The 20th edition of the Index of Economic Freedom shows economic freedom once again on the rise, reaching the highest point in the Index’s 20-year history. Behind this record are stories of human progress and the achievements of countries and their citizens—literally billions of people around the world whose lives have measurably improved. There are also stories of backsliding, regression, and even failure.
As previous editions of the Index have documented, the link between economic freedom and long-term development is clear and strong. Countries that allow their citizens more economic freedom reach higher incomes and better standards of life. People in economically free societies live longer. They have better health. They are able to be better stewards of the environment, and they push forward the frontiers of human achievement in science and technology through greater innovation.
With the perspective of 20 years, it is apparent that despite ups and downs, the principles and lessons of economic freedom have been widely understood, accepted, and implemented in practice by a significant number of countries around the globe. Their progress is seen in the score changes. The poorer performing countries, by contrast, have tried only some of the ideas, adulterated others, or even, in a few cases, rejected them outright.
The negative consequences are readily apparent in countries falling in the rankings. The Index provides compelling evidence that economic prosperity and economic freedom go hand in hand. Lasting prosperity cannot exist in the absence of economic freedom.
To be sure, there have been setbacks for economic freedom over the past two decades. (See Chart 1.) Some of them were quite severe as in the aftermaths of the 1997 Asian financial crisis and the 2008 global financial turmoil.
Looking back, however, the crises have served as critical tests of countries’ commitments to preserving and advancing economic freedom. The political and policy choices that emerged from the crises and in subsequent years have led to diverging trends of economic freedom with far-reaching economic consequences for those who have chosen different paths. Countries that have acknowledged the limits of government and continued their commitment to sustaining economic freedom have reaped tangible rewards of swift economic rebound and renewed dynamism. By contrast, those that have relinquished economic freedom with short-sighted interventionist and populist policies have prolonged the crises and fallen into the trap of economic stagnation and greater uncertainty.
These real examples of the consequences of the rise and fall of economic freedom in countries around the globe demonstrate unmistakably that economic prosperity is not a national birthright: Rich economies can fall into self-inflicted stagnation all too quickly, while long-suffering underdeveloped nations can ascend from poverty to economic dynamism in a matter of years.
As the Index has documented over the past two decades, the most critical variable in sustaining the wealth of nations and the most effective means to eliminating poverty is economic freedom.
The findings of the 2014 Index once again evince the strongly positive link between advancing economic freedom and achieving greater prosperity. Chart 2 shows the most basic benefit of economic freedom, confirmed now with data covering 20 years: 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.
Greater levels of economic freedom have had a major positive impact on poverty levels over the past decade. Poverty intensity, as measured by the United Nations Development Programme (UNDP) Multidimensional Poverty Index that assesses the nature and intensity of deprivation at the individual level in education, health, and standard of living, is much lower on average in countries with higher levels of economic freedom. The intensity of poverty in countries whose economies are considered mostly free or moderately free is only about one-fourth the level in countries that are rated less free.
Twenty Years of Advancing Economic Freedom
By a great many measures, the past 20 years during which the Index has been charting the advance of economic freedom have been the most prosperous in the history of humankind. More people are living better lives than ever before. Some, unfortunately, are not. As Index editor Terry Miller pointed out in these pages in 2009, it is a human tragedy—an appalling, avoidable human tragedy—that not all of the world’s people have participated in our era’s explosion of prosperity.
Since 1995, when the Index started documenting economic policies that promote broader economic growth and greater well-being, we have learned that:
- Those countries that practice some version of free-market capitalism, with economies open to global trade and investment, do better than those that are protectionist or that shun economic linkages with others.
- Competition promotes greater productivity and a more efficient allocation of resources than central planning.
- Private ownership and the protection of individuals and enterprises by the rule of law encourage effort and initiative more than do collectivism and socialism.
- Governments that dominate their countries’ economies impoverish their citizens through economic stagnation.
The free-market system that is rooted in economic freedom has fueled unprecedented economic growth around the world. As Chart 3 illustrates, over the past two decades in which the global economy has moved toward greater economic freedom, becoming “moderately free” overall, the world economy achieved real GDP expansion by around 70 percent, lifting hundreds of millions of people out of poverty.
With global economic freedom rising over the past two decades, the world has recorded significant economic growth, and the global poverty rate has been cut in half. Opening the gates of prosperity to ever more people around the world, economic freedom has made the world a profoundly better place.
The Importance of Growing Economic Freedom
Any discussion about advancing economic freedom is essentially a story of the empowerment of people. Strengthening and expanding freedom improves each individual’s chance to achieve his or her goals and own and enjoy the value of what he or she creates. Amartya Sen, a Nobel laureate economist who has made considerable contributions to development economics, once noted that “[d]evelopment consists of the removal of various types of unfreedoms that leave people with little choice and little opportunity for exercising their reasoned agency.” People crave liberation from poverty, and they hunger for the dignity of free will. By reducing barriers to these fundamentals, the forces of economic freedom create a framework in which people can fulfill their dreams of success.
In this vein, one of the most important goals of economic policy in almost every country in the world is to increase the rate of economic growth. Since the Index of Economic Freedom is primarily a measure of the economic policy environment in various countries, the 20-year history of the Index and its database have a lot to say about what really drives economic growth and related human progress in different aspects. There is strong support within the global database for the idea that improvements in economic freedom are an important determinant of rates of growth. Key drivers of this economic growth and poverty reduction are the high levels of flexibility and resilience that come with economic freedom.
More specifically, as documented in the previous editions of the Index and supported by volumes of academic research, vibrant and lasting economic growth results when governments implement policies that enhance economic freedom and empower individuals with greater choice and more opportunities. In fact, the advancement of economic freedom is the most straightforward path to dynamic growth and true progress for the greatest number of people.
