IMPACT OF ECONOMIC FREEDOM ON ECONOMIC GROWTH IN CAMEROON

 ABSTRACT

The study was aimed at examining the impact of economic freedom on economic growth in Cameroon and it was set as a major objective to examine the impact of economic freedom on economic growth in Cameroon. Data was collected from secondary sources using four variables (Government spending, Property rights, and Freedom to trade internationally) for a period of 36 years (from 1980-2016).

The econometric analysis was used to analyze the result and from the result, it was found out that the freedom to trade internationally has a significant effect on economic growth (GDP).

Keywords: Economic freedom, Economic growth, Cameroon

                     CHAPTER ONE

                    INTRODUCTION

1.1 Background of the study

Economists have felt obliged to seek different explanatory variables as to why the country is having similar equipment of factors of production. Many empirical studies have found a positive relationship between economic freedom and economic growth (Gwartney et al, 2000) But of thesis studies have used one or more indicators of economic freedom such as the black-market premium on foreign exchange while others have used different indices like rule of law which includes property rights, government integrity, judicial effectiveness and Government size such as tax burden, fiscal health, government spending.

Although different indices show similar results, making a choice is important. Therefore, this shows that a single measure does not fully reflect the economic environment of Cameroon and a high aggregated index makes it difficult to draw policy conclusions (Lawson, Block. 1996).

Four main institutions measured the level of economic freedom in a country. These institutions are the Fraser house, the Heritage Foundation, the Freedom House, and the Scully and Slottje (1991). The first measures renewed the data set regularly (Gwartney et al, 2000). The Fraser house created an application and published it in 1970 where he included the various components that can be used to measure economic freedom in a country. We have the Size of the Government, Legal system and Property rights, Sound Money, Freedom to trade internationally, Regulation.

The Heritage foundation measurements are rule of law ( Property rights, government integrity, judicial effectiveness), Government size ( Tax burden, fiscal health, government spending), Regulatory Efficiency ( business freedom, monetary freedom, labour freedom), Open markets ( Trade freedom, investment freedom, financial freedom). Therefore economic freedom is examined in a way that covers a range of factors of institutional quality. Hence it is examined by the Fraser House, Freedom House, Heritage Foundation.

The main role of the Fraser house is to assess conditions to ensure freedom of choice of the individuals. Thus, they used the above components to evaluate the quality of the competitive environment. That is people should have the right to own property and protection of these rights (Gwartney et al, 2012).

There is also a positive role in the sense that the index also examines macroeconomic stability in a country that incorporates space on the discretion of individual subjects. To examine this, the heritage foundation focuses on the four key aspects highlighted above and these aspects are realized through the ten components of economic freedom, hence the components are rated on a scale that ranges from 0-100. (Heritage foundation 2015). Economic freedom is closely linked to economic growth (Berggren, 2003 Han and Sturm 2000), Labour freedom and property rights are explained by (Friedman, 1993).

According to Friedman, free societies persist only because economic freedom is based more on production economically than through methods of controlling economic activities (M. Friedman, Gwartney, Lawson, Block, W 1996). In their studies, they realized that the quality if institutions may lead to increase in economic growth but on the other hand, it may not be the only cause, an increase in economic growth may change the moral level in a country.

Despite the abundance of theoretical and empirical works, the economic theory still now unable to give a complete and exact specification of all variables having a significant impact on economic growth. In this case, it is important to investigate components of economic freedom that are important for economic growth in Cameroon and the direction of their effects.

We, therefore, decompose one common measure of economic freedom into seven different categories and analyze the effect of each category in growth regression using observations from 74 countries during the period of 36 years most especially Cameroon as a case study. Economic growth was represented by GDP per capita while economic freedom was represented by two different indices which were the index of Economic Freedom (IEF) and the Economic Freedom of the world (EFW) published by the Heritage Foundation and Fraser institute respectively. The relationship between the variables was tested through the fixed effect panel data technique.

Since Adam Smith’s inquiry into the nature and causes of the wealth of nations (1776), economists have been trying to answer the question: why are some countries more prosperous than others since 1956, the Solow growth model has been dominating the theory of economic growth. It looks at labour productivity, capital accumulation, population growth, and technological progress as an exogenous variable to explain long-term growth. However, Solow’s model does not explain technological progress and in the 1980s growth theories developed alternative models in which technological progress is endogenous.

