TN still most economically free; Gujarat, Andhra gain

Nikhila Gill

The Economic Freedom Rankings for the States of India, 2009 posts sharp changes in the overall levels of economic freedom in the states between 2005 and 2009. While Tamil Nadu retained the top spot, Gujarat moved up from No.5 to No.2, Andhra Pradesh gained four places to claim the No.3 slot, while Madhya Pradesh fell from No.2 to No.6 and Orissa was at No.17, six places down.

The authors of the report by the CATO Institute and Indicus Analytics in partnership with Friedrich Naumann Stiftung caution that though there is a link between economic freedom and growth, the correlation is not very high. However, there is an observable trend illustrating this correlation— AP and Gujarat improved the most and grew at an average of 10.5% between 2004-05 and 2008-09; the states that worsened moderately grew at 8.7% on average; those who came in at the bottom averaged growth rates of 6.7% (in the same period).

The report defines 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".

The study uses a robust methodology, analysing three broad areas (further divided into sub-categories)—(i) size of government, (ii) legal structure and security of property rights, and (iii) regulation of credit, labour and business.

The top-scoring states in 2009 were Tamil Nadu, Gujarat and Andhra Pradesh while Bihar, Uttarakhand and Assam came in at the bottom. However, not all states showed an increase in levels of economic freedom, with Madhya Pradesh, Orissa, Punjab and many more registering a decline. This is significant because states with higher levels of freedom tend to perform better across a range of economic variables and exhibit higher levels of in-migration.

The report further discusses the significance of a country's score on economic freedom and its effects on measures of economic development (life expectancy, per capita investment, infant mortality etc); the two are strongly correlated. While correlation does not signify causation, given the strength of the correlation across development and deprivation indicators, it does suggest causation, as pointed out by Bibek Debroy.

But, does economic freedom matter? China, with its autocratic government and low levels of economic freedom, continues to grow at an inexplicably high pace. It can be deduced from China's (and other developing countries') example that absolute levels are less relevant than the changes in levels of economic freedom. As Bibek Debroy explains, "when one begins with low levels of economic freedom, even incremental changes can have large and disproportionate effects on growth".

Laveesh Bhandari opines that while the decline in the median value for economic freedom of the states of India (from 0.38 to 0.36) may not be indicative of long-term trends, it needs to be closely monitored. This implies that despite high GDP growth, the overall economic freedom in the states of India is not improving. Improvements in the size of the government are outweighed by fall in both legal structure and property rights as well as regulation of credit labour and business. Says Bhandari: "As India opens its national markets to international investment and commodity flows, it cannot afford to constrain its own entrepreneurs. For this, economic freedom needs to be improved at the national, state and local levels."

Among the top-performing states, Andhra Pradesh and Gujarat registered the biggest improvements in economic freedom. Swaminathan Aiyar has unearthed (with the help of DA Somayajulu) the factors underlying Andhra Pradesh's unexpectedly high levels of growth. Despite the state's welfare subsidies, it "used high public investment and business-friendly policies to accelerate growth", a strategy of growth-led populism. This strategy helped to strengthen the connection between economic freedom, rapid economic growth and welfare.

Thus, while economic freedom is not the only freedom that exists — political and civil rights, too, have spillover effects on economic freedom — if development and prosperity are the benchmarks, it is most significant.