Economic freedom is proven secret of success

COMMENTARY International Economies

Economic freedom is proven secret of success

Feb 5th, 2015 2 min read
Kim R. Holmes, Ph.D.

Acting Senior Vice President, Research

Kim R. Holmes, oversaw the think tank’s defense and foreign policy team for more than two decades.

Suppose someone told you there were over two decades of economic data showing the secret of success for every nation in the world and that a Nobel laureate in economics inspired the methodology that was used to analyze that data.

Would you sit up and listen?

I hope so, because if you did, you would discover a lot about why some economies succeed while others fail.

The study is The Heritage Foundation/Wall Street Journal’s annual Index of Economic Freedom. The Nobel laureate is world-renowned economist Milton Friedman. The 2015 index, edited by Terry Miller and Anthony B. Kim, shows that high levels of economic freedom — the degree to which an economy is free of growth-suppressing government interference and regulations — produce all sorts of benefits.

One is the alleviation of poverty. Year after year, the index demonstrates that economically free countries outperform others in reducing poverty. It shows that the intensity of poverty in countries whose economies are mostly free or moderately free is only about one-fourth the level found in countries rated less free. Poverty intensity is how severely people suffer from low living standards — i.e., from the lack of basic services such as health care and education.

Clearly, the worst place to be poor is in an economically repressed country like Belarus, Venezuela, North Korea or Zimbabwe. Not only is there little or no upward economic mobility, but the poverty there is positively crushing.

Critics of capitalist economies like to complain about inequality or the lack of social mobility, but they fail to ask “compared with what?” Countries with low economic freedom are often economically stratified and poor. Nations that are economically freer have higher per capita incomes than those with lower economic freedom scores. This means their standards of living are higher.

At the same time, inequality in Greece, Argentina, Russia, India and other economically unfree countries is high. Even in communist countries like Cuba, which ostensibly is supposed to be a worker’s paradise, severe inequality exists between the party elites and the rest of the population.

Milton and Rose Friedman had an interesting take on how economic freedom relates to upward mobility. They said “so long as freedom is maintained, it prevents positions of privilege from becoming institutionalized. Freedom means diversity, but also mobility. It preserves the opportunity for today’s disadvantaged to become tomorrow’s privileged and, in the process enables almost everyone, from top to bottom, to enjoy a fuller and richer life.”

Indeed, by every measure of human development, economic freedom produces better results. Life expectancy is longer, literacy rates are higher and education opportunities are better in countries that embrace economic freedom. If you want all these things, it is far better to live in relatively economically free countries like the U.S., Chile, Switzerland or Taiwan than in Greece, Indonesia, Brazil or Venezuela, which are mostly unfree or repressed.

If you counter that is because the former countries are simply richer, that ducks the question of why they are that way. It’s not natural resources that make Switzerland, Taiwan, Chile or Singapore wealthy societies. It’s economic freedom. The Index of Economic Freedom consistently shows over the years the robust relationship between improving economic freedom and achieving higher per capita economic growth. It’s not just a rising tide that raises all boats. It’s also an economy that is more dynamic, flexible and open to ideas and technologies.

If such ideas are good enough for prosperous countries like the U.S., Australia and Switzerland — not to mention for successful companies like Apple — why are they not good for developing countries that would like to be wealthy?

Of course they’re good enough, not only because they work for the rich, but also because they work for everybody.

 - A former assistant secretary of state, Kim R. Holmes is a distinguished fellow at The Heritage Foundation.

Originally appeared in The Washington Times