'Economic freedom' falls, partly due to stricter labour laws

According to a study released in July 2003 by the Fraser Institute, a Canadian free market think-tank, 'economic freedom' is declining in Germany, contrary to a general worldwide trend towards greater freedom. In the report’s ranking of 123 countries by their degree of economic freedom, Germany slipped from 13th place in the previous report to 20th place. An important reason for this fall is what the report regards as stricter regulation of Germany's labour market.

On 8 July 2003, the Fraser Institute, a Canadian free market think-tank, released its latest annual report on Economic freedom of the world, drawn up in conjunction with members of the Economic Freedom Network (a group of similar institutes around the world). The report, published since 1996, uses the most recent internationally comparable data available - referring to 2001 in this case - to provide a ranking of 123 nations according to their degree of 'economic freedom', defined as 'personal choice, voluntary exchange, freedom to compete, and protection of the person and property'. According to the 2003 study, Germany stood in 20th place in the economic freedom rankings, down from 13th place in the 2002 report (having stood at 12th in 1995, 10th in 1990 and eighth in 1985).

Using 38 variables for each country in five categories, the authors of the report awarded Germany 7.3 points in the 2003 report, compared with 7.6 points in the 2002 version, on a scale ranging from zero (the lowest degree of economic freedom) to 10 (the highest degree of economic freedom). The five categories of variables that are regarded as reflecting economic freedom are: the government's influence on the economy; the legal system and protection of private property; currency stability; the degree of freedom in foreign trade; and the degree of regulation of credit, labour and business. Economic freedom is assessed to have increased slightly worldwide since the 2002 report, with the average number of points awarded rising a little from 6.34 to 6.35. Hong Kong topped the list, closely followed by Singapore and the USA. The other top 10 economies in terms of economic freedom were New Zealand, the UK, Canada, Australia, Ireland, Switzerland and the Netherlands.

Germany's drop in the rankings from the 2002 to the 2003 report is partly due to a lower ranking for 'labour market freedom'- measured in terms of the presumed impact on economic freedom of matters such as minimum wages, flexibility in 'hiring and firing', collective bargaining, unemployment benefits as a (dis)incentive to work, and military conscription. Germany's comparatively strictly regulated labour market was ranked in 80th place in the assessment. The points awarded to Germany in this category fell slightly from 2.9 for the 2000 data to 2.8 for the 2001 data (ie there was a slight decrease in 'freedom' in this area). This reduction was, in large part, due to stricter regulations on hiring and firing (the points awarded in this field dropped from 1.8 for the 2000 data to 1.4 for the 2001 data). The report suggests that the degree of overall labour market freedom fell, despite the fact that economic freedom in relation to industry-wide collective bargaining among the social partners was thought to have increased modestly (from 2.3 points in 2000 to 2.5 points in 2001:).

According to the report, another area that is very important in explaining the deterioration in Germany’s ranking is the increased influence of the government on the economy. Indeed, the report’s writers regard this increase as so significant that Germany has fallen to 107th place in the category measuring the 'size of government'. The report notes that the only categories in which the assessment for Germany did not deteriorate were 'access to sound money/stable currency' and 'freedom to exchange with foreigners'.

Despite this decline in Germany's economic freedom ranking, a decrease in labour market regulation might occur in the coming years. A report by the International Monetary Fund released on 14 July, which evaluated the government's current and planned reforms of the labour market and benefit programmes, suggested that 'the added emphasis on structural reforms in the government's policy strategy is entirely right ... Germany needs to seize the moment and implement the bold plans under discussion in Agenda 2010 and elsewhere' (DE0303105F).

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