It’s a puzzle almost as old as society itself: Why do some economies grow year after year while others remain mired in stagnation? Is there a secret to prosperity? Can others copy it?
There is, and they can, say the editors of the 2004 Index of Economic Freedom. The evidence assembled in this 10th annual country-by-country report on the openness of economies worldwide shows that the road to growth is paved with liberty.
During the last seven years, countries that have done the most to improve their scores on the Index’s 10 measures of economic freedom have, in general, experienced the highest rates of economic growth.
The Index, published by The Heritage Foundation and The Wall Street Journal, has long documented that the nations with the most economic freedom are also the most prosperous. Those with the best scores in the 10 categories measured-trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation and informal (or black) market activity-enjoy higher standards of living and higher per capita incomes.
The latest data suggest that countries begin to see the benefits of opening their economies simply by starting or continuing the process. The one-fifth of countries surveyed where Index scores improved the most enjoyed an average growth in gross domestic product of 4.89 percent. For the one fifth that improved the least, GDP grew at only about half that rate (2.53 percent).
The process works in reverse for those that restrict their economies. According to Index editors Marc Miles (director of the Center for International Trade and Economics at The Heritage Foundation), Edwin Feulner (president of The Heritage Foundation) and Mary Anastasia O’Grady (edits the “Americas” column and is a senior editorial page writer at the Journal), if countries slow or stop their progress, growth plummets. The message that governments should take from the new Index is that they can help themselves by starting to adopt economic freedom.
Data gathered for the 2004 Index suggests that many countries are getting the message. Of the 155 countries analyzed, 75 scored better this year than last year and 11 had scores that were unchanged. The scores of sixty-nine countries were worse than they were last year. Overall, 16 countries are classified as having “free” economies, 55 as “mostly free,” 72 as “mostly unfree” and 12 as “repressed.”
”The Most Free:”
*Hong Kong (1st)
*New Zealand (3rd)
*United Kingdom (7th)
*United States (10th)
”The Least Free:”
*North Korea (155th)
Asia remains a continent of extremes. Home to many of the world’s most repressed economies, the region also contains the three freest economies-Hong Kong (which took the top slot for the 10th straight year), Singapore and New Zealand. North America/Europe boasts seven of the top 10 most economically free countries. Sub-Saharan Africa, by contrast, has no free economies. North Africa and the Middle East has just one (the tiny island of Cyprus), as does Latin America and the Caribbean (Chile).
Of all the variables measured by the Index, “monetary policy,” which examines inflation controls, demonstrated the most improvement worldwide. Monetary policy scores improved in 30 nations and worsened in only nine, for a net worldwide improvement of 21 countries.
In general, the 2004 Index shows that more governments are refraining from intervening in their economies.
But in a reversal from last year, the “fiscal burden of government” score (which measures how much a government taxes and spends) worsened overall. The cost of government rose in 71 nations and fell in 57.
The editors also note a trend toward declining protection of property rights. Seven nations weakened their safeguards of such rights and none-out of all 155 graded-strengthened them. “Without strong property rights, an investor cannot be sure of his ability to lay claim in a business he builds,” the report emphasizes. “As the risk involved in a business venture increases, investors and entrepreneurs are left reluctant and likely to put their money elsewhere.”
The editors suspended grading for five countries now in a state of “civil unrest or anarchy”: Angola, Burundi, Congo, Sudan and Iraq. A lack of reliable data made it impossible for them to grade Serbia and Montenegro as well.
The full text of the 2004 Index, including all charts and graphs, will be available online at www.heritage.org/index. A Spanish-language edition also is being published.
”North America and Europe:”
Not only does this region have the most “free” countries (11), it also boasts the highest number that moved toward greater economic freedom (seven). No country in the region improved more than the Slovak Republic. Its score is 0.27 better this year, making it the eighth most improved worldwide-a feat it achieved by cutting taxes, easing wage and price controls, accelerating the pace of privatization and restructuring the banking sector. But Luxembourg is the most economically free country in the region, followed by Ireland and Estonia. Belarus is the least free.
The performance of Europe is all the more remarkable when one considers that it is saddled with the Common Agricultural Policy (CAP)-an “anti-competitive combination of subsidies designed to give the European farmer an edge,” writes The Wall Street Journal’s Brian Carney in the Index. “It has grown
inexorably and now eats up approximately half of the EU’s 90 billion euro annual budget.”
”Latin America and the Caribbean:”
For the most part, the news from this region is bad. Though 11 of its 26 countries improved their scores, an even higher number of countries (13) saw their economic freedom ebb. Venezuela and Argentina continued to reject sound free-market policies for economic recovery. Not surprisingly, Venezuela, the region’s most unfree economy, faces an 80 percent poverty rate.
For the second straight year, Cuba ranks among the 10 most-improved countries. The last basti