January 6, 2006
WASHINGTON, JAN. 4, 2006
made impressive gains throughout North America and Europe,
according to the 2006 "Index of Economic Freedom," published
annually by The Wall Street Journal and The Heritage
From the western end of the region, where the United States rejoined the world's 10 freest economies, to the middle, where Germany joined the ranks of "free" economies for the first time, to the eastern end, where Romania improved more than any other country worldwide except Pakistan, the North America-Europe region widened its worldwide lead in economic freedom.
Led by Ireland, the third-freest economy worldwide, the region includes 15 of the 19 economies rates as "free" and seven of the top 10. Among the 45 countries in North America and Europe, 33 improved, including Armenia, Georgia and Turkey, and 10 declined, according to the Index editors, Marc Miles, Kim Holmes and Mary Anastasia O'Grady.
Germany cracked the "free" barrier in part because of the lowering of tariff rates (weighted average) by the European Union but also because of improvements in its "fiscal burden of government" score. It lowered income taxes and government expenditures as a percentage of gross domestic product (GDP) and, as a result, recorded a score of 1.96-0.4 better than last year, when it narrowly missed a "free" designation.
The United States ranked among the 10 freest economies every year for the first 10 editions of the Index. But after slipping to 12th place overall last year, it regained a top 10 ranking by narrowly cutting government spending as a percentage of GDP and by lowering tariff rates (weighted average). It is now tied for ninth worldwide with Australia and New Zealand.
Romania retains a "mostly unfree" rating, and its 3.19 score ranks 92nd among the 157 countries rated in this year's Index. Moreover, its weighted average tariff rates actually climbed in the last year. But Romania implemented a flat tax of 16 percent on individual and corporate income, cut inflation and reduced government intervention in the economy. Georgia also made sizable gains, improving enough to move from "mostly unfree" to "mostly free." Cyprus changed categories as well; changes in trade policy and corporate tax rates, along with lower inflation and greater openness to foreign investment bumped it into the ranks of the "free."
Among those suffering reverses is Estonia-rising government spending and the adoption of EU trade policies worsened its Index score. Other countries posting declines include Denmark, Switzerland, Sweden, Hungary and Ukraine. Belarus, the least free country in the region, also made matters worse; declines in its fiscal burden of government and informal market scores pulled it back into the ranks of "repressed" economies.
As in previous years, 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 informal (or black) market activity. Countries are rated one to five in each category, one being the best and five the worst. These ratings are then averaged to produce the overall Index score.
Worldwide, the scores of 99 countries improved, 51 declined and the scores of five, including Greece, are unchanged from last year's Index. Of the 157 countries ranked, 20 are classified as "free," 52 as "mostly free," 73 as "mostly unfree," and 12 as "repressed." Four countries-Congo, Iraq, Serbia-Montenegro and Sudan-were not ranked because the data was not deemed reliable. Two that had been suspended from the rankings-Angola and Burundi-were again ranked this year because of returning stability.
This is the 12th consecutive year The Heritage Foundation and The Wall Street Journal have published the Index. Marc Miles is director of Heritage's Center for International Trade and Economics, Kim Holmes is Heritage's vice president for foreign affairs, and Mary Anastasia O'Grady, who is a member of the Journal's editorial board and edits the "Americas" column.
Print versions of the 2006 Index of Economic Freedom (422 pp., US$24.95) can be ordered by calling 1-800-975-8625 and are available in English or Spanish. Additionally the full text, along with all charts and graphs, will be available via the Internet at www.heritage.org/index.
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