On a worldwide basis, the advance of economic freedom has ground to a halt. Since peaking in 2008, when the average economic freedom score reached 60.2 on the Index 0–100 scale, global economic freedom has failed to advance, and this year’s average score of 59.6 is no better than the score achieved a full decade ago in 2003.
Still, there are bright spots around the world:
- Four Asia–Pacific economies and Switzerland earned designation as truly “free” economies in the 2013 Index. Each achieved a score above 80 on the grading scale. Hong Kong was able to hold its position as the world’s freest economy, a position it has held for 19 consecutive years. With another strong advance in economic freedom, Singapore remains a close second and has narrowed the gap between it and Hong Kong. Australia, New Zealand, and Switzerland maintained their previous standings of 3rd, 4th, and 5th, respectively. The relative strength of these five free economies is no accident. Their continuing commitment to rule of law, limited government, regulatory efficiency, and open markets has been the source of impressive resilience during uncertain economic times.
- Seven emerging economies and one advanced economy joined those considered “mostly free” in the 2013 Index, raising the number of countries in that category to 30. The eight countries are Georgia, United Arab Emirates, Czech Republic, Botswana, Norway, Jordan, South Korea, and the Bahamas. Notably, in the 2013 Index, Jordan became a “mostly free” economy for the first time, and Georgia recorded the largest score improvement over the past year.
- The scores of 91 countries improved, and 24 recorded their highest scores ever in the Index. Of the 91 economies that recorded score gains, 71 are considered developing or emerging economies. Of those developing economies, 23 come from the Sub-Saharan Africa region, 16 are from Europe, and 15 are from the Asia–Pacific region.
- Five emerging economies have recorded notable increases in economic freedom over the past five years, maintaining high economic growth rates despite the difficult international economic environment. The five countries are Colombia, Indonesia, Jordan, Poland, and the United Arab Emirates. With a five-year cumulative score increase of 3.5 points or more, each of these countries has achieved five consecutive years of improving economic freedom since 2008 and turned the global economic crisis into an opportunity to upgrade its economic system.
- Every region continues to be represented by at least one of the top 20 freest economies, but some notable reshuffling has occurred in the 2013 Index. Half of the leading economies are in Europe, led by Switzerland and Denmark. The Danish economy has climbed to the 9th spot, overtaking the United States and Ireland. Losing its status of one of the world’s 10 freest economies, Ireland has fallen to 11th place. Germany and Sweden have replaced Macau and Cyprus in the top 20. Five top performers are in the Asia–Pacific region, with Taiwan, just squeaking in at number 20, joining world leaders Hong Kong, Singapore, Australia, and New Zealand. Canada and the U.S. represent North America. The other regions are represented by one country each: Chile (South and Central America/Caribbean region); Mauritius (Sub-Saharan Africa region); and Bahrain (Middle East and North Africa region).
ECONOMIC LEADERS IN DECLINE
The overall stagnation observed in worldwide levels of economic freedom has coincided with significant setbacks in countries previously regarded as leaders in economic freedom. In particular, the United States and Ireland, which had risen in previous years as high as 4th place in the rankings, have seen their scores drop substantially in recent years. Both suffered declines in economic freedom again this year.
Seventy-eight countries registered declines in economic freedom in the 2013 Index, and another eight recorded no change in overall score. It remains to be seen whether the global economy is undergoing the leading edge of a fundamental realignment of countries along the continuum of economic freedom or whether the breaks in progress in many countries are just transitory manifestations of a loss of commitment to advancing economic freedom.
LIMITED GOVERNMENT ENHANCES ECONOMIC DYNAMISM
A pleasant surprise in the Index rankings this year was the strong evidence that many countries are putting substantial effort into getting their fiscal houses in order. The Index category that measures restraint in government spending showed one of the largest improvements of any of the 10 economic freedoms, with the worldwide average score rising from 59.8 to 61.1. Fiscal freedom improved as well, with many countries continuing efforts to streamline tax systems and lower marginal rates.