Also, more recent endogenous growth models (Romer, 1986, 1990; Lucas, 1988) have pointed out other variables that contribute to differences in growth rates, such as knowledge spill-overs, R&D, and human capital in Cameroon.

Yet exogenous and endogenous models were insufficient in explaining economic growth. Both approaches omit economic freedom as an important determinant of growth. Hence, a new line of research that emphasizes the importance of institutions and existing policies for economic growth has emerged. Measuring whether institutions create an environment conducive to economic growth is a complex task that requires quantifying the quality of the institutional environment in Cameroon and its ability to promote and sustain economic freedom.

The three most comprehensive studies that attempt to measure economic freedom are the Heritage foundation’s index of economic freedom, the Fraser Institute’s economic freedom of the world index, and Freedom House’s Freedom in the world index. In this thesis although, there are many independent variables listed above I will focus my explanation on the following variables

• Dependent variable (Economic growth)

• Independent variables (Government spending, Property rights, and Freedom to trade internationally)

The Evolution of Economic Freedom in Cameroon

Former French and British colonies merged in the 1960_s to form Cameroon. President Paul Biya, now 85 years old, is African second longest-ruling head of state. He abolished terms limited in 2008 and went on to win seven-year terms of office in 2011 and again in 2018 in elections that were marred by irregularities.

The tension between the Anglophone minority and the central government erupted into violence, with atrocities reportedly committed by both sides. The Islamic terrorist group Boko Haram frequently attacks across Cameroon’s 1230-mile border with Nigeria. The economy depends on oil for about 40% of export earnings. Cameroon is building central Africa’s only deep seaport in Kribi, which is financed by china’s export-import bank and is expanding hydropower generation.

Economic freedom is the fundamental right of every human to control his or her labour and property. In economic free society, individuals are free to work, produce, consume and invest in any way they please both protected by the state and unconstrained by the state.

The index measures economic freedom by assigning a grade from 0-100(with 100 being maximum freedom) to 10 economic freedom components: business freedom, trade freedom, fiscal freedom, government spending, monetary freedom, investment freedom, property rights, labour freedom, freedom from corruption, financial freedom. But will lay more emphasis on government spending, trade freedom, and property rights. Therefore, to increase economic freedom in Cameroon, the government of Cameroon will need to focus on improving its performance on the main three indicators; property rights, government spending, and freedom to trade internationally.

Cameroon’s economic freedom score is 52.3, making it’s economy the 132^nd freest in the 2010 index. Its overall score is 0.6 lower than last year. Cameroon faces challenges common to developing African nations: insufficient bureaucracy, an unreliable system, and poor infrastructure.

President Paul Biya has held office since 1982 and the political reforms have been largely ignored. In 2008, Biya’s supporters in parliament, having won a strong majority in 2007, passed constitutional amendments granting the president immunity for acts committed while in office and enabling Biya to run for a third term in 2011. Despite abundant natural resources, half of the population still depends on agriculture and the national statistics office estimates that the informal sector accounts for over 90% of economic output. Rising oil prices have added to GDP growth and government revenue; with international oil declining, economic growth is also expected to decline.

The Evolution of Economic Growth in Cameroon

The economy of Cameroon was one of the most prosperous in Africa for a quarter of the century after independence. The Gross Domestic Product (GDP) in Cameroon was worth 38 billion US dollars in 2019, according to official data from the World Bank and projections from trading economics. The GDP value of Cameroon represents 0.03% of the world economy.

The GDP in Cameroon is equal to the total expenditure for all final goods and services produced within the country in a stipulated period of time. Specifically, Cameroon’s real GDP will have to grow by roughly 8% between 2015-2035, which in turn will require the investment share of GDP to increase from 20% in 2015 to 30% in 2035 and production growth to reach 2% over the same period from its average zero growth rates over the past decade.

Cameroon is endowed with rich natural resources and it remains one of the world’s leading producers of certain crops like cocoa, palm product, coffee, banana, rubber, cassava, and maize. The primary sector contributes to more than 14% of the GDP and employs almost 62% of the active population (World Bank). Before the development of the oil trade which alone presents over 8% of the GDP, agriculture was the country’s economic pillar.

