All Israelis would benefit from more economic freedom

ByROBERT BORENS
October 20, 2014 21:44

What is economic freedom and why should Israelis care about it?




money

Shekel money bills. (photo credit:REUTERS)

Convening this week at the C-Hotel in Neveh Ilan is the second semi-annual Friedberg Economics Institute seminar, entitled, “Growth, Economics, and Prosperity.”

The Friedberg Economics Institute (www.fei.org.il) was founded this year in Israel to bring about greater awareness in the country regarding the nature and benefits of economic freedom.

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The seminars are held in partnership with the Jerusalem Institute for Market Studies. The initial target audience for these seminars is Israeli university students.

Students from all academic backgrounds, second year and above, are invited to apply to attend the four-day seminar/retreat and 30 are accepted, with all expenses paid.


What is economic freedom and why should Israelis care about it? Two major indexes are published each year measuring economic freedom – one published by the Fraser Institute in Vancouver, Canada in cooperation with 70 free-market oriented policy institutes from around the world, and the other is published by the Heritage Foundation in Washington, DC, in partnership with The Wall Street Journal.

According to the Fraser Institute’s Economic Freedom of the World, “The cornerstones of economic freedom are (1) personal choice, (2) voluntary exchange coordinated by markets, (3) freedom to enter and compete in markets, and (4) protections of persons and their property....”

Economic freedom is an issue of interest and concern because the evidence is compelling that nations that are more economically free are more prosperous, healthy, fair and politically free.

According to data compiled in Economic Freedom of the World, nations in the most economically free quartile have an average per capita income of $39,899, compared to an average of $6,253 for nations in the least economically free quartile.

Average annual growth rate of the most economically free nations is 3.43 percent compared to 2.55% in the least economically free.

Average income of the poorest 10% of the population in nations that are most economically free nations is $11,610 and $1,358 in the least economically free.

And life expectancy in the most economically free nations is 79.6 years compared to 63.2 in the least economically free nations.

The economic freedom index standing of each nation is determined by five factors: size of government, quality of legal system and property rights, soundness of the nation’s currency, extent of free trade and the scope of regulation.

The bottom line of the whole exercise is that when government is used to protect individuals and their property, allowing maximum latitude for individual freedom and creativity, nations prosper.

In the latest edition of Economic Freedom of the World, Israel ranks 55 among 152 nations. This points to prospects for more growth and prosperity in Israel by targeting improvements in economic freedom.

Areas that the report shows are most problematic in Israel are the size of government – the scope of government spending and the rate of taxation – and regulation, particularly in labor markets.

In the four-day Friedberg Economics Institute seminar, students hear leading free-market thinking economists and policy makers from around the world.

Among those they will hear this week at Neveh Ilan is Leszek Balcerowicz, former finance minister and governor of the national bank of Poland, credited with free market economic policies in Poland, in the post-Soviet era, that set that nation on the path to becoming the fastest growing economy in Europe.

Writing recently in the Wall Street Journal about Balcerowicz’s achievements in Poland, former US Senator Phil Gramm notes that per capita GDP in Poland increased to $13,432 in 2013 from $1,683 in 1990 by “transforming a state-based collectivist economy to a market-oriented economy.”

Among the lecturers at the institute’s first seminar last April was Jose Pinera, former minister of labor and social security of Chile, under whose leadership Chile’s bankrupt state-run social security system was transformed into a system in which individuals fund their own private retirement accounts.

According to a recent study by Dictuc, a Chilean consulting firm, since the Chilean pension system was privatized in 1980, returns to workers have been six times higher than what they would have realized under the government- run social security system.

Sweeping free market reforms in Chile in the late 1970s-early 1980s transformed a third world economic laggard into one the world’s most economically free and successful economies.

Per capita GDP moved from around $5,000 in the mid-’70s to over $20,000 by 2013.

By some estimates Israel’s underground economy is as high as 25% of GDP. In Transparency International’s Corruption Perceptions Index, Israel ranks 23 of 34 nations.

Human beings will always be creative in pursuing personal interests. The challenge of good government policy to is direct individual creativity productively, so that it best serves the interests of all. Too much government inspires corruption. Excessive taxes and regulation inspires doing business underground.

There is powerful evidence that all Israelis would benefit by less rather than more government, through more rather than less economic freedom.

However, identifying what needs to change and achieving change are different things.

The path to change and reform is multifold, but one certain necessity is the importance of education in building a new generation, one which sees the world differently.

Through the Friedberg Economics Institute seminars, we hope to build a new generation of leaders in Israel that will understand and appreciate the benefits to all of more economic freedom.

The author is director of the Friedberg Economics Institute.

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