- Countries with higher levels of economic freedom substantially outperform others in economic growth, per capita incomes, health care, education, protection of the environment, and reduction of poverty, according to data collected for the 2013 Index of Economic Freedom.
- Regrettably, the results also indicate that economic freedom is not advancing strongly. Only 31 countries have increased their economic freedom scores by 1 point or more over the past year, and 35 registered declines of that magnitude. The average world economic freedom score increased only 0.1 point, reflecting policy stagnation that in turn is reflected in lower world growth rates.
- Government spending scores improved somewhat on average, heralding serious efforts in many countries to halt the rapid budget growth that accelerated during the financial crisis and recession. By contrast, regulatory efficiency declined as countries attempted to stem growing unemployment by increasing minimum wages or otherwise tightening labor market controls. The failure of those policies was evident in many countries around the globe.
- Five emerging economies have notably improved economic freedom in recent years, surviving the global economic turmoil with sustained positive growth rates: Colombia, Indonesia, Jordan, Poland, and the United Arab Emirates. With a cumulative score improvement of 3.5 points or more, each of these countries has achieved five consecutive years of improving economic freedom and turned the global economic crisis into an opportunity to upgrade its economic system.
- On the other hand, two advanced economies and one developing country have registered five consecutive years of declining economic freedom: the United States, Ireland, and Equatorial Guinea. Each has recorded a cumulative score decline of 5 points or more since 2008. All have suffered from substantial declines broadly across the 10 components of economic freedom, particularly in the areas of the rule of law and limited government.
- The importance of political stability to economic freedom and prosperity is illustrated this year by the suspension of Libya and Syria from the Index rankings. Ongoing conflicts in those two countries have made it impossible to gather the necessary data to grade all aspects of their economic freedom, and it is obvious that economic development has ground to a halt at least temporarily in both countries.
THE RULE OF LAW
Given the political turmoil engulfing the Middle East and the ongoing problems in other regions of the world, the 2013 Index includes a number of special studies focusing on the importance for development and economic prosperity of maintaining and advancing the rule of law.
- Dr. Robert Barro of Harvard University examines the relationship between “Democracy, Law and Order, and Economic Growth” and, with particular relevance in view of the ongoing turmoil in the Middle East, concludes that reform efforts in poor countries should concentrate on establishing the rule of law, property rights, and free markets rather than democracy, which has little relationship to future economic performance. See Chapter 3: Democracy, Law and Order, and Economic Growth.
- The relationship between “Economic Freedom and Government-Granted Privilege” is extraordinarily destructive, according to Dr. Matthew Mitchell of the Mercatus Center at George Mason University. Government interventions on behalf of specific firms and individuals violate one of the fundamental tenets of economic freedom—equitable treatment for all—and lead to unproductive behavior and a loss of efficiency. Dr. Mitchell concludes that such privileges are “pathological,” limiting the prospects for mutually beneficial exchange, raising prices, lowering quality, and discouraging innovation. See Chapter 4: Economic Freedom and Economic Privilege.
- The protection of property rights is the key to ensuring beneficial development outcomes in countries seeking to exploit endowments of natural resources, according to James M. Roberts of The Heritage Foundation and John A. Robinson. They explain that “Property Rights Can Solve the ‘Resource Curse,’” encouraging investment, entrepreneurship, and innovation. By contrast, bad outcomes follow when abundant resources are made available to a corrupt regime. See Chapter 5: Property Rights Can Solve the Resource Curse.
- According to Myron Brilliant, Senior Vice President for International Affairs of the U.S. Chamber of Commerce, “Good Business Demands Good Governance,” and better international metrics for the rule of law would inspire government reforms that would improve investment flows and job creation in countries that maintain high standards and are effective in controlling corruption. See Chapter 6: Good Business Demands Good Governance.
THE WORLD RANKINGS
- Hong Kong again leads the world rankings, followed by Singapore, Australia, New Zealand and Switzerland. These economies, judged economically free according to the Index criteria, demonstrate the benefits of policies that consistently strive to protect and expand economic freedom.
- The top performers in the Index come from all parts of the world. Hong Kong, Switzerland, Canada, Chile, Mauritius, and Bahrain each claimed a regional crown, with scores among the dozen best overall.
- With Ireland’s decline in rank from 9th place to 11th place, the eurozone is no longer represented in the Index Top 10. A significant realignment of European countries is underway in terms of economic freedom. Sweden, Germany, Georgia, the Czech Republic, Norway, Poland, Romania, and Bulgaria all recorded their highest economic freedom scores ever in 2013. France, Greece, Italy, Portugal, and the United Kingdom all registered scores about the same or lower than those they first registered nearly two decades ago when the Index began recording economic freedom.