Three years of data are now available on the impact of government stimulus on economic growth rates. The 2011 Index first reported the negative impact of government spending in the early days of the global recession for advanced economies that are members of the Organisation for Economic Co-operation and Development (OECD). The full data set now available for a much greater number of countries shows a similar negative relationship between increases in government spending and economic growth.
Interestingly, the relationship is far more negative in the case of advanced economies than it is for developing and emerging economies (correlation coefficient –0.46 versus –0.09). Over the past three years, countries that have increased government spending have tended to record lower economic growth rates.
MARKET-OPENING MEASURES CONTINUE, BUT REGULATORY EFFICIENCY DECLINES
The economic freedom category that improved the most in the 2013 Index is investment freedom. Average scores in this category increased to 52.2 from 50.7 in the 2012 Index. Countries clearly continue to recognize the benefits of integrating as fully as possible into global economic markets.
Regulatory efficiency, by contrast, declined significantly. Average scores dropped in every economic freedom related to regulatory efficiency, with labor freedom suffering the most. Many countries apparently believe that improvements in well-being for poorer workers can be achieved through legislative fiat. Even top-ranked Hong Kong has experimented with a minimum wage, and labor market rigidities and bureaucratic and costly business regulations continue to drive many people into informal types of economic activity, particularly in developing countries.
THE RULE OF LAW
The 2013 Index focuses on the impact on economic growth and social well-being of the rule of law, one of the four pillars of economic freedom. The five essays included in a Special Focus Section provide a comprehensive overview of the subject. Measures in the Index related to the rule of law include indices related to the protection of property rights and corruption, and the composite of these two indicators is even more highly correlated than overall economic freedom scores with high levels of per capita GDP. Those countries that have improved the rule of law over the past five years show an average growth rate of 4.4 percent over the period, while those economies where the rule of law has declined have grown less than 3 percent per year on average.
Not surprisingly, the rule-of-law indicators are highly correlated with high levels of investment and job growth. Their impact is more striking within the developing and emerging countries than it is for more advanced economies (coefficient of correlation 0.70 versus 0.53), perhaps because there is more variability in scores among the developing and emerging countries. The Index thus regards the rule of law as a foundational aspect of economic freedom, essential for achieving economic progress and societal prosperity.
ECONOMIC FREEDOM AND PROSPERITY
The results of the 2013 Index reinforce the conclusion that advancing economic freedom in the areas of rule of law, limited government, regulatory efficiency, and open markets is the most effective way to generate broad-based economic dynamism, creating more opportunities for people to work, higher levels of productivity, and gains from market opening and trade that elevate prosperity and reduce human poverty. This multidimensional relationship between economic freedom and true human progress has been empirically documented in the Index over the past 19 years, and other similar studies have confirmed its findings.
The most basic benefit of economic freedom, confirmed now with data covering 19 years, is the strong relationship between economic freedom and levels of per capita income. For countries that achieve scores that reflect even moderate levels of economic freedom (60 or above), the relationship between economic freedom and per capita GDP is highly significant. Countries moving up the economic freedom scale show increasingly high levels of average income.
Given the strength and empirical durability of the relationship between higher levels of economic freedom and greater prosperity, it can only be regarded as a human tragedy that the majority of the world’s people still live in countries where economic freedom is either repressed or heavily regulated. The governments of China and India bear a special responsibility in this regard. The policy environments that they set for economic activity affect the lives of more than 2.5 billion people. Both economies are considered “mostly unfree.”
Greater levels of economic freedom have had a major positive impact on poverty levels over the past decade. Based on the United Nations Multidimensional Poverty Index, the intensity of poverty in countries whose economies are considered mostly free or moderately free is only one-fourth the level in countries that are rated less free. Poverty rates have declined more significantly in freer countries as well.
