November 1, 2000

November 1, 2000 | News Releases on Foreign Aid and Development

Economic Freedom Advances in North America and Europe, Survey Shows

WASHINGTON, NOV. 1, 2000-Six of the world's 10 freest economies are located in Europe and North America, The Heritage Foundation and The Wall Street Journal report today in their annual "Index of Economic Freedom."

The region, one of five rated in the 2001 Index, made the greatest progress toward economic freedom last year, with Ireland, Luxembourg, the United States, the United Kingdom, the Netherlands, and Switzerland ranking in the Top 10. It's the first such appearance for the Netherlands, which previously ranked 14th.

"North America and Europe consistently confirm the Index's central finding: that the countries with the most economic freedom have higher rates of economic growth and are more prosperous than those with less economic freedom," note Index editors Gerald P. O'Driscoll Jr., director of Heritage's Center for International Trade and Economics, Kim R. Holmes, a Heritage vice president and director of the think tank's Davis International Studies Institute, and Melanie Kirkpatrick, assistant editorial page editor of The Wall Street Journal.

Ireland rose from 7th to 3rd place, due to a greater openness to foreign investment and the freedom of its banking and financial sector. But Index editors warned that it may slip next year because of price controls imposed by the government in response to the European Union's monetary policy. The EU has also pushed Ireland to moderate its free-market practices.

Many former Soviet states improved. Lithuania made the biggest jump-from 61st to 42nd place-after undertaking an ambitious program of private-sector development and decreased government spending. But Estonia is the closest to becoming a "free" economy, with lower taxes and inflation improving its score this year.

Other former Communist countries are having a tougher time after independence. Moldova plunged from 90th to 120th place due to growing inflation and higher government spending, while Russia,still struggling with widespread corruption and mismanagement, is among the 10 countries whose scores have slipped the most since 1995. (Its overall score remained stable this year, however.) Government-imposed price controls caused Belarus's score to worsen.

The fighting has stopped in Bosnia and Herzegovina, but the economic wounds left by the punishing ethnic conflict there will take longer to heal. Chronic mismanagement in the central government, which includes free spending that does not appear to benefit the public, kept the nation in the economically "repressed" category again this year.

The United Kingdom improved its score this year by lowering inflation, while the United States improved its score by further deregulating its banking and finance sectors. France and Belgium maintained their "mostly free" status, but their tax and regulatory regimes continue to hamper their economies. Germany improved this year with an effort to cut taxes and a plan to improve competition and private-sector development.

The Index ratings reflect an analysis of 50 different economic variables, grouped into 10 categories: banking and finance; capital flows and foreign investment; monetary policy; fiscal burden of government; trade policy; wages and prices; government intervention in the economy; property rights; regulation; and black-market activity. Countries are rated one to five in each category, one being the best, five the worst. These ratings are then averaged to produce the overall Index score.

Over the years, the Index of Economic Freedom has emerged as a reliable indicator of national prosperity. The report notes a strong relationship between economic freedom and per capita income. World Bank data show that per capita income for "mostly unfree" or "repressed" economies averaged about $2,800 in 1998-a figure that quadruples to $11,054 for "mostly free" economies and doubles again (to $21,206) for "free" economies.

About the Author

Related Issues: Foreign Aid and Development