Let me sincerely thank the hosts of this event for their attention and for the opportunity to participate in this discussion. My comments on the research findings will focus on two main aspects. First, let me share my thoughts about the implications of economic freedom for business growth prospects and economic development in general. Second, I will try to answer the question what Lithuania can learn from the 2006 economic freedom index.    

A hundred years ago one could hardly imagine the amazing technological progress made over the past century or today’s scope of globalization or meteoric speed rates of information flows. So it can be assumed that the “dissolving borders” among the world’s economies have reduced the gap between the richest and the poorest countries. Unfortunately, actual figures point to the contrary trends. According to the World Bank, in the 1870s the average income per capita in the 17 wealthiest nations was 2.4 times higher than that in the rest  of the world, and in the 1990s this gap widened to 4.5 times. Why has the gap been widening?

Back at the end of the 18th century one of the most prominent founders of modern economic science, Scottish scientist Adam Smith attributed England’s economic achievements to its geographic location. Today’s empirical studies confirm Smith’s arguments. In analysing the patterns of global development from 1965 through 1990, economists at the Harvard Institute for International Development have found that being entirely landlocked can trim down a country’s economic growth rate by about 0.7 percentage point. A severe climate, demographic trends, culture and twists in history are other major factors explaining the widening gap between the rich and the poor.

Given all these “natural” disadvantages, it would appear that many African nations are doomed to poverty: after all, we cannot „present” them with the seaside or alter the tropical climate, which is not good for agriculture but quite favourable for the spread of terminal diseases and epidemics. Fortunately, the situation is not hopeless. As Nobel prize-winner Milton Friedman noted more than twenty years ago, the cure for economic deprivation is economic freedom. Economic literature offers ample evidence of this proposition. There is no doubt that the research findings being presented today are one piece of evidence.

According to the twelfth edition of the economic freedom index, GDP per capita, measured by purchasing power parity, in Hong Kong, which enjoys the highest rating of economic freedom, was not the highest in 2004. On the other hand, analysis of all of the countries covered by in the index indicates a positive long-term correlation between economic freedom and living standards. As the authors of the index note, the countries which belong to the „repressed” and „mostly unfree” groups have 70 percent lower income per capita than „mostly free” nations, including Lithuania. Unfortunately, the latter group falls behind „free” countries more than twice. It should be noted that the credibility of these findings is high as research performed by other well-known institutions, e.g. Canada’s’ Fraser Institute or the Harvard Institute for International Development, show very similar results.                

Analysts at the Heritage Foundation and The Wall Street Journal define economic freedom as the absence of government coercion or constraint on the production, distribution or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself. In other words, economic freedom can be broadly understood as every one of us being free to use our legitimate property to the extent that we do not inhibit other people’s possibilities to do the same. Goods and services do not appear out of a blue sky. Their existence depends on the guarantees of ownership rights and motivations to produce, to distribute and to consume them. So the level of economic freedom in a given country depends essentially on the policies and the institutional environment that this country has pursued. That is to say, the scope of economic freedom depends on how well a country is doing in legitimate protection and establishment of ownership rights, how much people are suffering from trade restrictions, how much inflation trims their purchasing power, and many other factors.

In this respect and in comparison with economic freedom indicators from other sources, one of the major advantages of the index under discussion today is its representative character. The 2006 Index of Economic Freedom measures 157 countries against a list of 50 independent variables divided into ten factors of economic freedom. An analogous index from the Fraser Institute ranks slightly more than 120 nations against five factors of economic freedom based on 38 variables. On the other hand, the Fraser Institute’s index dates back to 1970, whereas the Heritage Foundation and The Wall Street Journal‘s index was started only in 1995.

At first sight, qualitative methodology of the Heritage Foundation and The Wall Street Journal’s index appears to be another disadvantage – although in the initial stage an analysis is performed on the basis of quantitative statistical indicators, a country’s overall economic freedom rating is an average score granted by experts. In addition, all ten factors of economic freedom are weighted equally: it is assumed that all of them are equally important in any country.

On the other hand, these can hardly be considered serious drawbacks of this kind of surveys. The authors of the index do not aim to measure quantitatively the effect that each of the factors of economic freedom has for a country’s economic development but rather are seeking to determine the degree to which a country is economically free. Furthermore, the application of the same methodology in all countries is a prerequisite for a proper comparison.

In terms of economic freedom, Lithuania is neither an outsider nor a winner. The good news is that economic freedom in Lithuania has been increasing since the very launch of the index. As the latest data show, Lithuania has managed to retain the same ranking, while both of our Baltic neighbours have gone down, i.e. they have faced tighter constraints on economic freedom.

As a representative of the financial sector, I find it particularly delightful that the situation in Lithuania’s banking sector has merited the highest score for some time now. The stability of the financial sector, which has been secured through one of Lithuania’s most successful reforms over the past fifteen years, the monetary reform, has undoubtedly contributed to this achievement. Furthermore, it is important mentioning that currently Lithuania has one of the lowest inflation rates among the EU newcomers.

According to the Harvard Institute for International Development, the most important economic policy areas for achieving economic well-being are openness of an economy, prudent fiscal discipline and credible rule of law. The annual growth rate of open economies is by approximately 1.2 percentage point higher than that of countries barricaded with heavy import duties and other trade restrictions. If the level of government saving measured as a ratio of GDP grows by 10 percentage points, economic growth accelerates by 1 percentage point on the average.

Lithuania’s scores for the first two factors of economic freedom – trade policy and government intervention – are satisfactory. They are 2 points each on the 1-to-5-point scale used by the Heritage Foundation and The Wall Street Journal. On the other hand, our economic freedom is being inhibited the most by such law-and-order-related phenomena as entrenched corruption, bureaucratic barriers to business and an insufficiently credible judiciary. So if Lithuania gave priority to solving these problems, i.e. problems which local experts have emphasized on many occasions too, the country would certainly make one step forward on its road to economic prosperity. After all, we are still positioned among „mostly free,” not „free” countries, which means that there is plenty room for improvement.      

To summarise, we can draw several conclusions. The global experience of economic development raises no doubt that economic freedom is one of key prerequisites for creating economic well-being. The essential and, unfortunately, hardly achievable task is to determine the optimal level of economic freedom. As there are no economies in the world as like as two peas, the optimal scope of government activity is not universal; it does differ across countries. The economic freedom index we are discussing today does not show its optimal level for Lithuania or for any other country, but it is a good indicator of loopholes in government policy and institutional set-up. If we want to facilitate economic progress in our country, we have to find ways to solve those problems first rather than to choose one country as our guiding star and blindly copy its policies.

Thank you for your attention.