It would be a shame if countries respond to the downturn with policies that further retard growth.
As former Texas Longhorn coach Darrell Royal liked to say, when faced with a challenging bowl game, you need to "dance with the one who brung you" to the party. Mr. Royal meant that even when faced with daunting new challenges, one would be well advised not to abandon a winning formula that had already brought success. That is good advice as the United States and other economies face the daunting task of restoring economic growth.
The "party" in this case is the six decades of increasing prosperity that the world has enjoyed since the end of World War II. U.S. Gross Domestic Product was about $1.6 trillion in 1947 (valued in 2000 dollars), a little over $11,000 for every man, woman and child. In 2007, it was $11.5 trillion, or about $38,000 per capita. That's almost a doubling of average incomes each generation, made possible by the free market's efficiency in allocating capital and labor.
Capitalism, the U.S. dance partner during this period of unprecedented economic growth, is, by the accounts of political leftists, no longer the smartest looking companion on the dance floor. They like the looks of other systems like socialism much better. Yet despite recent setbacks, they would be hard pressed to deny that capitalism steps out more nimbly than its rivals, and keeps up with the music far more surely.
For 15 years, The Wall Street Journal and The Heritage Foundation have been measuring countries' commitment to free-market capitalism in the "Index of Economic Freedom." The 2009 Index, published this week, provides strong evidence that the countries that maintain the freest economies do the best job of promoting prosperity for all citizens.
The positive correlation between economic freedom and national income is confirmed yet again by this year's data. The freest countries enjoy per capita incomes over 10 times higher than those in countries ranked as "repressed." This year, for the first time, the Index also correlates economic freedom with important societal values like poverty reduction, human development, political freedom and environmental protection. The linkages are robust, with economically freer countries performing significantly better on every indicator of well-being.
Those tempted to abandon the free market and capitalism in the current crisis need to look carefully at the record of countries moving down that path. In 2009, it is Zimbabwe that has lost the most economic freedom, dropping 6.7 points on the Index's 0-100 scale and falling to next-to-last place. Deficit spending, the expropriation of land and resources, and government support of favored enterprises have destroyed the economy; hyperinflation and corruption have devastated the nation.
Venezuela recorded the second largest drop in the Index, losing 4.8 points as a result of price controls, currency devaluations, nationalizations and the corruption that characterize Hugo Chávez's brand of Bolivarian socialism.
Hong Kong and Singapore are once again the freest economies in the world, followed in the rankings by Australia, Ireland and New Zealand. The U.S. slipped one spot to sixth place this year because of increases in both tax revenue and government spending as a percentage of GDP.
The biggest success stories in the Index of Economic Freedom continue to be the countries of Eastern Europe and the former Soviet Union. Azerbaijan, Armenia, Georgia, Bosnia and Herzegovina, Moldova, Lithuania and Romania have all gained at least 20 points of economic freedom over the life of the Index. Per capita GDP in these countries has grown at an average annual rate of 7.4% over the past decade.
In a special chapter in this year's Index, the Journal's Stephen Moore chronicles the critical role that tax cuts, particularly cuts in corporate taxes, have played in economic growth in Eastern European countries and others like Ireland. The citizens of those countries lived for decades with state-directed economic planning and regulation, which many now advocate for the U.S. and other advanced economies. They remember the clumsiness of socialism and the government missteps that fostered economic disaster. To switch dance partners now that they have adapted to the quick step of capitalism and are enjoying its many benefits would be a tragic mistake.
It would be ironic indeed if the world's advanced economies, in seeking to address current woes, abandoned the system that has brought them and others around the world the amazing levels of prosperity experienced over the last half century. The "Index of Economic Freedom" provides a record of that progress. It charts the path to economic advancement and proves that the best way forward is to hang onto our partner and step to the music of the market.
Terry Miller, a former ambassador to the U.N. Economic and Social Council, is director of the Center for International Trade and Economics at The Heritage Foundation.
First appeared in the Wall Stree Journal