The
Point
Published by Institute of Economic Affairs (IEA)
Issue No. 2 • March, 2014
INDEX OF ECONOMIC FREEDOM:
Kenya’s Perfomance
By Stephen Jairo
E
conomic growth is an important aspect for any
country around the globe, and which yields positive
benefits to the country - especially to the citizens.
Economic freedom can be defined as the freedom to
prosper, without intervention from a government or
economic authority, and where individuals are free to
secure and protect their human resources, labor and
private property.
The Heritage Foundation defines economic freedom as
the condition where individuals can act with autonomy
while in pursuit of their economic livelihood and
greater prosperity.
The key ingredients of economic freedom are personal
choice, voluntary exchange, freedom to compete in
markets, and protection of person and property.
There are three fundamental principles that underpin
economic freedom; the idea as well as the policy
recommendations that emanate thereof.
These are;- empowerment of individuals, non-discrimination,
and open competition.
Developed by the Heritage Foundation 20 years ago,
the index of economic freedom measures ten areas of
economic freedom grouped into four broad categories
or pillars of economic freedom, on a scale of 0 (Least
Free) to 100 (Most Free). These pillars are;
i)
ii)
iii)
iv)
Rule of Law
Government Size
Regulatory Efficiency
Open Markets
Each of these pillars is comprised of sub-components
which are discussed below.
I
Rule of Law
Under the Rule of Law, two economic freedoms are
looked into:
a) Property Rights:
Secure property rights give citizens the confidence to
undertake entrepreneurial activity, save their income,
and make long-term plans, knowing that their income,
savings, and property (both real and intellectual) are
safe from unfair expropriation or theft.
The protection of private property requires a judicial
system that is corruption free, independent, transparent
and effective, while also delivering services equitably
and without discrimination. The higher the protection
of private property, the higher the score on property
rights and vice-versa.
http://www.businessdictionary.com/definition/economic-freedom.html#ixzz2trRMsGWk
http://www.econlib.org/library/Enc/EconomicFreedom.html
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http://www.heritage.org/index/about
1
2
b) Freedom from corruption:
Corruption erodes economic freedom by introducing
insecurity and uncertainty into economic relationships,
and can take forms such as bribery, extortion, nepotism,
patronage, cronyism, embezzlement and graft. To
guard against this, there is need for transparency and
openness in the various processes.
Monetary Freedom: This combines measures of price
stability and assessment of price controls. Monetary
freedom requires a stable currency and prices in the
market being determined by market forces. This is
influenced by the monetary policy of the government.
II
Trade Freedoms: This reflects an economy’s openness
to the flow of goods and services as affected by the
presence or absence of tariff and non-tariff barriers
that affect trade in general; exports and imports.
Government Size
Fiscal Freedom: This is a measure of the tax burden
imposed by the government, and includes direct and
corporate taxes as a percent of GDP.
Government Spending: This considers the level of
government expenditures, including consumption and
transfers, as a percentage of GDP.
III
Regulatory efficiency
Business Freedom: This is a measure of the overall
efficiency of the government in regulation of the
businesses in terms of difficulty in starting, operating
and closing. it looks at an individual right to establish
and run an enterprise without undue interference from
the state. It uses 10 factors based on data from World
banks doing business study that are weighted equally.
Labor Freedom: This measures an individuals’ ability
to work as much as they want, and wherever they want,
as well as the ability of firms to hire and fire workforce
as is necessary.
Open Markets
Investment Freedom: is a measure of the freedom
to invest. All countries have varied restrictions as
to the levels of investments allowed from external
investors; investments leads to creation of a variety
of opportunities including job creation and an
improvement in economic activities.
Financial Freedom: Availability of fully functional,
sound and updated financial systems ensures that
individuals have diversified options in terms of
savings, access to credit, payment options, as well as
options for investment. This measure looks at these in
terms of banking efficiency and independence from
government control and interference.
Measures of the Index
The index of economic freedom has a methodology
that scores the sub-components in each pillar as
discussed in the matrix below:
Pillar
Component
Score Methodology
Rule of Law
Property Rights
Countries are graded on a scale of 0 to 100, where Zero means that private property is outlawed, and all property belongs to
the state. A score of 50 means the court system is highly inefficient, and delays are so long that result to non-use of the judicial
system, while a score of 100 means that private property is guaranteed by the government, justice system is up and running and
is corruption free.
Freedom from Corruption
Is based on Transparency International’s Corruption Perception Index (CPI) which measures level of perceived corruption in 176
countries.
The scale for scoring government spending is non-linear, meaning that government spending is close to zero is lightly penalized,
while levels of government spending that exceed 30 percent of GDP lead to much worse scores in a quadratic fashion (for example,
doubling spending yields four times less freedom ). Only extraordinary large levels of government spending - for example, over 58
percent of GDP - receive a score of zero.
Government Size
Government Spending
Fiscal Freedom
2
IV
Is composed of three quantitative factors;
• The top marginal tax rate on individual income
• The top marginal tax rate on corporate income, and
• The total tax burden as a percentage of GDP . These three are scored equally, meaning each accounts for one third of this
components’ score.
