January 9, 2013 | Commentary on Economic Freedom, Index of Economic Freedom

In the Index of Economic Freedom, Liberalization Slips

The foundations of economic freedom are weakening around the world, according to the 2013 Index of Economic Freedom, published today by the Heritage Foundation and The Wall Street Journal. Particularly concerning are the rise of populist "democratic" movements that use the coercive power of government to redistribute income and control economic activity.

In the post-Arab Spring Middle East, some democratically elected governments are adopting totalitarian practices reminiscent of revolutionary Iran or the Taliban. economic-freedom can't flourish under the arbitrary rule of authoritarians and despots, and it has declined significantly in Egypt, Tunisia, Algeria and Saudi Arabia, among other countries.

Corrupt political and legal environments cause underdevelopment in poorer countries, and this year's index devotes a special section to the importance of the rule of law in fostering freedom and economic growth. Unfortunately, economic favoritism and cronyism exist in advanced democracies, too. In the index, Matt Mitchell of the Mercatus Center at George Mason University catalogs a dozen ways in which government privileges for special interests hurt productivity and reduce efficiency. The damage isn't just economic. The pathology of privilege, which tends to favor the rich and powerful, erodes the integrity of political systems, too.

Elsewhere in the index, Harvard's Robert Barro warns of advanced democracies engaging in redistributionist economics on behalf of electoral majorities. The resulting transfers of income and wealth tend to compromise property rights and reduce the incentives to work and invest. Policies that promote the rule of law and protect individuals from arbitrary government regulation, by contrast, ensure fairness—and, as documented in years of empirical data, promote higher incomes and faster growth.

Surprisingly, ailing Europe made the most progress last year, while the average economic-freedom score world-wide increased only a 10th of a point. The threat of imminent collapse in the euro zone has prompted some serious efforts to rein in government spending and taxation. Leading the way in Europe are those countries that know firsthand the ravages of socialism. Georgia, a former Soviet republic, showed the most improvement in the 2013 index, with Estonia and Poland not far behind. Even Sweden, the former poster child for democratic socialism, has adopted more market-oriented policies promoting economic freedom.

Still, almost all of the most advanced countries lost ground this year. Even top-ranked Hong Kong saw its score decline due to increased government spending and higher inflation. The United States, ranked only 10th most free in the world this year, joins Ireland as the only advanced economies to have lost economic freedom five years in a row.

It is no exaggeration to blame the recent slowdown in economic liberalization around the world on the lack of U.S. leadership. Trade flows—the engine of world growth—have declined as the U.S. economy has stagnated. Protectionism threatens consumers and businesses with higher costs and restrictions in supply. Ill-conceived banking regulations such as the Dodd-Frank law generate uncertainty and anxiety. And investment freedom declines in the face of higher costs and new legal and tax liabilities such as those introduced by ObamaCare. These misguided U.S. policies hurt Americans first, but others feel the harm as well.

Nor is the loss of economic freedom a necessary byproduct of the quest to ensure greater fairness. All around the world, the true cost of lost economic freedom isn't just slower economic growth but poorer performance on social indicators such as health, education, poverty reduction and environmental protection. Freer economies are better able to achieve such progressive social goals than are economies that rely more on government regulation and centralized control.

-Mr. Miller is the director of the Center for International Trade and Economics at the Heritage Foundation.

About the Author

Ambassador Terry Miller Director, Center for Data Analysis and the Center for Trade and Economics and Mark A. Kolokotrones Fellow in Economic Freedom
Center for Trade and Economics (CTE)

First appeared in The Wall Street Journal.