Malaysia’s Performance in 2016 Index of Economic Freedom By Heritage Foundation and Wall Street Journal

1 HIGHLIGHTS OF MALAYSIA’S PERFORMANCE

1. Malaysia registered an overall economic freedom score of 71.5 in the 2015 Index (2015: 70.8), making Malaysia the 31st out of 186 (2015: 37th out of 186) freest countries. Malaysia’s improved score of 71.5 is above the world average of 60.7 placing Malaysia in the “Mostly Free” (countries with scores of 70-79.9) group of countries such as Sweden, Austria, South Korea and Norway. The overall ranking for 186 countries is shown in Appendix 1.

2. In 2016, improvements in ranks were achieved in six of the 10 economic freedoms such as business freedom, monetary freedom, fiscal freedom, investment freedom, financial freedom and freedom from corruption. Property rights remained same, while government spending, labor freedom and trade freedom took a marginal decline. (Table 1).

3. The 2016 Economic Freedom Index released by the Heritage Foundation on 1st February 2016, acknowledges that Malaysia scores well in the area of open markets measured by trade freedom, investment freedom, and financial freedom. The financial sector is robust, and foreign investment is being permitted to a greater degree. While the rule of law remains weak, the government has taken steps to tackle corruption more effectively.

Table 1: Malaysia’s Economic Freedom Performance 2016 and 2015 Comparison

Changes 2016 2015 Category 10 Components in Rank Rank Score Rank Score +2 Overall 29 71.5 31 70.8

Property Rights 50 55.0 50 55.0 RULE OF LAW +1 Freedom from Corruption 51 52.0 52 50 +5 Fiscal Freedom 50 85.0 55 84.4 GOVERNMENT SIZE -4 Government Spending 75 74.3 71 74.0 +1 Business Freedom 5 91.4 6 93.5 REGULATORY -5 Labor Freedom 45 71.5 40 75.7 EFFICIENCY +28 Monetary Freedom 17 84.5 45 80.8 -2 Trade Freedom 72 81.4 70 80.0 OPEN +13 Investment Freedom 83 60.0 96 55.0 MARKETS +1 Financial Freedom 38 60.0 39 60.0

2 Table 2: The 10 Economic Freedoms

3 4. Malaysia has undertaken structural reforms to enhance the entrepreneurial environment. Management of public finance has been relatively prudent, with gradual reductions in various government subsidies in recent years, and the corporate income tax rate will be reduced from 25 percent to 24 percent in 2016.

5. The government maintains investments in such key sectors as banking, media, automobiles, and airlines. Malaysia is a leading exporter of electronics and information technology products; other industries include agricultural products and automobiles

MALAYSIA AMONG THE ASIA-PACIFIC COUNTRIES

6. Economic freedom has advanced in the Asia–Pacific region for three years in a row. Since 2013, the region as a whole has recorded a cumulative score gain of close to 1.6 points. The Asia–Pacific area continues to have by far the largest number of the world’s “free” economies. Hong Kong, Singapore, New Zealand, and Australia lead the Index. Nonetheless, the region is marked by sharp dis- parities in levels of economic freedom. Over 60 percent of the 42 countries in the Asia–Pacific region score between 40 and 60 on the economic freedom scale, remaining either “mostly unfree” or “repressed.”

7. With a score of 71.5, Malaysia is ranked 8th out of 42 countries in the Asia– Pacific region, overtaking Macau (Table 3). Since 2012, Malaysia’s economic freedom has advanced by 5.1 points, the third largest point increase in the Asia– Pacific region. Among ASEAN countries, Malaysia remained 2nd out of 10 countries (Table 4).

Table 3: 2016 Index of Economic Freedom for Asia-Pacific Countries

Country 2016 2015 Rank Score Rank Score Hong Kong 1 88.6 1 89.6 Singapore 2 87.8 2 89.4 New Zealand 3 81.6 3 82.1 Australia 4 80.3 4 81.4 Taiwan 5 74.7 5 75.1 Japan 6 73.1 6 73.3 Korea, South 7 71.7 7 71.5 Malaysia 8 71.5 8 70.8 Macau 9 70.1 9 70.3 Brunei Darussalam 10 67.3 10 68.9 Thailand 11 63.9 12 62.4 Kazakhstan 12 63.6 11 63.3 Samoa 13 63.5 14 61.9 Philippines 14 63.1 13 62.2 Vanuatu 15 60.8 16 61.1 Azerbaijan 16 60.2 17 61