The societal benefits of economic freedom extend far beyond higher incomes or reductions in poverty. Countries with higher levels of economic freedom enjoy higher levels of human development, including better education and more comprehensive health care. They live in cleaner environments and do a better job of making the most efficient use of energy and other natural resources.
Economic freedom varies noticeably by region, with inhabitants of North America and Europe continuously enjoying greater levels of economic freedom on average than those who live in other regions of the world.
In the 2013 Index, Europe and North America were the only two regions that recorded score improvements from last year, with improvements of 0.5 point and 0.3 point, respectively. In the other four regions of the Index, economic freedom declined. The South and Central America/Caribbean region recorded the largest average loss of economic freedom: 0.6 point. The Middle East and North Africa region showed the second-largest decline: 0.3 point, a number that would likely have been even higher had grading been possible for Libya and Syria. Both the Asia–Pacific region and Sub-Saharan Africa lost one-tenth of a point of economic freedom.
In every region, however, the evidence continues to show that economic freedom is the key to greater prosperity and overall human development.
North America continues to be the world’s economically freest region in the 2013 Index. The region recorded a score improvement of 0.3 point from last year, with Mexico’s notable score improvement outweighing economic freedom declines in Canada and the United States. With Canada continuing to be the region’s freest economy since 2010, the North American region has two “mostly free” economies (Canada and the U.S.) and one “moderately free” economy (Mexico).
North America scores above the world averages in rule of law, regulatory efficiency, and open markets but continues to lag in the pillar of limited government, which consists of fiscal freedom and the management of government spending. Compared to last year, on average, the region has improved in the areas of investment freedom, trade freedom, and the management of public spending while registering score declines in business freedom and monetary freedom.
Narrowing the gap with North America, the European region has the world’s second-highest level of economic freedom. Europe is the most improved region in the 2013 Index, with a score gain of 0.5 point. The scores of 32 countries improved, while just nine countries lost economic freedom. Switzerland continues to be the only “free” economy in the region, and about 81 percent of the 43 European countries score between 60 and 80 and are considered either “moderately free” or “mostly free.” Europe has two “repressed” economies that score below 50: Ukraine and Belarus.
There are five European countries whose economic freedom status has changed notably in the 2013 Index. Georgia, Norway, and the Czech Republic have become “mostly free” economies. Cyprus has dropped into the “moderately free” category, while Italy has regained that status. Georgia achieved the largest score improvement in the 2013 Index, and two other countries, Estonia and Poland, were among the world’s 10 most improved.
Taken as a whole, the European region scores higher than the world averages in rule of law, regulatory efficiency, and open markets. Despite some progress in constraining government spending over the past year, European countries fall almost five points below the world average in fiscal freedom and more than 20 points below the world average in government spending scores—a reflection of continuing problems in public finance management that result from years of financing the growth of the public sector.
Europe has been undergoing tumultuous and uncertain times epitomized by the ongoing sovereign debt crisis in the eurozone. Stagnant growth continues to exacerbate debt levels, leaving many European countries with no choice but to cut spending to reduce unsustainable fiscal deficits. In comparison to last year, Europe has improved on average in the areas of management of public spending and investment freedom while showing deteriorations in monetary freedom and financial freedom. Europe’s rule of law also has been undermined by a higher level of perceived corruption and the weakened protection of property rights.
MIDDLE EAST/NORTH AFRICA
The Middle East/North Africa region has experienced widespread turmoil. The region’s overall economic freedom has decreased by 0.3 point since the 2012 Index, and grading of economic freedom for Libya and Syria has had to be suspended. Many of the region’s economies remain only “moderately free” or “mostly unfree.” Algeria and Iran are considered “repressed,” scoring below 50. Structural and institutional problems abound, and the regional unemployment rate, which averages more than 10 percent, is among the highest in the world and is most pronounced among younger members of the labor force.
