The Index of Economic Freedom strives to provide as comprehensive a view of economic freedom as possible with data that illuminate varying aspects of the rule of law, the size and scope of government, the efficiency of regulations, and the openness of the economy to global commerce.
The need to advance economic freedom is stronger than ever. Our world has experienced—is experiencing—astounding progress, yet many in countries both rich and poor are still clamoring for change. Indeed, a recurring theme of human history has been resilience and revival. History has demonstrated that free-market capitalism, built on the principles of economic freedom, can be relied upon to provide that change. It pushes out the old to make way for the new so that real and true progress can take place. It leads to innovation in all realms: better jobs, better goods and services, and better societies.
Economic Freedom: Transforming Opportunity into Prosperity
Today’s successful economies are not necessarily geographically large or richly blessed with natural resources. Many economies have managed to expand opportunities for their citizens by enhancing their economic dynamism. In general, the overarching objective of economic policies must be to create an environment that provides the best chance for translating opportunity into prosperity.
The Index results have shown that sustaining such economic dynamism is achievable when governments adopt economic policies that empower individuals and firms with more choices, thereby encouraging greater entrepreneurship.
Economic freedom is closely related to openness to entrepreneurial activity. Chart 1 shows the close correspondence between economic freedom and entrepreneurial opportunity measured by the Business Environment pillar of the Legatum Institute’s Prosperity Index.
Given this relationship, it should be apparent that a government’s most effective stimulus activity will not be to increase its own spending or increase layers of regulation, both of which reduce economic freedom. The best results are likely to be achieved instead through policy reforms that improve the incentives that drive entrepreneurial activity, creating more opportunities for greater economic dynamism.
Equally notable is the strong positive relationship between economic freedom and levels of per capita income. For countries achieving scores that reflect even moderate levels of economic freedom (60 or above), the relationship between economic freedom and per capita GDP is highly significant.
As indicated in Chart 2, countries moving up the economic freedom scale show increasingly high levels of average income. Economies rated “free” or “mostly free” in the 2019 Index enjoy incomes that are over twice the average levels in all other countries and more than six times higher than the average levels in “repressed” economies.
Economic Freedom: the Proven Antidote to Poverty
By a great many measures, the past two-and-a-half decades during which the Index has been charting the advance of economic freedom have been the most prosperous period in the history of humankind. Countries that have adopted some version of free-market capitalism, with economies that are open to the free flow of goods, services, and capital, have participated in an era of globalization and economic integration that has provided solutions to many development problems throughout the world.
Unquestionably, the free-market system that is rooted in the principles of economic freedom—empowerment of the individual, nondiscrimination, and open competition—has fueled unprecedented economic growth. As Chart 3 illustrates, over the life of the Index, as the global economy has moved toward greater economic freedom, the world economy has doubled in size. This progress has lifted hundreds of millions of people out of poverty, and the global poverty rate has declined by two-thirds.
Opening the gates of prosperity to ever more people around the world, economic freedom has made our globe a profoundly better place. More people are living better lives than ever before. Clearly, this monumental reduction in global poverty is an achievement that should inspire celebration of the free-market system, deeper understanding of its dynamics, and greater commitment to its promotion.
The key driver of poverty reduction is dynamic and resilient economic growth that comes with improving economic freedom. Not surprisingly, one of the most important goals of economic policy in almost every country in the world has been to increase the rate of economic growth.
More specifically, as documented in the previous editions of the Index and supported by volumes of academic research, vibrant and lasting economic growth results when governments implement policies that enhance economic freedom and empower individuals with greater choice and more opportunities. Advancing economic freedom is the imperative for dynamic economic expansion and true progress, no matter what a country’s current level of development may be.
As Chart 4 demonstrates, there is a robust relationship between improvements in economic freedom and levels of economic growth per capita. Whether long-term (25 years) or short-term (five years), the relationship between changes that advance economic freedom and rates of economic growth is consistently positive. Improvements in economic freedom are a vital ingredient in the achievement of rates of economic expansion that are high enough to reduce poverty effectively.
