Area 5: Regulation Other Information:
When regulations restrict entry into markets and interfere with the freedom to engage in voluntary exchange, they reduce economic
freedom. The fifth area of the index focuses on regulatory restraints that limit the freedom of exchange in credit, labor,
and product markets. The first component (5A) reflects conditions in the domestic credit market. One sub-component provides
evidence on the extent to which the banking industry is privately owned. The final two sub-components indicate the extent
to which credit is supplied to the private sector and whether controls on interest rates interfere with the market in credit.
Countries that use a private banking system to allocate credit to private parties and refrain from controlling interest rates
receive higher ratings for this regulatory component. Many types of labor-market regulations infringe on the economic freedom
of employees and employers. Among the more prominent are minimum wages, dismissal regulations, centralized wage setting, extension
of union contracts to nonparticipating parties, and conscription. The labor-market component (5B) is designed to measure the
extent to which these restraints upon economic freedom are present. In order to earn high marks in the component rating regulation
of the labor market, a country must allow market forces to determine wages and establish the conditions of hiring and firing,
and refrain from the use of conscription. Like the regulation of credit and labor markets, the regulation of business activities
(component 5C) inhibits economic freedom. The sub-components of 5C are designed to identify the extent to which regulations
and bureaucratic procedures restrain entry and reduce competition. In order to score high in this portion of the index, countries
and territories must allow markets to determine prices and refrain from regulatory activities that retard entry into business
and increase the cost of producing products. They also must refrain from "playing favorites", that is, from using their power
to extract financial payments and reward some businesses at the expense of others.
Objective(s):
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