4 Sri Lanka 17 59.9 21 58.6 Tonga 18 59.6 18 59.3 Kyrgyz Republic 19 59.6 15 61.3 Bhutan 20 59.5 24 57.4 Indonesia 21 59.4 22 58.1 Mongolia 22 59.4 19 59.2 Fiji 23 58.8 20 59 Cambodia 24 57.9 23 57.5 India 25 56.2 26 54.6 Pakistan 26 55.9 25 55.6 Vietnam 27 54.0 32 51.7 Maldives 28 53.9 28 53.4 Bangladesh 29 53.3 27 53.9 Papua New Guinea 30 53.2 29 53.1 China 31 52.0 30 52.7 Micronesia 32 51.8 35 49.6 Tajikistan 33 51.3 31 52.7 Nepal 34 50.9 34 51.3 Laos 35 49.8 33 51.4 Burma 36 48.7 38 46.9 Solomon Islands 37 47.0 36 47 Kiribati 38 46.2 39 46.4 Uzbekistan 39 46.0 37 47 Timor-Leste 40 45.8 40 45.5 Turkmenistan 41 41.9 41 41.4 Korea, North 42 2.3 42 1.3

Table 4: 2016 Index of Economic Freedom for ASEAN Countries

2015 2014 Country Rank Score Rank Score Singapore 1 87.8 1 89.4 Malaysia 2 71.5 2 70.8 Brunei 3 67.3 3 68.9 Thailand 4 63.9 4 62.4 The Philippines 5 63.1 5 62.2 Indonesia 6 59.4 6 58.1 Cambodia 7 57.9 7 57.5 Vietnam 8 54.0 8 51.7 Laos 9 49.8 9 51.4 Burma 10 48.7 10 46.9

CONCLUSION

5 On a worldwide basis, this year’s increase in economic freedom has been driven by improvements in half of the 10 economic freedoms. Investment freedom improved by one point on average, while ratings for the control of public spending and freedom from corruption were higher by an average of 0.8 point and 0.7 point, respectively. Both monetary freedom and trade freedom also recorded slight improvements. There is a robust relationship between improving economic freedom and achieving higher per capita economic growth. As economies gain economic freedom and thus achieve dynamic growth, individuals and companies are empowered to build businesses, create jobs, and generate greater innovation for their communities and societies.

6 Appendix 1

7 8 9 10 11 Appendix 2

METHODOLOGY AND HIGHLIGHTS FROM THE 2016 INDEX

1. The Index of Economic Freedom is constructed through analysis of 10 specific components of economic freedom, some of which are themselves composites of additional quantifiable measures. Each of the 10 economic freedoms is graded using a scale from 0 to 100. The 10 component scores are equally weighted and averaged to get an overall economic freedom score for each economy.

2. The 10 components of economic freedom are:

i) Property Rights; ii) Freedom from Corruption; iii) Fiscal Freedom; iv) Government spending; v) Business Freedom; vi) Labor Freedom; vii) Monetary Freedom; viii) Trade Freedom; ix) Investment Freedom; and x) Financial Freedom.

3. This report is based on quantitative and qualitative data sourced from secondary reports published by international bodies. 4. The Index of Economic Freedom is constructed through analysis of 10 components of economic freedom, which are grouped for ease of reference into four categories or pillars:

 Rule of law (property rights, freedom from corruption)  Government size (fiscal freedom, government spending)  Regulatory efficiency (business freedom, labor freedom, monetary freedom); and  Open markets (trade freedom, investment freedom, financial freedom)

5. The report indicates the range of economic freedom scores as below:  80-100 : Free  70-79.9: Mostly Free  60-69.9: Moderately Free  50-59.9: Mostly Unfree  0-49.9 : Repressed

6. The global average economic freedom score of 60.7 is the highest recorded in the 22-year history of the Index.

12 7. The Index of Economic Freedom has provided an economic policy road map for countries that aspire to greater economic dynamism and prosperity.

8. The 2016 Index of Economic Freedom mentions Nations with higher degrees of economic freedom prosper because they capitalize more fully on the ability of the free-market system to generate and reinforce dynamic growth through efficient resource allocation, value creation, and innovation.

9. It is notable that nations that have focused on improving their competitiveness and opening their societies to new ideas, products, and innovations have done a much better job of achieving the high levels of social progress that their citizens demand. And it is not the massive redistributions of wealth or government dic- tates on income levels that produce the most positive social outcomes.

10. The erosion of economic freedom was most pronounced in labor freedom. The average global labor freedom score fell by 1.6 point, reflecting still-stagnant employment conditions around the world as well as the pressing necessity of enhancing the flexibility of labor markets.

11. Hong Kong has maintained its status as the world’s freest economy, a distinction that it has achieved for 22 consecutive years. However, the gap between that territory and Singapore, the second-freest economy, has almost vanished. Hong Kong’s economic freedom score declined by a single point, with an erosion of the rule of law reflecting an increased level of perceived corruption.