The secondary sector accounts for more than a quarter of the GDP and employs 9% of the workforce. The country’s main industries are food processing, sawmill, the manufacture of light consumer goods and textiles. The tertiary sector accounts for more than half of the GDP (52%) and employs around 30% of the active population. It benefits from the economic activity created around large-scale energy projects. The services sector is booming, driven by the sector of telecommunications, air traffic, and transport.

1.2 Statement of the problem

One of the most challenging tasks in creating an index that tracks economic freedom is establishing a comprehensive measurement methodology. Seven attempts have been made in the last decades to create aggregate indices that evaluate categories of freedom (the objective and subjective categories) and assign freedom scores to every individual in Cameroon.

The objective categories include the following; fiscal freedom, business freedom, labour freedom, government spending freedom from corruption, monetary freedom, and trade freedom. Whereas the subjective categories consist of investment freedom, financial freedom, and property rights. As a result of this, researchers have been trying to evaluate critically the different indices and compare their methodologies to find out which index gives a better indication of economic freedom.

Caudill et al. (2000) has conducted a study that compares the three most commonly used economic freedom indices- Fraser institutes index, Heritage Foundation’s index, and Freedom houses index. Their study aimed to check whether economic freedom could be effectively measured by a single index or which category should this single best index consist of. Caudill has performed factor and principal analyses using data from the three indices.

The result shows that both analyses are multivariate statistical methods used to reduce and summarize a large number of variables to a few orthogonal constructs which explain much of the variation in the original data.

 In such cases, each of the categories can be considered to be one of the axes defining a space within which the range of values in the data set varies. Therefore, the principal technique redefines this space in terms of a new set of axes, thereby minimizing the number of directions along which the data varies. Each of the axes thus obtained through the analysis is a principal component underlying factors of the set of categories.

In general, the greater the correlation between each of the variables examined, the fewer the principal components that will be extracted as underlying factors of the database. Hence the focus is usually placed on the first principal components as it accounts for the greatest per cent of the variation in the data set and yields the most important factor underlying the variables.

In order words, if the analysis does extract a component that explains all portions of the variation in the data set, then one can claim that there is a single axis along which the data set varies. The relation between the set categories and each principal component is summarized in the eigenvector and although the principal components are unobserved features, values for each of the components can be derived from these eigenvectors. There is a positive relationship between economic growth and per capita income in all countries especially Cameroon with low, medium, or high-income levels (Islam 1996). Summarily, Sturm and De Haan (2001) found a positive relationship between economic growth and economic freedom. An increase in per capita income accounts as a token of economic growth (Acemoglu& Robinson, 2012).

The government of Cameroon in an attempt to distinguish between economic freedom and economic growth, the Cameroon government uses the Fraser institute measures and its sub-components questions through the panel data analysis method. As a result of this analysis, it was found that there is a statistically significant positive relationship between the level of economic freedom for all income groups in Cameroon and economic growth with the inclusion of sub-components of the freedom index in the model.

The effects of such sub-components vary depending on the level of income groups. The government, therefore, went further to examine the factors affecting economic freedom concerning economic growth.

1.3 Research questions

Main question

What is the impact of economic freedom on economic growth in Cameroon?

Specific questions;

• What are the effects of property rights on economic growth in Cameroon?
• What are the effects of government spending on economic growth in Cameroon?
• To what extend does freedom to trade internationally affect economic growth in Cameroon?

1.4 Objectives of the study

The objective of this study is to examine the impact of economic freedom on economic growth in Cameroon (that’s to examine the measurement methodology of the index of economic freedom and also to analyse whether the index offers an adequate measurement of economic freedom).

The specific objectives include the following

1. To investigate the impact of government spending on economic growth
2. To evaluate the effects of poverty rights on economic growth
3. To access the impact of freedom to trade internationally on economic growth

IMPACT OF ECONOMIC FREEDOM ON ECONOMIC GROWTH IN CAMEROON

IMPACT OF ECONOMIC FREEDOM ON ECONOMIC GROWTH IN CAMEROON

IMPACT OF ECONOMIC FREEDOM ON ECONOMIC GROWTH IN CAMEROON

IMPACT OF ECONOMIC FREEDOM ON ECONOMIC GROWTH IN CAMEROON

IMPACT OF ECONOMIC FREEDOM ON ECONOMIC GROWTH IN CAMEROON

IMPACT OF ECONOMIC FREEDOM ON ECONOMIC GROWTH IN CAMEROON