Cry Freedom!
Saturday, 01 August 2009 10:56

Who could argue with the right to have economic freedom?  According to the Index of Economic Freedom of the Heritage Foundation and the Wall Street Journal, there are in fact many restrictions on our freedom to buy and sell, borrow and invest, and work.  But when you see countries like Ireland, the US, Switzerland, the UK, Iceland and Luxembourg in the top 15, it is clear that some countries may not deserve their freedoms.  Ireland, US, UK and Iceland all got carried away and ended up in financial crises – while Switzerland and Luxembourg abuse their freedoms through their tax haven and other corrupt activities.

 

 

So what is economic freedom according to Index of Economic Freedom?  The authors identify four policies that: (i) put the individual first and allow people to decide for themselves what is best for their own well-being and that of their families; (ii) recognize that the free market is the only reliable predictor of the real prices of goods, labor, and capital; (iii) use government to shape a fair and secure environment, protect private property and the value of money, enforce contracts, and promote competition, but not to produce or sell goods and services; and (iv) emphasize openness to international trade and investment as the surest paths to increased productivity and economic growth.  Overall, a government that limits its involvement in economic activity consistent with these principles maximizes opportunities for individuals to reach their full potential and promotes the greatest levels of prosperity and human well-being for society as a whole.

 

Taking this as a starting point, the authors then calculate an index for about 180 countries based on 10 economic freedoms in the following areas: business, trade, fiscal, government size, monetary, investment, financial, property rights, corruption, and labor.

 

The ranking of countries does not yield any great surprises.  Hong Kong, Singapore and Australia are the top three on the scale.  The US comes in at number 6, while Japan is at 19.  The big Europeans are down the scale at 25th for Germany, 64th for France and 76th for Italy.  The BRICs don’t do well, with Brazil at 105, India at 123, China at 132 and Russia at 146.  North Korea comes in last at 179.  In short, only 7 countries are ranked as “free”, 23 are “mostly free”, 53 are “moderately free”, 67 are “mostly unfree” and 29 are “repressed”.

 

North America comes in with the highest regional ranking of 75.7, following by Europe (66.3), South and Central America (60.1), Middle East/North Africa (60.0), Asia Pacific (57.6) and Sub-Saharan Africa (53.1).  The Asia-Pacific region is unique by virtue of the disparity in its levels of economic freedom.  It has four of the world’s freest economies – Hong Kong, Singapore, Australia and New Zealand.  Most other countries in the region are classified as “mostly unfree”, while Turkmenistan, Bangladesh and Burma have economies which are “repressed”.

 

Overall economic freedom in the Asia-Pacific is below the world average.  It scores higher than the world average for only two of the ten economic freedoms, namely, government size and labor freedom.  The report notes that “The typical Asian country has notably lower scores in four components: investment freedom, financial freedom, property rights and freedom from corruption.  Asian countries could make the most progress by strengthening their banking and investment institutions and by enhancing transparency and corporate governance.”  The report does concede that economic freedom has been improving gradually in India and China over the years.

 

The Index of Economic Freedom has been going some 15 years.  And while progress is being made, it is a slow uphill task.  In the life of the Index, world freedom has advanced in the trade, monetary and fiscal areas.  It has been broadly stable for the following areas: government size, finance, corruption and labor; while freedom for business, investment and property rights has moved backwards.

 

According to the authors’ analysis, economic freedom matters.  Economic freedom is strongly related to good economic performance.  Human development, political openness, and environmental sustainability thrive in an environment that is economically free.  A sustained commitment to economic freedom is critical to fostering economic development and prosperity.

 

The authors reluctantly acknowledge that the free market system has shown some weaknesses leading to the global economic crisis.  They predictably seek to shift the blame on to government and warn about the risks of a revival in regulation.  With a sigh, they lament that 2008 may end up being the high point in economic freedom.  This really is cheeky.

 

For my part, I do believe that economic freedom is the most powerful motor for prosperity and poverty reduction.  But that freedom must be exercised responsibly, and government regulation has an undeniable role in protecting the collective interest.

 

 

 

Reference:

 

2009 Index of Economic Freedom, “The Link Between Economic Opportunity and Prosperity”.  A Product of the Heritage Foundation and the Wall Street Journal.

http://www.heritage.org/Index/


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