Evidence-based policy pace-setting
Regulatory Efficiency
Open Markets
Business Freedom
Is derived from various measures including ease of starting, operating and closing a business. The score uses 10 factors equally
measured using World Bank’s “Doing Business Report”. The higher the score, the freer the business environment.
Labour Freedom
This uses 6 quantitative factors on the basis of World Bank’s “Doing Business Report”. These are converted to a scale of 0 to 100
with a higher score meaning a better environment.
Monetary Freedom
Trade Freedom
Is based on the weighted average inflation rate and price controls for the recent years
Scoring this component is based on two inputs; Trade weighted average tariff and Non-tariff barriers
Investment Freedom
This indicator measures a variety of restrictions that are imposed on investment
Financial Freedom
This component of the index evaluates an economy’s financial freedom by looking at 5 broad areas which are considered to assess
an economy’s overall performamce.
Global Outlook
and Canada with scores of 81.6, 81.2, and 80.2
respectively.
The 2014 Index of Economic Freedom was carried
out in 186 countries spread over six regions;
1. Asia-Pacific – 2. Europe – 3. Middle East/North Africa –
4. North America – 5. South & Central America /
Caribbean countries
6. Sub-Saharan Africa – 43 countries
45 countries
18 countries
3 countries
29countries
48 Countries
Each of 178 countries graded in the 2014 Index is
classified as “free” (i.e. combined scores of 80 or
higher); “mostly free” (70 - 79.9); “moderately free”
(60 - 69.9); “mostly unfree” (50 - 59.9); or “repressed”
(under 50).
There are positive economic freedom advancements
worldwide despite the challenging economic and
political environments being experienced. The global
average economic freedom score has reached 60.3,
the highest ever recorded in the 20-year history of the
Index. World economic freedom has improved by 0.7
basis points from last year and 2.7 points from 1995.
Much of the momentum towards greater freedom
that had been lost during the past five years has been
regained and according to the index, the world score
has improved in virtually all the areas that are measured.
Of the 178 economies numerically graded in the 2014
Index (8 countries have no scores in some measures),
six have earned the designation of “free” with scores
above 80. These are Hong Kong in first position with
a score of 90.1, closely followed by Singapore with a
score of 89.4, and Australia which is in third position
with a score of 82.0. The fourth, fifth, and sixth
positions are held by Switzerland, New Zealand,
The next 28 countries, with scores between 70 and 80,
are categorized as “mostly free.” The only Sub-Saharan
African countries in this category are Mauritius, with
a score of 76.5, and Botswana with a score of 72.
The largest portion of the countries graded (117
economies), have freedom scores between 50 and 70.
Of these, 56 economies are considered “moderately
free” (scores of 60–70), and 61 are “mostly unfree”
(scores of 50–60). Twenty-seven countries are
categorized as “repressed” economies with scores
below 50.
Kenya’s Performance
For the years 2009 to 2014, there have been
improvements and decline in terms of the overall
score on the economic freedom index. For the year
2014, Kenya is ranked at position 111 among the 186
countries which have been listed, and is position 17 in
sub-Saharan Africa with a score of 57.1. This score
is an improvement by 1.2 basis points from the year
2013’s score of 55.9.
However, in comparison to the previous years’ scores,
this performance is still low, especially when compared
to a score of 58.7 in the year 2009, which had also
declined from a high score of 59.3 in 2008. It is worth
noting that this index score denotes the fact that
economic freedom in Kenya is on the growth path,
having declined to a low score of 55.9 in 2013. This is
illustrated in figure 1 next page.
Evidence-based policy pace-setting
3
Figure 1: Trend of Kenya’s score on the Index of
Economic Freedom, 2009-2014
A country’s fiscal freedom is indeed one aspect that
cannot be overlooked. Sound financial control systems
are key to prosperity in any country. In this regard,
there has not been much change in the score for this
indicator, having declined to 77.7 in 2011 from 78.1
in 2010. The score for 2014 is 78. These trends are
shown in figure 2 below
Figure 2: Trend of Kenya’s Index of Economic Freedom,
Government Size (2009 – 2014)
Within the East African Community, Kenya is ranked
at position 4 after Rwanda, Uganda, and Tanzania, with
scores of 64.4, 59.9, and 57.8 respectively. Burundi is
number 5 with a score of 51.4.
The following is a look at the performance on each
indicator for Kenya. It is important to note that
various factors have contributed to the overall score
and changes on this index.
Rule of Law
Table 1: Trend of Kenya’s Index of Economic Freedom, Rule
of Law (2009 – 2014)
2009
2010
2011
2012
2013
2014
Property Rights
30
30
30
30
30
30
Freedom from Corruption
21
21
22
21
22
21
The Rule of Law looks at the two indicators as in Table
1 above. Of these, property rights has maintained
its performance score for the years outlined herein,
whereas the score for freedom from corruption has
fluctuated between 21 and 22 during the same period.
