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Freest Economy? It's Not the U.S.

Thursday, 19 April 2001 12:00 AM

The fifth such annual report, "Economic Freedom of the World: 2001," is a comprehensive rating of 123 of the world's economies, says Cato. Published by the Cato, Canada's Fraser Institute and institutes from 50 other countries, the report was started with the help of Nobel laureate Milton Friedman. It uses 21 objective criteria to produce an economic freedom index of the world.

According to authors James Gwartney and Robert Lawson, the core ingredients of economic freedom are "personal choice, protection of private property, and freedom of exchange." After compiling the economic freedom index, they compared the data with indicators of social progress.

The result, they say, is that more freedom translates into less poverty, faster economic growth and higher scores on the United Nations Human Development Index.

"Modern economic growth is primarily about discovery, innovation and brain power. Thus, the strong relationship between economic freedom and strong growth should not be surprising," said Gwartney, a professor of economics at Florida State University.

The rankings of other major economies include Canada (13th), Germany (15th), Japan (20th), France (34th), Taiwan (38th), Mexico (62nd), and India (92nd). Among the lowest-ranking countries were Myanmar (123rd), Algeria (122nd) and Sierra Leone (119th).

Also in the bottom 10 was Russia, which ranked 117th, just above Romania. As a post-communist country, Russia did considerably worse than communist China, which came in 81st.

"More than ever, prosperity is about getting the institutions and policies right. This report highlights both the strengths and weaknesses of countries. It indicates key areas where countries need to improve if they are to realize their full potential," says Gwartney.

This year, the authors added several new features to the report, including a more comprehensive index of economic freedom and a trade openness index.

The comprehensive index of economic freedom examines 58 countries in more detail. It integrates a number of new factors into the analysis in seven major areas: size of government, security of property rights, access to sound money, freedom to trade with foreigners, regulation of capital and financial markets, regulation of labor markets and freedom to operate and compete in business.

Hong Kong retains its No. 1 position in this index, with Singapore ranked second and the United States just below in third place. The United Kingdom, which ranked above the United States in the main index, places fifth in the comprehensive index.

Western European countries ranked high in all areas except size of government and labor market regulation. Former socialist countries and much of Latin America ranked poorly because of excessive business regulation and low quality of their legal systems.

Six of the 11 lowest-ranked countries were socialist or former socialist countries. Eight of the 11 highest-ranked countries inherited their institutional framework from the British. According to the authors, "this suggests that British common law and other English institutions are highly supportive of economic freedom."

The trade openness index is another new feature that was created to explore the link between freedom to trade and wealth. Economic theory says that open economies will derive more output from their domestic resources, be more innovative and dynamic, and have a greater incentive to choose policies more consistent with investment and growth.

Economies that are open over long time periods should therefore achieve more rapid growth rates and higher levels of per-capita gross domestic product than those persistently closed.

Using data from 1980 to 1998, the report's authors tested this theory. "Persistently open economies have grown more rapidly than those with trade sectors that are more closed," the authors say. "This is true even after accounting for the effects of other factors such as price level instability and quality of legal system."

The most recent trade openness index reveals that Hong Kong and Singapore once again top the list. Several ex-communist countries do well, including Lithuania (19th), the Czech Republic (10th) and Estonia (third). And Europe does particularly well: only five of the top 15 countries (Hong Kong, Singapore, Costa Rica, South Korea and Nicaragua) are non-European.

Copyright 2001 by United Press International.

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The fifth such annual report, Economic Freedom of the World: 2001, is a comprehensive rating of 123 of the world's economies, says Cato. Published by the Cato, Canada's Fraser Institute and institutes from 50 other countries, the report was started with the help of Nobel...
Thursday, 19 April 2001 12:00 AM
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