November 8, 2000

November 8, 2000 | Commentary on Political Thought

Economic Freedom & the "Fear of Committment"

In a scene from Alfred Hitchcock's 1954 movie "Rear Window," Jimmy Stewart and Grace Kelly argue about whether they'll ever marry. Kelly wants a commitment; Stewart prefers what he calls the "status quo" - a steady girlfriend, but no wedding ring.

By the closing credits, it's clear Kelly is going to get her way. But in real life, the proverbial "fear of commitment" is hard to shake. And we see it not only in human relationships, but also in the one between a government and its citizens - specifically, in the amount of economic freedom it's willing to allow them.

Unfortunately, the more countries you look at, the more you realize that the Stewart approach is alarmingly prevalent. The editors of the 2001 "Index of Economic Freedom," just published by The Wall Street Journal and The Heritage Foundation, found that 128 out of the 155 countries surveyed - including Canada, Russia, Japan and Germany - just can't seem to decide whether they want a free-market economy or a state-controlled one.

But on-again, off-again experiments with free-market policies don't lead to happy economic endings. To enjoy the tremendous benefits of economic freedom, a country must be fully committed to it. It can't undertake economic reform part-time - now adopting, now repealing free-market initiatives - and expect economic freedom to flourish.

Yet some nations act as if they can. Consider:

The Czech Republic: Independent since 1993, the Czechs have done much to repair the damage wrought by decades of communism. They stabilized their currency, discarded price controls and privatized many state industries. But the republic's economic performance faltered in 1996 because its state-dominated banking sector had not been reformed. The government has continued to privatize other industries, but non-tariff trade barriers, such as inconsistent customs procedures, are restricting trade. In the last year, the Czech Republic has slipped in the Index rankings from being the 22nd freest economy in the world to being the 27th.

Argentina: In 1991, after a decade of economic struggle that ended with massive inflation, the government introduced reforms that included an aggressive privatization plan. This brought a surge of foreign investment and economic growth, but by the mid-90s, the drive to liberalize the economy had stalled. The country is today mired in a deep recession. It's doing some things right - wage and price controls are virtually non-existent, and inflation is low - but the black market is growing, and the courts aren't protecting private property. These factors, combined with higher-than-necessary tariffs, caused Argentina to fall from 17th to 29th in the new Index rankings.

Taiwan: It's known as one of Asia's famous "tigers," but it didn't start out that way. In the 1950s, Taiwan had an inefficient and overregulated economy. Reforms came about in the late 1960s with property rights, a stabilized tax system, and the transfer of public lands to private use. The Taiwanese also reformed their banking and financial sectors. Growth exploded in this highly industrialized land. But the government has been returning to the statist practices of yesteryear - allowing non-tariff trade barriers, increasing public spending, propping up currency and stock markets. Taiwan has gone from being the 11th freest economy to being the 20th.

This is a two-steps-forward, one-step-back approach to economic freedom. Why don't these countries stick with a steady run? Certainly it can be done. Consider the former Soviet state of Lithuania. It has lowered inflation, cut government spending, and jettisoned wage and price controls. It also jumped from 61st place on last year's Index to 42nd on this year's, one of the best improvements recorded.

Not only can countries opt for commitment, they should. The Index proves that the more economic freedom a nation has, the more prosperous its citizens are. World Bank data show that per capita income for economies labeled "mostly unfree" or "repressed" in the Index averaged about $2,800 in 1998. That figure quadruples to $11,054 for "mostly free" economies - and doubles again to $21,206 for "free" economies.

There's no question that complete economic freedom should be the goal of all nations. And the trend lines are in the right direction: Economic freedom has increased every year since 1995. This past year, 70 countries granted their citizens more economic liberty, while 52 restricted it.

The question is, when will governments caught between "free" and "repressed" stop embracing freedom half-heartedly and make a real commitment - and let true prosperity bloom for their citizens?

Edwin J. Feulner, Ph.D. is president of the Heritage Foundation, a Washington-based public policy research institute. He served on the Congressional Commission on International Financial Institutions, which suggested reforms for the International Monetary Fund (IMF) and the World Bank.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

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