12. The BRICS nations (Brazil, Russia, India, China, and South Africa) has stalled, except in India, which improved by 1.6 points. Russia plunged 10 places in the rankings to 153rd, with its score deteriorating by 1.5 points. The rankings of the other BRICS countries—South Africa, Brazil, and China—declined to 80th, 122nd, and 144th, respectively.

13. The United States continues to be mired in the ranks of the “mostly free,” the second-tier economic freedom category into which the U.S. dropped in 2010. Worse, with scores in labor freedom, business freedom, and fiscal freedom notably declining, the economic freedom of the United States plunged 0.8 point to 75.4, matching its lowest score ever.

14. Within the top five freest economies, Switzerland is the only economy whose overall score did not decline in the 2016 Index. Outperforming Australia, the competitive Swiss economy has moved into fourth place, less than a point behind New Zealand.

15. United Kingdom replaced Mauritius as the 10th freest economy, the world’s top 10 freest economies in the 2016 Index consist of four Asia–Pacific economies (Hong Kong, Singapore, New Zealand and Australia); four European economies (Switzerland, Ireland, Estonia, and the United Kingdom); and one country each from North America (Canada) and the South and Central America/Caribbean region (Chile).

13 16. Hong Kong accomplished the top position in the 2016 Index of Economic Freedom with a score of 88.6, followed by Singapore (2nd, 87.8), New Zealand (3rd, 81.6), Switzerland (4th, 81.0), Australia (5th, 80.3), Canada (6th, 78.0), Chile (7th, 77.7), Ireland (8th, 77.3), Estonia (9th, 77.2) and coming in at the 10th position is United Kingdom with a score of 76.4.

17. There is a robust relationship between improving economic freedom and achieving higher per capita economic growth. Whether long-term (20 years), medium-term (10 years), or short-term (five years), the relationship between changes in economic freedom and changes in economic growth is consistently positive. As economies gain economic freedom and thus achieve dynamic growth, individuals and companies are empowered to build businesses, create jobs, and generate greater innovation for their communities and societies.

14 Appendix 3

The Index of Economic Freedom is constructed of 10 components of economic freedom, which are grouped into 4 categories:

Categories Components Definition 1. Rule of Law a) Property Rights The property rights component is an assessment of the ability of individuals to accumulate private property, secured by clear laws that are fully enforced by the state. It measures the degree to which a country’s laws protect private property rights and the degree to which its government enforces those laws. It also assesses the likelihood that private property will be expropriated and analyzes the independence of the judiciary, the existence of corruption within the judiciary, and the ability of individuals and businesses to enforce contracts. The more certain the legal protection of property, the higher a country’s score; similarly, the greater the chances of government expropriation of property, the lower a country’s score. Countries that fall between two categories may receive an intermediate score. b) Freedom from Corruption erodes economic freedom by introducing insecurity and uncertainty into economic relationships. Corruption

2. Government a) Fiscal Freedom Fiscal freedom is a measure of the tax burden imposed by government. It includes direct taxes, in terms of the top marginal tax Size rates on individual and corporate incomes, and overall taxes, including all forms of direct and indirect taxation at all levels of government, as a percentage of GDP. b) Government This component considers the level of government expenditures as a percentage of GDP. Government expenditures, including Spending consumption and transfers, account for the entire score. No attempt has been made to identify an optimal level of government expenditures. The ideal level will vary from country to country, depending on factors ranging from culture to geography to level of development. However, volumes of research have shown that excessive government spending that causes chronic budget deficits and the accumulation of sovereign debt is one of the most serious drags on economic dynamism.

3. Regulatory a) Business Business freedom is an overall indicator of the efficiency of government regulation of business. Efficiency Freedom b) Labor Freedom The labor freedom component is a quantitative measure that considers various aspects of the legal and regulatory framework of a country’s labor market, including regulations concerning minimum wages, laws inhibiting layoffs, severance requirements, and measurable regulatory restraints on hiring and hours worked.

c) Monetary Monetary freedom combines a measure of price stability with an assessment of price controls. Freedom 4. Open Markets a) Trade Freedom Trade freedom is a composite measure of the absence of tariff and non-tariff barriers that affect imports and exports of goods and services. b) Investment In an economically free country, there would be no constraints on the flow of investment capital. Individuals and firms would be Freedom allowed to move their resources into and out of specific activities, both internally and across the country’s borders, without restriction. c) Financial Financial freedom is a measure of banking efficiency as well as a measure of independence from government control and Freedom interference in the financial sector.

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