Many countries in the region have been undergoing political and economic upheaval since early 2011, and the gradual rise in economic freedom observed in prior years has come to a halt. Unfortunately, economic problems will not be solved simply by holding elections or allowing greater expressions of dissent. Policies and practices that restrict economic freedom are deeply ingrained, and it remains to be seen whether the region’s new political leaders have the political will to undertake the fundamental economic reforms that are needed.
Scores for most of the 15 countries in the region are concentrated between 50 and 70. In the 2013 Index, seven of the region’s 15 economies improved their economic freedom, and the same number of countries lost economic freedom. Five countries in the region recorded notable changes in their economic freedom status. The United Arab Emirates and Jordan have advanced into the “mostly free” category, while Lebanon and Morocco have slid back into “mostly unfree” status. Algeria has become a “repressed” economy for the first time in its Index history. While no countries in the region were among the world’s 10 most improved in the 2013 Index, Egypt recorded the third-largest score decline.
The Middle East/North Africa region has scores that are lower than the global average in half of the 10 economic freedoms, including property rights, freedom from corruption, monetary freedom, investment freedom, and financial freedom. Reflecting the fragile foundations of economic freedom in the region, the scores for rule of law have continued to deteriorate. Business freedom, labor freedom, trade freedom, and investment freedom have also declined.
SOUTH AND CENTRAL AMERICA/CARIBBEAN
With mixed progress toward greater economic freedom in the region’s individual countries, the South and Central America/Caribbean region is ranked fourth out of the six regions in the 2013 Index. The economic freedom scores of 20 of the region’s 29 countries declined, and the region recorded the second-largest overall loss of economic freedom (0.6 point) of any region. Half of the 10 largest declines in economic freedom registered in the 2013 Index came from this region, recorded by Belize, Panama, Haiti, Bolivia, and Trinidad and Tobago.
Five countries in the region have changed their economic freedom status. Bolivia and Haiti are now considered “repressed.” The Bahamas has improved to “mostly free,” while Belize and the Dominican Republic have fallen from “moderately free” to the “mostly unfree” category.
On average, the countries in the South and Central America/Caribbean region perform better than the world averages in only three of the 10 components of economic freedom: fiscal freedom, control of government spending, and monetary freedom. The region continues to lag behind world averages in the other seven areas of economic freedom, particularly freedom from corruption and property rights, both of which are critical to sustaining the rule of law and stable long-term economic development. Corruption and a lack of protection for property rights are major problem areas, reflecting long-standing issues of poor governance and political instability in the region.
Noticeably, the South and Central America/Caribbean region’s countries are distributed throughout the rankings in a more balanced fashion than are the countries of any other region, almost like a bell curve. All but nine countries receive an economic freedom score between 50 and 70, and 13 countries fall in the middle category of “moderately free.”
The Asia–Pacific region is distinguished by the extraordinary disparity in levels of economic freedom among its economies. Four of the world’s 10 freest economies—Hong Kong, Singapore, Australia, and New Zealand—are in this region, yet most of the other countries remain “mostly unfree.” Countries such as Turkmenistan and Burma have economies that are “repressed.” North Korea, which continues to reject any form of free-market activity, remains the least free economy in both the region and the world.
In comparison to last year, the region’s economic freedom has declined by one-tenth of a point. In the 2013 Index, the scores of 19 countries in the region have improved, and those of 20 have declined. About 63 percent of the 41 countries in the Asia–Pacific region score between 40 and 60 on the economic freedom scale, remaining either “mostly unfree” or “repressed.” Four countries have adjusted their economic freedom status. South Korea and Sri Lanka have moved up into the “mostly free” and “moderately free” categories, respectively. On the other hand, both the Kyrgyz Republic and Samoa have become “mostly unfree” economies. While Sri Lanka recorded the third-largest score improvement in the 2013 Index, Samoa registered the second-biggest score decline.