As Chart 4 demonstrates, there is a robust relationship between improving economic freedom and achieving higher per capita economic growth. Whether long-term (20 years), medium-term (10 years), or short-term (5 years), the relationship between changes in economic freedom and changes in economic growth is consistently positive.
Undeniably, countries moving toward greater economic freedom tend to achieve higher rates of growth in per capita GDP over time. In all of the three specific periods examined in this 20-year Index database, the average annual per capita economic growth rates of countries that have grown economic freedom most are at least 50 percent higher than those of countries where freedom has stagnated or eroded.
Even better, advancing economic freedom produces dynamic and inclusive growth for ordinary people in a society. Economic freedom, cultivated by the rule of law, limited government, regulatory efficiency, and open markets, has proven to be critical to generating the broader-based economic growth that creates opportunities in all sectors of society.
Economic Freedom: The Real Agent of Revolution
As emphasized in the Index and confirmed by its findings, sustaining vibrant growth and broader-based economic expansion requires that countries be committed to putting into practice three fundamental principles of economic freedom: empowerment of the individual, non-discrimination, and open competition.
In pursuing these principles of economic freedom and the policies necessary to realize them over the past 20 years, many governments have facilitated the free flow of goods and services, improved the ease of doing business, established monetary stability, and cut taxes, all while accentuating greater transparency and accountability under more dependable rule of law.
It is encouraging to see that the powerful forces of economic freedom have fostered the spirit of entrepreneurship and innovation that creates new products and more jobs, spreading the benefits of economic dynamism to an increasing number of countries around the globe over the past 20 years. As Chart 5 summarizes, more countries are classified as at least “moderately free,” with scores of above 60, today than in the 1995 Index.
The advancement of global economic freedom to its highest level ever in the 2014 Index, with a greater number of countries rated at least “moderately free,” is particularly welcome given that the notable upsurge has been driven mainly by developing and emerging economies around the world, which now account for the first time in the modern era for about half of the global economy’s output.
Globally, 124 countries have improved their economic freedom scores relative to the first year in which they were rated in the Index, while 52 countries have recorded score declines.
Most notably, 10 developing countries across the globe that were rated as “repressed” economies in the first years they were graded in the Index almost 20 years ago have successfully leaped forward into the ranks of the “moderately free” or “mostly free.” (See Chart 6.)
This is quite a geographically and economically diverse group, encompassing African countries, Eastern European countries, and members of the former Soviet Union. Over the past two decades, these 10 developing economies as a group have recorded an average annual economic growth rate of 5 percent, which is 1.2 percentage points higher than the average of all other countries.
On the other end of the scale, three countries—Argentina, Ecuador, and Venezuela—have dropped into the ranks of the “repressed” over the past two decades. (See Chart 6.) These economies were rated more highly in the first years they were graded in the Index but since then have steadily lost economic freedom. These three have recorded growth rates that, on average, lag almost two percentage points behind those that have graduated from “repressed” status.
Economic Freedom: A Vital Means for Charting Greater Progress
Growing economic freedom is unequivocally about achieving greater overall prosperity that goes beyond materialistic and monetary dimensions of well-being. Improvements in economic freedom enhance economic dynamism and, thus, overall human developmental progress.
Advancing economic freedom is strongly related to the enhancement of overall human development as measured by the UNDP Human Development Index, a composite assessment of health, education, and standard of living. As Chart 7 shows, since the beginning of this century, countries that have improved their economic freedom to greater degrees have also achieved much greater enhancement of human development.
Governments that choose policies that increase economic freedom are placing their societies on the pathway to more education opportunities, better health care, and greater standards of living for their citizens. Those governments in the first quartile that have embraced policies that enhance economic freedom have recorded at least a 30 percent higher average annual growth rate of overall human development since 2000 in comparison to the others.
Greater economic freedom can also provide more fertile ground for effective and democratic governance. Advancing economic freedom is about empowering more people to exercise greater control of their daily decision-making processes. In doing so, economic freedom ultimately nurtures political reform as well. Economic freedom encourages a pluralistic society and makes it possible for independent sources of ideas and resources to counterbalance entrenched political power.
Debate about the direction of causality between economic freedom and democracy has become more controversial in recent years due to the multifaceted interaction between the two. However, the positive relationship that exists between economic freedom and political freedom is undeniable. Chart 8 demonstrates that there is a positive linkage between advancing economic freedom and greater political freedom as measured by Freedom House. Although the relationship is not as robust as one might hope to see, over the past two decades, countries that have advanced their economic freedom have tended to achieve greater enhancement of political freedom in general.
Undoubtedly, achieving greater political freedom and well-functioning democracy is a messy and often excruciating process. However, the complex interplay between improving economic freedom and advancing political freedom is something positive and merits further examination.
The Index Beyond 20
Improving and maintaining economic freedom is the proven way to generate positive cycles of economic growth and lasting prosperity. Economies that have advanced economic freedom have achieved overall levels of growth higher than those achieved by countries where economic freedoms have been curtailed by the heavy hand of government. No other systems that have been tried have come close in terms of providing broad-based prosperity. Countries that have not joined the march of freedom have left their citizens lagging behind and even, in the worst cases, stuck in poverty or destitution.
Such failures are inexcusable. Most important, they are preventable. It is too soon to know how coming years will play out as the Index of Economic Freedom enters its third decade. Nonetheless, it is both heartening to know that economic freedom is again on the march and safe to predict that countries that find the political will and wisdom to advance economic freedom will see their citizens prosper in the years ahead.