 The
recent study “Economic Freedom in the German
Federal States” (“Wirtschaftliche Freiheit
in den deutschen Bundesländern”) published
by the Liberal Institute of the Friedrich Naumann
Foundation finds a strong correlation between economic
freedom and wealth. The index examines the degree
of economic freedom in the 16 federal states of
Germany.
Before the results of the report are presented,
it is necessary to briefly introduce the German
federal system. Germany is proud of its tradition
of local self-administration, which has lead to
competent and competitive local governments. However,
the autonomy of the federal states has significantly
deteriorated over the years.
The 16 federal German states have only small areas
of responsibility where they can act independently
without the interference of the central administration.
Most importantly, they have virtually no financial
sovereignty and therefore no fiscal instruments
to compete for investment. Another huge obstacle
for federal competition is the national balancing
of the federal state budgets. Tax revenues collected
at the state level go into a national fund which
is subsequently redistributed among the states in
order to level the living conditions in the entire
country. Less effective state administrations receive
subsidies, while the better operating states lose
revenue and are thereby penalised.
Despite these institutional obstacles, the study
reveals significant differences in the level of
economic freedom among the federal states. The highest
degree of economic freedom is measured in the South
of Germany where the states of Bavaria and Baden-Wuerttemberg
stand at the top scoring 7.2 and 7.0 points respectively.
Berlin is the taillight scoring 4.4 points.
The report finds a positive correlation between
these levels of economic freedom and the prosperity
of the states. A higher degree of economic freedom
goes along with a higher GDP and higher annual growth
rates in those states. Furthermore, the unemployment
rate is higher in states where the government intervenes
more in the economy.
Remarkable is the huge gap of economic freedom
between the eleven original Western German states
and the five new Eastern states (Thuringia, Brandenburg,
Mecklenburg West-Pomerania, Saxony, Saxony-Anhalt),
which were part of the former socialist German Democratic
Republic (GDR) until 1990: the Eastern states feature
a much lower degree of economic freedom due to much
more interventions of the local authorities in the
economy.
Altogether, the process of economic freedom in
the Western German federal states has strongly declined
after 1970. The report ascribes this development
to a massive increase of state intervention and
government consumption, featuring, for instance,
a growing amount of government employees. While
recent years have seen a slight increase in economic
freedom, no state has yet reached the level of 1970
again.
To calculate the economic freedom of the federal
states, the authors have used 10 relevant indicators:
consumption of the federal state, public investments,
number of public servants, amount of social contributions
as percent of the GDP (Sozialleistungen in %
des BIP), amount of business tax, extent of
financial aid, amount of income and corporation
taxes prior to federal financial equalisation, degree
of obligation to contribute to social insurance,
number of recipients of social welfare as a percentage
of the population (Sozialhilfebezieher in %
der Bevoelkerung), and the average size of
social welfare per recipient (Durchschnittliches
Sozialhilfeniveau in Euro pro Sozialhilfeempfaenger).
The report argues that the higher these components,
the lower the level of economic freedom in the respective
state.
The report relies on the methodology of the Fraser
Institute employed in its Economic Freedom of the
World report. A basic requirement for individual
liberty is the existence of economic freedom. People
do not lead a self-determined life, if they are
not free to acquire property, to trade or to produce
goods. Giving them economic freedom also leads to
higher prosperity; a fact that was proven by the
Canadian Fraser Institute. Its Economic Freedom
of the World Index compares the degree of economic
freedom in most countries of the world and illustrates
the positive correlation between economic freedom,
higher growth rates, less unemployment, and prosperity.
Noticeably, the conclusion of the study is very
similar to the results of the Economic Freedom of
the World Index: prosperity is the result of economic
freedom. Prosperity cannot be achieved through state
interventions as these will ultimately jeopardise
development.
The report is available in German. For more information
or to request a copy please contact Ms. Janett Engel
at janett.engel@fnst.org
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