Although its overall economic freedom score is below the world average of 59.6 in the 2013 Index, the Asia–Pacific region continues to score higher than the world averages in four of the 10 economic freedoms related to limited government and regulatory efficiency: fiscal freedom, government spending, business freedom, and labor freedom. Typically lower government expenditures result in a regional government spending score that is over four points better than the world average. The region’s labor freedom score beats the world average by about five points, although many small Pacific island economies still lack fully developed formal labor markets.
India and China are ranked 119th and 136th, respectively, in the world, and both remain “mostly unfree.” The two countries’ high economic growth has not been deeply rooted in policies that promote economic freedom. The foundations for long-term economic development continue to be fragile in the absence of effectively functioning legal frameworks. Progress with market-oriented reforms has been uneven and has often backtracked under the influence of those with a political interest in maintaining the status quo.
Sub-Saharan Africa’s overall level of economic freedom remains weaker than that of any other region. With a score decline of 0.1 point that ended two years of steady improvement, the region’s movement toward greater economic freedom has stalled.
Unlike other regions that have a more diverse range of “free” economies, in Sub-Saharan Africa, there are only distinctions among less free economies. A majority of nations in the region are ranked either “mostly unfree” with scores between 50 and 60 or “repressed” with scores below 50. Fifteen of the world’s 33 “repressed” economies are in Sub-Saharan Africa. Four countries in the region have made notable changes in their economic freedom status. Botswana has advanced to “mostly free,” but Burkina Faso regressed to “mostly unfree.” São Tomé and Príncipe and Ethiopia are now considered “repressed.”
Sub-Saharan Africa is ranked last in seven of the 10 components of economic freedom. Some of the gaps between Sub-Saharan Africa’s scores and world averages are especially striking. The region lags by about 13 points in business freedom and by over 10 points in both property rights and freedom from corruption. Labor freedom is restricted, reflecting in part the region’s lack of progress in developing modern and efficient labor markets. The single factor for which the region scores higher than the world average is government spending. Ironically, however, the region scores worse than the global average in terms of fiscal freedom.
ECONOMIC FREEDOM: THE WELLSPRING OF TRUE PROGRESS
Over the past year, a critical battle has been fought around the world between defenders and oppressors of economic freedom. Global economic uncertainty has emboldened critics of the free enterprise system, who have raised questions about the best policy framework for revitalizing economic growth, employment, and overall social progress.
The broad consensus supported by volumes of evidence-based research is that vibrant and lasting economic growth is achievable only when governments adopt economic policies that increase individual choice and opportunity, empowering and encouraging entrepreneurship.
In addition to the great levels of prosperity and human development induced by high levels of economic freedom, the higher growth rates spurred by advances in economic freedom tend to inspire a virtuous cycle of openness and resilience, triggering even further improvements in economic freedom. The result is a sort of compounding that has created in the countries with the highest levels of economic freedom a level of prosperity and human well-being unmatched in human history.
Greater economic freedom also provides more fertile ground for effective and democratic governance. It empowers people to exercise greater control of their daily lives. By increasing options, economic freedom ultimately nurtures political reform as well. Economic freedom makes it possible for individuals to gain the economic resources necessary to challenge entrenched interests or compete for political power, thereby encouraging the creation of more pluralistic societies.
TIME TO RENEW COMMITMENT
TO ECONOMIC FREEDOM
The current period of uncertain and fragile global economic performance represents a critical opportunity to ponder the principles that can revitalize economic growth. The results of the 2013 Index of Economic Freedom document economic policy stagnation in many countries around the world and record a general decline in the momentum for increasing freedom. If we are to restore economic growth, that decline is going to have to be reversed, most importantly in countries like the United States and Ireland that once led the charge for greater freedom.
As Friedrich A. Hayek once observed, “If old truths are to retain their hold on men’s minds, they must be restated in the language and concepts of successive generations.” That need has never been more evident to those who carry on the fight for greater economic freedom and the broader understanding and acceptance of the fundamental principles on which prosperity is based.