In today's Finshots, we talk about free economies. Yup, just that.

The Story

A few months ago, Indian e-commerce giant Flipkart announced it was moving its base from Singapore back to India. This wasn’t a random decision. The company has plans to float an IPO in the Indian markets, and relocating its holding company to India seemed like a smart move.

Now this might not be a surprise for many as we’ve already seen a bunch of companies including PhonePe doing something similar.

But why were these companies based in Singapore in the first place? Why not just operate from home ground?

Well, it all comes down to the ease of doing business.

Singapore has offered businesses the freedom to operate smoothly. And the proof lies in its consistent ranking at the top of global indices that track business-friendliness.

Take the latest report from the Heritage Foundation's Index of Economic Freedom, which ranked Singapore first.¹ And just last week, the Fraser Institute’s report on Economic Freedom ranked Singapore as the second freest economy in the world, right after Hong Kong.²

And that’s why Indian companies like Flipkart found Singapore so attractive. It’s not just business-friendly. It’s one of the freest economies on the planet. And what did that mean?

It meant fewer business headaches. It was about giving people and businesses the freedom to make their own economic choices with minimal barriers, all while respecting the others’ rights.

In the freest economies, governments don’t impose sky-high taxes or control industries. Imagine running a business where the government takes a huge chunk of your earnings. That would slow down growth, wouldn’t it? But in a freer economy, you get to keep more of what you make, allowing you to reinvest and grow.

Another hallmark of a free economy is the strong protection of property rights. When laws safeguard property and are fair, independent courts have your back, and businesses can operate with confidence. You don’t have to worry about the government swooping in to interfere or seize assets out of the blue. Think about it. If you're investing millions into building a factory, you'd want to make sure that your investment is safe from any sudden government actions.

And then there’s the freedom to trade. Freer economies don’t just make it easy for businesses to enter the market, compete with other big players and exit when they want. They also simplify exporting products globally without the worry of getting hit by heavy tariffs. It’s all about giving businesses the freedom to grow and trade without unnecessary hurdles. For instance, a Singapore-based company can ship goods to Europe without worrying about additional taxes.

A lighter regulatory framework is also key. While regulations can ensure fairness, too many can slow down the entire process. In a freer economy, businesses can get off the ground faster. You see, fewer forms lead to fewer delays!

So, to sum up, the freest economy is one in which people and businesses can make decisions with minimal government interference, trade freely and aren’t weighed down by too much red tape.

Take Hong Kong, for example. It’s held the title of the freest economy since the 1970s.³ Yup, that’s over five decades at the top!

Over the years, more than 9,000 overseas companies have set up shop in Hong Kong, making it a bustling hub for international business.⁴ And since late 2022, that trend has only picked up steam, with over 100 major tech companies deciding to expand into the city. This influx could translate into a whopping $50 billion in potential investment and create an additional 15,000 jobs!

But it doesn’t stop there. So far this year, Hong Kong has already helped 470 businesses grow, marking an impressive 57% increase compared to the same time last year.

On top of that, they have no tariffs on imported goods—none at all. The only excise duties are on four things: liquor, tobacco, fuel and methyl alcohol. There are no quotas or anti-dumping laws, either. This makes Hong Kong a magnet for businesses seeking a strategic, low-regulation hub.

Singapore is no different.⁵ It offers low corporate tax rates, no capital gains tax, and no tax on dividends. Thanks to its vast network of tax treaties, companies based in Singapore can avoid the headache of double taxation, which is a huge plus for businesses dealing in international trade.

Naturally, these reasons make places like Hong Kong and Singapore magnets for companies that want to thrive in a low-regulation, pro-business environment.

And if that makes you wonder how these economies manage to thrive with such low taxes while still funding public improvements, here's the thing. They rely on the small amounts of tax revenue they collect, along with indirect taxes, to balance out the lower rates on income and corporate taxes. Plus, since companies are already investing heavily in developing infrastructure, the government doesn’t have to micromanage or control industries to ensure that gets done. It's a pretty clever system that keeps things running smoothly.

But, as with everything, there’s a flip side.⁶

More economic freedom can sometimes lead to greater inequality. Without taxes and wealth redistribution, the rich can get richer while the poor are left behind. Public services like healthcare or education could also go for a toss because businesses are focused on profits, not public welfare.

But that’s not all. With fewer regulations, workers’ rights could suffer as you could see lower wages or poor working conditions, as companies prioritise profits over people.

Despite these concerns, data shows that extreme poverty is almost 40 times less common in the freest economies. In fact, the poorest 10% in these regions earn about 8 times more than their counterparts in less free economies.

So, where does that leave us? Is there a way to find a balance between economic freedom and regulation? Should India aspire to become a freer economy?

While we may not have all the answers right now, it’s definitely worth thinking about. A quick web search for “India free economy” will tell you that the Heritage Foundation's latest Index of Economic Freedom rates India as “mostly unfree”, placing us at 126th out of 165 countries. And that has been the case for a long, long time. Even the Fraser Institute's report on Economic Freedom shows us sitting at 84th place. And that says a lot, especially when we’re making waves in various industries and innovations but still lagging in the freedom department.

India’s Economic Freedom ranking over the years

Source: heritage.org

So yeah, perhaps it’s time to take a page from Hong Kong and Singapore’s playbooks and figure out how to truly embrace economic freedom. After all, we deserve the benefits that a free economy can bring, don’t we?

Until then…

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Story Sources: Heritage.org [1]; Fraser Institute [2] [6]; Bloomberg [3]; Brand Hong Kong [4]; Livemint [5]

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