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Economic freedom still rising worldwide

By ERIC BADERTSCHER, for United Press International   |   Aug. 8, 2002 at 1:41 PM   |   Comments

WASHINGTON, Aug. 8 (UPI) -- Despite the continuing drumbeat of short-term bad news about the U.S. economy, its prospects are actually better than ever because economic freedom continues to flourish around the world, according to an influential Washington think tank.

The libertarian Cato Institute, in conjunction with Canada's Fraser Institute, has released these findings in the sixth annual "Economic Freedom of the World" report.

The study, which rates 123 countries, measures how consistent a nation's policies and institutions are with the factors that create economic freedom. The report was written by a team of authors and includes a preface by Nobel laureate economist Milton Friedman.

The report defines the key elements of economic freedom as personal choice, voluntary exchange, the freedom to compete and protection of persons and property.

It qualifies nations as having policies consistent with these elements when they provide an infrastructure for voluntary exchange and protect people and their property from seizure by individuals or institutions through violence, coercion or fraud.

Another key element of economic freedom is that a government provide a legal structure and law-enforcement system that protects owners' property rights and enforces contracts even-handedly.

The report translates these principles into five indicators of economic freedom: the size of government (expenditures, taxes and enterprises); legal structure and security of property rights; availability of sound money; freedom to trade with foreigners; and regulation of credit, labor and business.

Based on these indicators, the study rates individual countries and gives an overall global rating of economic freedom.

This edition of the report includes a number of new variables -- there are now 37 -- to broaden and deepen its analysis. These factors include per-capita income, protection of intellectual property, tax laws and overall government regulation.

Based on the index's 10-point scale rating, the average economic freedom rating was 6.39 for the year 2000, up from 5.99 in 1995.

This rise represents a consistent trend toward greater economic liberty; after a decrease in the 1970s, when the rating dropped from 5.98 to 5.32, the index has steadily improved since 1980.

This increase correlates with efforts in the 1980s and 1990s by communist countries such as the former Soviet Union and China to liberalize their economies.

The United States ranked third overall, with a score of 8.5, which put it just ahead Great Britain, which had a score of 8.4.

Despite the 1997 takeover by China, Hong Kong retained first place with a rating of 8.8, followed by Singapore with 8.6.

The other top 10 nations were New Zealand (8.2), Switzerland (8.2), Ireland (8.1), Australia (8.0), Canada (8.0) and the Netherlands (8.0).

Most of the lowest-ranked nations were African, Latin American or former Communist countries. Botswana had the best record in Africa, with a rating of 7.0, which tied it with six other countries (including France and South Korea) for 38th place.

The five lowest-ranked nations were the Democratic Republic of the Congo, Myanmar (formerly Burma), Guinea-Bissau, Algeria and Ukraine. Their scores ranged from 3.2 for the Democratic Republic of the Congo to 4.5 for Ukraine.

China, despite efforts to create a more market-based economy, ranked 101. Russia ranked 116.

Report co-author Chris Edwards of Cato told United Press International the report an amazing collaboration. He noted the large number of think tanks from around the world that participated. He also emphasized that each year, those who compile the report continue to improve their methodology.

"The U.S. economy is far from free," he said, even though the United States scored in the top 10 nations.

Edwards pointed to measures by the administration of President George W. Bush, such as the farm subsidy bill and import barriers on steel and Canadian lumber, as ways the U.S. government diminishes economic freedom.

Edwards, reflecting Cato's libertarian philosophy, said that nations certainly require some amount of government to maintain prosperity and order. However, he said, they should limit their tax take to an amount equivalent to 10 percent to 15 percent of gross domestic product.

Currently, government revenue represents about 30 percent of the U.S. GDP. Of this, the federal government takes 20 percent, while state and local authorities collectively take 10 percent.

This level, Edwards said, hampers economic growth and reduces the standard of living, and so reduces the amount of economic freedom in the United States.

Gerry O'Driscoll, a senior fellow in economic policy at the conservative Heritage Foundation, told UPI that for several years his think tank has produced a competing report called "The Index of Economic Freedom."

The 2002 edition of this report is now online at the Heritage Web site.

O'Driscoll, director of Heritage's Center for International Trade and Economics, said the Heritage and Cato reports differ less about philosophy -- both share a "laissez-faire" capitalist worldview -- than about methodology.

The Heritage report grades nations on a five-point scale, where a score of "1" signifies governmental policies most conducive to economic freedom.

Heritage examines the qualitative data and assigns numbers, O'Driscoll said, while the Cato report deals exclusively with numbers. That is, the Heritage report makes judgments, while the Cato report performs objective statistical analysis, he said.

O'Driscoll gave the example of Heritage's decision to examine judicial independence as a factor in economic freedom, while Cato thought such a variable was too subjective.

He also noted that Cato relies on analytical data from other sources to assemble its report.

Cato draws data for the "Economic Freedom of the World" report from the "Global Competitiveness Report," which is produced by the independent World Economic Forum, and from the "International Country Risk Guide," produced by the PRS Group.

The PRS Group produces economic data and analysis used by many businesses -- including 80 percent of Fortune 500 companies -- to make sense of the global business landscape.

O'Driscoll said that he does not attribute any relative lack of economic freedom in the United States to a single factor. Instead, he said that economic freedom grows out of a combination of trade, government policy and foreign investments.

James Gwartney of Florida State University, one of the Cato report's lead authors, pointed out that the Heritage and Cato reports produce somewhat similar rankings in the top and bottom 10 nations. For example, the United States ranked third in the Cato study and fourth in the Heritage report.

Interestingly, the United States shares that fourth place with four other nations: Estonia, Ireland, Luxembourg and the Netherlands.

The Heritage index's top three were Hong Kong, Singapore and New Zealand. Australia and Chile filled out the Heritage top 10, right after the United States.

Heritage's lowest-ranked nation was North Korea, followed by Iraq. Both had scores of 5.00, the worst possible. The other bottom 10 included Iraq, Libya, Cuba, Laos, Iran, Turkmenistan, Uzbekistan, Belarus and Zimbabwe, which had scores ranging up to 4.30.

Some countries included in Cato's study, such as the Democratic Republic of the Congo, did not even make it into the Heritage report, which lists them as "not rated."

Gwartney said that the Cato report's methodology is more refined than that of the Heritage report because it relies on gradations within categories.

Cato's use of 37 variables and five areas of economic freedom, he said, "(M)akes it possible ... to have a pretty refined idea of economic freedom within an area."

Gwartney said that Cato wanted to avoid value judgments so that the report would give the same results to all readers, regardless of their worldview.

He said he thought one of the major contributions of the Cato report was that it showed the strong correlation between economic freedom and income equality.

That is, nations with high levels of economic freedom tend to have higher per capita incomes than less free nations.

This finding is also supported by the Heritage report.

This correlation, Gwartney said, has been true from Adam Smith onward: economic freedom leads to growth. Even the poorest 10 percent in an economically free nation tended to have higher incomes than their counterparts in a more restrictive country.

"We think there's a message here, when you find a relation between economic freedom and growth," he said.

Despite Cato's stated attempts make the report as objective as possible, the think tank's known libertarian tilt leads some think tank professionals to question the survey's objectivity.

Will Marshall, president of the Progressive Policy Institute, which is affiliated with the centrist Democratic Leadership Council, questioned Cato's conclusions about appropriate levels of government spending.

"Cato is well known for its libertarian views," he said. "It's absolutely consistent in its advocacy of limited government."

Marshall argued that the issue of state spending is a cultural issue to be decided by each nation, adding: "I don't know where anyone can draw the golden line."

© 2002 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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