Nepal’s ranking in the latest World Economic Freedom Index slipped two positions to 126th, indicating presence of restrictive regulations and over reliance on government spending to boost economic activities.
The country’s ranking fell, as it obtained a score of 6.16, as against that of 6.19 a year ago, shows the Economic Freedom of the World Report 2014 published by Fraser Institute, a Canada-based think tank.
Nepal’s score is worst among South Asian nations that were surveyed, which implies the country is the least economically free in the region. The survey took data of 2012 into consideration to produce the latest report.
Earlier, the 2014 Index of Economic Freedom, jointly published by The Wall Street Journal and The Heritage Foundation, a US-based think tank, had also placed Nepal in the last position among South Asian countries.
“Low level of economic freedom could be considered as one of the reasons behind Nepal’s inability to catch up with other emerging markets,” says a statement issued by Samriddhi Foundation, which launched the report in the country.
The World Economic Freedom Index measures the degree of economic freedom based on performance in five major areas, including size of the government, legal system and security of property rights, sound money, freedom to trade internationally and regulation. These five areas consist of 24 components and several sub-components. In total, the index comprises 42 distinct variables.
Nepal’s performance deteriorated largely because of weak performance in ‘size of the government and regulation areas’, shows the report.
“The size of the government area measures the degree to which a country relies on personal choice and markets rather than government budgets and political decision-making,” says the report. Therefore, countries with low level of government spending, fewer state-owned enterprises and lower tax rates earn the highest ratings in this area
Nepal obtained a score of 7.39 in this area, as against 7.6 in the previous year. This shows that the government spending here is higher relative to spending by individuals, households, and businesses. This practice, as per the report, indicates increasing government intervention in economic activities, which reduces economic freedom.
Among South Asian countries, Bangladesh obtained the highest score of 8.84 in ‘size of the government’ area.
Similarly, Nepal obtained a score of 6.41 in ‘regulation area’, as against 6.7 in the previous year. This area basically focuses on regulatory restraints that limit the freedom of exchange in credit, labour and product markets, according to the report.
Low score in this area indicates that regulations here are restricting entry into markets and interfering with the freedom to engage in voluntary exchange, therefore, reducing economic freedom.
Bangladesh, once again, bagged the highest score of 6.79 among South Asian countries in this area.
However, Nepal’s score in ‘sound money’ area improved to 6.4 from 6.3 in the past. This area measures the consistency of monetary policy in ensuring price stability in the long term and ease with which foreign currencies can be used. India led the pack in South Asia in this area with a score of 6.73.
Among others, Nepal’s score in ‘legal system and property rights’ and ‘freedom to trade internationally’ areas remained unchanged at 4.2 and 6.4, respectively.
The ‘legal system and property rights’ area looks into rule of law, security of property rights, presence of independent and unbiased judiciary, and impartial and effective enforcement of the law. On the other hand, ‘freedom to trade internationally’ area looks into wide variety of restraints that affect international exchange, such as tariffs, quotas, hidden administrative restraints, and controls on exchange rates and capital.
Among South Asian countries, India bagged the highest score of 5.6 in ‘legal system and property rights’ area, while Sri Lanka obtained the highest score of 6.91 in ‘freedom to trade internationally’ area, shows the report.