Freedom is back in vogue
The author, former chief economist at the Asian Development Bank and a senior adviser for international economic affairs to former President Lee Myung-bak, is a professor of economics at Korea University.
“It is our generation’s calling to build a nation that espouses liberal democracy and ensures a thriving market economy ... a nation that truly belongs to the people,” President Yoon Suk-yeol said in his inaugural address. He repeatedly stressed “freedom” and said he was determined to create a free country. He underscored the importance of freedom as a universal value. In a controlled, repressed society where civic rights and political freedom are infringed upon, the people cannot be happy.
In addition to political freedom, economic freedom is a universal value. A citizen without such freedom cannot be truly free. Economic freedom is the cornerstone of a capitalist economy, which develops through exchanges on a free market, execution of contracts and protection of private property rights. Historically, many countries prospered when they enjoyed high degrees of economic freedom, hence democracy also advanced.
In his book “Free to Choose,” Nobel laureate Milton Friedman talked about three categories of economic freedom. First is freedom to choose how much and where you will use your income. When a state regulates an individual’s consumption and exchanges and increases taxes, this freedom is violated. Second is freedom to dispose material and human resources based on an individual’s value. There should be no restriction on choosing a job or engaging in a business activity. Third is freedom to own assets, and property rights must not be violated. Friedman said an economy prospers when the government minimizes market intervention and individuals and companies enjoy increased economic freedom.
“The economic order of the Republic of Korea shall be based on a respect for the freedom and creative initiative of enterprises and individuals in economic affairs,” says our Constitution. But the international community does not rate the freedom of economic activities in Korea highly.
The Fraser Institute releases an annual report of economic freedom in the world, ranking major countries in five areas: size of government, legal systems and property rights, soundness of money, freedom to trade internationally and regulations. In its latest report, Korea was ranked 47th in the world for economic freedom. It received particularly low scores, ranked at 99th on government size and 70th on regulations. This was because the government’s expenditure was large, the income tax rate was high, and regulations on business, labor and credit markets were severe.
The government must reduce intervention and regulations to promote economic freedom. And yet, a small government is not necessarily desirable. A state must increase effectiveness and fairness of a market with proper policies. It must stimulate competition, maintain law and order and build public infrastructure to allow stable economic growth. Furthermore, the government must create a social safety net to support basic lives of those who fell behind and vulnerable populations and reduce inequality by increasing social mobility between classes and generations. It must offer equal opportunity to all people to develop their abilities and skills as much as possible. When it does, the government should be careful that its intervention, intended to promote equality, does not lower economic freedom and the effectiveness of the market economy.
Steady growth of an economy is only possible when economic freedom leads to innovation. Innovation takes place when new ideas, new products and new production methods arise and create value. According to Joseph Schumpeter, innovation is a process of creative destruction, in which a new technology destroys an existing technology, and a driving force for economic development.
According to the Global Competitiveness Report of the World Economic Forum, Korea was one of the world’s most advanced countries, ranked sixth for science and technology innovation capabilities such as research and development spending and the number of patents. But its business vitality was only ranked 25th. It received low scores in categories such as expenses to create start-ups, growth of innovative companies, risk-taking of entrepreneurs and innovative ideas. For the sake of our future, we must encourage entrepreneurs to face immediate risks and lift excessive regulations that bar new companies from entering markets and allow innovative entrepreneurs and technology start-ups to grow.
Data from different countries shows that economic freedom and innovation are closely linked. Companies and the government must work together to create an ecosystem in which economic freedom and creativity are encouraged to boost innovation followed by more economic freedom. For example, regulations were temporarily eased during the pandemic to allow telemedicine, which helped boost economic freedom. That should be systemized to bring innovation to the entire public health system. We must learn lessons from Switzerland, the United States and Singapore — leaders in economic freedom and innovation — to upgrade our policies and systems.
Over the past years, the pandemic resulted in more government intervention, controls and manipulation of information and restrictions on the freedom of citizens. As a new administration started its term in Korea, it is meaningful that the government values the importance of freedom. We must build a dynamic economy full of freedom and innovation by integrating an effective market, proper policies and a rightful system.