November 16, 2000

November 16, 2000 | News Releases on Foreign Aid and Development

Global Survey Shows Link Between Economic Freedom and Prosperity

WASHINGTON, Nov. 16, 2000-Free-market economists have long asserted that economic liberty leads to higher wages and greater prosperity, and the data compiled in this year's "Index of Economic Freedom" prove it.

The survey, published annually since 1995 by The Heritage Foundation and The Wall Street Journal, ranks more than 150 nations according to the degree of economic freedom their citizens enjoy. The editors this year found a strong relationship between economic freedom and per-capita income.

"Few will be surprised to learn that the countries with the most economic freedom also have higher rates of economic growth and are more prosperous than are those with less economic freedom," said Index co-editor Gerald P. O'Driscoll Jr., director of Heritage's Center for International Trade and Economics. "But it's striking to look at the numbers and see how stark the difference is."

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.

Although the 2001 Index shows a net gain in economic freedom over the last year, a majority of the world's economies remain relatively "unfree." Overall, 74 economies were rated as "free" or "mostly free," while 81 earned ratings of "mostly unfree" or "repressed." Most of the freest economies are concentrated in North America and Europe, while a majority of the world's most repressed economies are in Asia and Africa.

"If the countries that are unfree would make the right reforms, they could dramatically increase their per capita income and raise their overall prosperity," O'Driscoll said. "And we're not talking pie-in-the-sky changes, but practical steps that are well within reach, such as reducing tariffs, lowering tax rates-or cutting inflation, which has helped many countries in Latin America and Eastern Europe become more wealthy."

What's more, even small changes in economic freedom can yield large dividends, O'Driscoll noted. "For example, Hong Kong-which has consistently held the No. 1 spot on the Index-doesn't just make more than Cuba or North Korea, which wouldn't surprise anyone, but also outperforms a number of European and Latin American countries that fall into the 'mostly free' category," he said.

Consider the example of Australia, which until the 1980s had a heavily regulated economy. It has privatized its retirement system and ended state control over a number of industrial sectors. It has also deregulated its banking system and opened its domestic airline industry to competition. Its economy has grown at an average annual rate of 3.1 percent throughout the 1990s, while maintaining low rates of inflation. Its GDP per capita: $22,978-up 17 percent since 1994, when it was $19,627.

The freedom/prosperity relationship holds true for countries moving in the opposite direction as well. In Russia-where, the editors warn, President Putin's efforts to "re-examine" privatization is leading foreign investors "to question the extent of [its] commitment to open and transparent markets based on the rule of law"-GDP per capita is $2,262. In 1994, it was 8 percent better, at $2,452.

Ratings on the Index are based on 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.

Copies of the 2001 Index of Economic Freedom (398 pp., $24.95) can be ordered by calling 1-800-975-8625. The full text is also available at index.heritage.org.

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