 from 0.955, that places it on the 13th position.
(4.) (Haller Alina-Petronela, 2008), p. 147
(5.) Since 2004, Norway has registered HDI values that placed it on the first place from the standpoint of the human development. Even in 2006, when it took the second place, the HDI value was the same with Island's one. In 2007, the rise of HDI for Island was a slight one, from 0.968 to 0.969, while Norway's rise was from 0.968 to 0.971.
(6.) (Haller Alina-Petronela, 2008), p. 153
(7.) In the economic and social growth and development of Norway, freedom plays an extremely important role, but we cannot ignore factors like natural resources, stable economic environment or high productivity.
(8.) World Trade Organization. China became a WTO member in 2001; subsequently, the economic progress of the country was an impressive one, in spite of all of the shortcomings and difficulties one can still find here.
(9.) Both the scores of economic freedom and the levels of HDI characterize the ante-crisis period, reflecting the reality of the years before 2008; that delimitate the beginning of the world recession. The up-to-date statistical data are, until the official validation, regarded as prognoses, with a high risk of error.
(10.) (Terry Miller, Holmes Kim (eds.), 2010), p. 52
(11.) (Terry Miller, Holmes Kim (eds.), 2010), p. 53
(12.) (Haller Alina-Petronela, 2008), p. 147
(13.) (Haller Alina-Petronela, 2009), pp. 91-102
ALINA-PETRONELA HALLER
hallalina@yahoo.com
Iassy Branch of Romanian Academy
Table no. 1: Human Development Index (HDI) in 2006-2007
2006 2007
Country Position HDI Position HDI
USA 15 0.950 13 0.956
Germany 23 0.940 22 0.947
Norway 2 0.968 1 0.971
Japan 8 0.956 10 0.960
Hong Kong 22 0.942 24 0.944
China 94 0.762 92 0.772
Romania 62 0.825 63 0.837
Poland 39 0.875 41 0.880
Source: UNDP (2008), Human Development Indices. A Statistical Update
2008 UNDP; UNDP (2009), Human Development Report 2009, New York:
Palgrave MacMillan
Table no. 2: Economic Freedom Index (EFI) and Human Development
Index (HDI), at the level of the year 2007
Position Position
in the in the
hierarchy Score of hierarchy
of economic economic of human
Country freedom freedom development HDI
USA 8 78.0 13 0.956
Germany 23 71.1 22 0.947
Norway 37 69.4 1 0.971
Japan 19 72.9 10 0.960
Hong Kong 1 89.7 24 0.944
China 140 51.0 92 0.772
Romania 63 64.2 63 0.837
Poland 71 63.2 41 0.880
Source: UNDP, (2008), Human Development Indices. A Statistical
Update 2008, UNDP; UNDP, (2009), Human Development Report 2009,
New York: Palgrave MacMillan; Terry Miller, Holmes Kim (editors),
(2010), 2010 Index of Economic Freedom, The Wall Street Journal
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| Title Annotation: | PROCEEDINGS OF THE 2ND INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMY |
|---|---|
| Author: | Haller, Alina-Petronela |
| Publication: | Economics, Management, and Financial Markets |
| Date: | Mar 1, 2011 |
| Words: | 3174 |
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