According to the scoring method, the more certain the
legal protection of property, the higher the country’s
score. On the other hand, rampant widespread
corruption has seen Kenya being placed at position
136 of the 177 countries surveyed, with a score of 26
on a scale of 1 to 100, where 0 is highly corrupt. The
higher the levels of corruption in a county, the lower
the economic freedom score.
Regulatory Efficiency
Regulatory efficiency is comprised of measures on
business freedom, labor freedom, and monetary freedom.
From Figure 3 below, business freedom has declined
every year, since 2009 at 66.9 to 61.7 in 2012 and in
2014 scoring 55.8. Over the period in focus, business
freedom has declined by a whopping 11.1 points. On
the other hand, labor freedom experienced a sharp
decline from a high of 63.3 in 2012 to 57.1 in 2013.
However, this again shot up to a score of 64 in 2014.
Figure 3: Trend of Kenya’s Index of Economic Freedom,
Regulatory Efficiency (2009 – 2014)
Government Size
Government size is scored based on fiscal freedom
and government spending. The trend from Figure 2
shows that in 2011, the rating was much worse off at
72.1 than it was in 2010 at 83.1, reducing by 11. In the
following years, the score has declined to a score of
74.6 in 2014, although this is an increase from 2013
which scored 73.5.
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Kenya has scored well in terms of monetary freedom
which is highest amongst these three measures, albeit
with notable fluctuations in the years focused at herein.
Evidence-based policy pace-setting
The highest score was realized in 2012 at 79.1, having
moved positively in years 2010 and 2011 at 72.7 and
73.2 respectively.
Three indicators recorded no change for the period
2013 to 2014. These are: property rights, investment freedom,
and financial freedom.
Open Markets
As noted by the Heritage Foundation, economic
freedom generates more opportunities and greater
well-being for more people, no matter where they live.
The Kenyan constitution promulgated in August 2010
seeks to enshrine a sense of accountability and good
governance to both office holders and the population
at large, in a bid to improve service delivery and
accessibility.
Table 2: Trend of Kenya’s Index of Economic Freedom,
Open Markets (2009 – 2014)
2009
2010
2011
2012
2013
2014
Trade Freedom
71.8
67.9
72.8
66.7
66.7
72.8
Investment Freedom
50
45
50
50
50
50
Financial Freedom
50
50
50
50
50
50
Open markets performance on the overall has
improved. It is comprised of 3 measures; Trade Freedom,
Investment Freedom, and Financial Freedom.
One important measure of the index is freedom from
corruption, which in comparison to other measures
scores the least.
Trade freedom is the highest of the three, having an
average of 69.7 basis points for the period 2009 to
2014. The score in 2011 and 2014 is the same at 72.8,
and there was no change in the score for years 2012
and 2013 which maintained at 66.7.
Overall, the index shows that there are areas in which
the country has made great positive strides (6 of the
indicators noted improvements), while there are yet others
in which there are negative changes, and also, some in
which no changes have been noted.
However, it is important to note that there is marked
improvement in trade freedom by 6.1 points. On the
other hand, Investment freedom has neither declined
nor improved for the period, maintaining its score at
50.
It is therefore imperative that the policy makers look
into ways of improving on the declining indicators’
scores, and also, putting in place measures to improve
on the stagnant indicators.
Kenya has a number of financial institutions that offer
a variety of financial services to the different clients
with varied requirements. Other than the decline to
45 in 2010 from 50 in 2009, the score for financial
freedom has maintained, like for investment freedom,
at 50.
Inferences for Kenya
There are positive points that can be noted from
the index, which can be taken as key pointers to the
areas that the government, the citizens as well as the
business community needs to focus on.
Of all the indicator scores as enumerated in Table 3
above, labor freedom is the most improved, earning 6.9
basis points from the previous score to 64, followed by
trade freedom moving positively with 6.1 basis points
to a score of 72.8 in 2014.
On the other hand, the most declined indicator,
business freedom, had a negative movement of 2.2
basis points, followed by freedom from corruption
negatively moving by 1 basis point.
Evidence-based policy pace-setting
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Table 3: Most Improved/Declined Score on Indicators 2013 - 2014
Overall Score
2013
2014
Change
Comments
55.9
30
22
77.5
73.5
58
57.1
57.1
30
21
78
74.6
55.8
64
1.2
0
-1
0.5
1.1
-2.2
6.9
Improved
No Change
Decline
Improved
Improved
Decline
Improved
Monetary Freedom
73.8
74.9
1.1
Improved
Trade Freedom
Investment Freedom
66.7
72.8
6.1
Improved
50
50
0
No Change
Financial Freedom
50
50
0
No Change
Rule of Law
Property Rights
Freedom from Corruption
Limited Government Fiscal Freedom
Government Spending
Regularatory Efficiency Business Freedom
Labour
Open Markets
References
http://www.heritage.org/index/
http://cpi.transparency.org/cpi2013/results/
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Evidence-based policy pace-setting
The
Point
The Institute of Economic Affairs (IEA - Kenya is a
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The Point is a publication by the Regulation and
competition Policy (RCP) Programme.
©2014 Institute of Economic Affairs
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3. Anthony Mwithiga
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Design & Layout:
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Evidence-based policy pace-setting
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