Undeniably, countries moving toward greater economic freedom tend to achieve higher rates of growth in per capita GDP. Throughout the history of the Index, the per capita economic growth rates of countries that have grown in economic freedom the most are on average at least 50 percent higher than those of countries where freedom has stagnated or slowed.
Greater economic freedom, while one of the most effective means of eliminating poverty, also has a major positive impact on the standard of living of those who remain poor. Poverty intensity, as measured by the United Nations Development Programme’s Multidimensional Poverty Index is much lower on average in countries with higher levels of economic freedom. As seen in Chart 5, the intensity of poverty in developing countries whose economies are considered mostly free or moderately free is only about one-third the level prevailing in countries that are rated less free.
Economic Freedom: the Key to Human Development and Democratic Progress
The societal benefits of economic freedom extend far beyond higher incomes or reductions in poverty. Countries with higher levels of economic freedom enjoy higher levels of overall human development as measured by the United Nations Development Programme’s Human Development Index which measures life expectancy, literacy, education, and the standard of living in countries worldwide. As Chart 6 shows, governments that choose policies that increase economic freedom are placing their societies on the path to more education opportunities, better health care, and higher standards of living for their citizens.
In recent years, policies and actions concerning the environment have tended to be intrusive and economically distortionary. Governments have pushed programs to tax carbon emissions and increase taxes on gasoline, have set up nontransparent and economically harmful exchanges and marketplaces for the buying and selling of carbon emissions, and have created subsidies for so-called clean energy. Such policies not only impose a huge cost on society, but also retard economic growth.
Fortunately, such trade-offs are not required. The same free-market principles that have proven to be the key to economic success can also deliver environmental success. Chart 7 shows the positive relationship between levels of economic freedom and levels of environmental protection as measured in Yale University’s Environmental Performance Index.
In addition, in countries around the world, economic freedom has been shown to increase countries’ capacity for innovation and thus to improve overall environmental performance as well. The positive link between economic freedom and higher levels of innovation ensures greater economic dynamism in coping with various environmental challenges. The most remarkable improvements in clean energy use and energy efficiency over the past decades have occurred not as a result of government regulation, but rather because of advances in economic freedom and freer trade.
Greater economic freedom can also provide more fertile ground for effective democratic governance.
Debate over the direction of causality between economic freedom and democracy has become more controversial in recent years because of the multifaceted interaction between the two. Undoubtedly, achieving greater political freedom through well-functioning democracy is a messy and often excruciating process.
However, the positive relationship that exists between economic freedom and democratic governance is undeniable. (See Chart 8.) By empowering people to exercise greater control of their daily lives, economic freedom ultimately nurtures political reform by making it possible for individuals to gain the economic resources needed to challenge entrenched interests or compete for political power.
Pursuit of greater economic freedom is thus an important stepping-stone to democracy. It empowers the poor and builds the middle class. It is a philosophy that encourages entrepreneurship and disperses economic power and decision-making throughout an economy.
Economic Freedom: Safeguarding Upward Mobility and Greater Social Progress
The massive improvements in global indicators of income and quality of life largely reflect a paradigm shift in the debate over how societies should be structured to achieve the most optimal outcome. In recent decades, this debate has largely been won by capitalism. Nonetheless, fears that the immediate benefits of capitalism are fading have brought to the forefront concerns about economic mobility and inequality. Even while acknowledging the positive impact of economic freedom in raising GDP growth, opponents of free-market capitalism continue to suggest that reducing the size and scope of government leads to harmful social consequences and can increase the gap between the rich and poor.
The data, however, tell a different story.
As shown in Chart 9, countries that provide the most conducive environments for social progress also largely embrace economic freedom. Countries that improve their competitiveness and open their societies to new ideas, products, and innovations have largely achieved the high levels of social progress that their citizens demand. Also notable is that nations with higher levels of economic freedom have a tendency toward a more even distribution of income.
It is not massive redistributions of wealth or government dictates on wages or prices that produce the most positive social outcomes. Instead, mobility and progress require lower barriers to entry, freedom to engage with the world, and less government intrusion.