January 14, 2004 | Commentary on Foreign Aid and Development
This is the time of year to take stock. On a
personal level we look at our own resolutions and finances. On a
global level, we like to take stock of where we are headed.
To this end, the Heritage Foundation/Wall Street Journal "Index of
Economic Freedom" was published Monday. The Index is now in its
10th season, and it has a proven record for economist and
lawmakers. In some countries, it is used to guide government policy
towards free market reforms, in others as an economic textbook at
universities. For the American government and lawmakers it is a
tool to evaluate the economic policies of recipients of foreign
aid, among other functions.
Countries are rated according to 10 factors: trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation, and informal market activity.
Writes editor Marc Miles, Director of the Heritage Foundation's Center for International Trade and Economics, "Ignore any one of the 10 factors of economic freedom, and abundant prosperity is likely to remain elusive." Anyone who might doubt that countries with the highest levels of economic freedom also have the highest living standards, need only compare the figures for South Korea, rated number 46 and North Korea rated 151, dead last.
Every year, there are new lessons to be learned, but the overriding trend remains steady: Since the collapse of communism, a growing number of free economies are making this world more prosperous. This is true even during trying times of international terrorism, global economic down turn and flagging World Trade Organization talks. That's the good news.
The cautionary note is that this expansion of economic freedom is not inevitable, nor irreversible. It requires constant nourishing and attention to good governance. In 2003, economic freedom improved in 75 countries, but declined in 69. It remained the same in 11. Out of 155 countries, only 16 are rated as economically "free," and 55 "mostly free." One the other hand, 72 are "mostly unfree," and 12 are classified as oppressed. Five countries could not even be rated for want of reliable economic data.
Writes co-editor Mary Anastasia O'Grady, editor of the Wall Street Journal's "Americas" column, "The Index's most disturbing findings are in Latin America where 11 countries improved their standing in the rankings but 13 declined. . . Venezuelan liberty declined so much that the economy is now considered 'repressed.' " Argentina is almost equally troubled, and with some notable exceptions, this trend away from economic freedom was also in evidence in Asia.
This year, there's also the lesson that economic freedom and political freedom do not always go hand in hand. Even as the Index was being unveiled in Hong Kong, rated the freest economy in the world for the 10th time, the Chinese government in Beijing made its intentions clear openly for the first time that it would not allow democratic elections in Hong Kong any time soon -- or perhaps ever. It was, of course, the British democratic backing that allowed Hong Kong's economic freedoms to flourish for a century, and Beijing's heavy hand might well in time crush its economic miracle.
On the positive side are developments in Europe, which continued on the path to economic freedom. North America and Europe -- the world's most prosperous regions -- also are home to seven of the 10 freest economies in the world. Another seven have experienced expansion in economic freedom. Slovakia demonstrated some of the most dramatic improvements, reducing taxes, liberalizing prices, accelerating privatization, and regulating banking. The irony is that the countries of Central and Eastern Europe that have made huge strides in recent years, in part to qualify for EU membership, may have to curb some of those same policies as EU regulations and fiscal harmonization is imposed from Brussels.
So, what can we expect from 2004? Were the Bush administration's Middle East policy to produce step towards democracy in the region and diversification of its oil dependent economies, the Index in 2005 could take a leap forward in the number of freer economies. On the other hand, dangers continue to abound. Trade liberalization remains a continuous up-hill battle, and terrorist attacks and the agenda of anti-globalization movements could still affect world trade and economic performance adversely.
The most important lesson to be taken away is that economic liberalization is not a one-way street, and free-market capitalism is not the end of history. It is, however, the best system human beings have so far devised to protect their freedoms and foster prosperity, and it needs to be vigorously protected.
First appeared in The Washington Times