The U.S. Loses Ground on Economic Freedom

COMMENTARY International Economies

The U.S. Loses Ground on Economic Freedom

Jan 12, 2011 2 min read

Former Visiting Fellow for Economic Freedom

Ambassador Terry Miller focused on research into how free markets and international trade foster economic growth around the world.

Riots in Greece and France! An IMF bailout for Ireland! The Euro under threat! A new government in London! Tea parties in America! Is it the end of capitalism? Many were predicting just that last year.

The 2011 Index of Economic Freedom, released today by the Heritage Foundation and The Wall Street Journal, tells a different story. The Index records countries' commitment to the free enterprise/capitalist system by measuring 10 categories of economic freedom: fiscal soundness and openness to trade and investment, government size, business and labor regulation, property rights, corruption, monetary stability and financial competition.

The good news this year? One hundred and seventeen countries, mainly developing and emerging market economies, improved their scores, and the average level of economic freedom around the world improved by about a third of a point on the Index's 0 to 100 scale.

Economies that stuck to the principles of economic freedom are recovering more quickly from the recession and financial crisis, and growing faster than countries whose governments tried to spend their way out of trouble. There's an amazing 4.5 percentage point difference in average growth rates between the big spenders and those governments that kept their budgets under control.

Markets and electorates have proven wiser than the technocrats and bureaucrats who seem ready to address every societal ill with a new regulation or spending program. Credit markets have tightened, and the euro, though obviously flawed, has been an instrument of fiscal discipline for some of Europe's welfare states. For two big spending governments, the U.K. and the U.S., electorates have stepped in and said "Enough," bringing about the fall of a Labour government and giving control of the U.S. House of Representatives to the Republicans and their Tea Party energizers.

Where once there seemed no end to the expansion of government and the welfare state, the lesson now is that there are limits beyond which governments may not tread without severe economic or political consequences. Austerity is the name of the game for governments whose promises have outstripped their ability to pay. Sustainability, not the faddish environmental sustainability that has dominated political circles for almost two decades, but rather the true sustainability of economic growth and job creation, is back in style.

For the U.S. and the U.K., the Index of Economic Freedom confirms what those countries' voters already knew, that there is an urgent need for real change. The U.S. dropped to 9th place in the 2011 Index, with its lowest economic freedom score in a decade, and the UK fell all the way to 16th place.

Those who fear we are losing economic vitality and leadership to Asia have cause for concern. Hong Kong, Singapore, Australia, and New Zealand dominate the top of the economic freedom rankings. Economic growth rates in those countries averaged 6.8 percent in 2010.

On the diplomatic front, U.S. economic leadership is being seriously challenged for the first time since World War II. U.S. pleas for more government spending and tighter market regulation have fallen on deaf ears at recent meetings of the G-20. And many countries around the world, particularly those whose economies have emerged from the deprivations of communism, show no desire to return to the government domination of the past.

The 2011 Index tells the tale: After two years of doubts and side-steps, economic freedom is again on the rise around the world. That's especially good news for the poor. Countries gaining economic freedom have done a much better job over the last decade in eliminating poverty. They've been more efficient at protecting the environment, better at improving health, and better even, as a new Index study demonstrates, in enhancing life satisfaction and overall happiness. That's a slam dunk for economic freedom.

Politicians around the world are getting the message, or they are being replaced. The proven path to prosperity is the path of freedom. Individuals want control of their own lives. They want governments that facilitate, not czars that coerce or command. Fortunately, the process of reclaiming economic freedom has already begun. Our economic recovery depends on its rapid success.

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

First appeared in The Wall Street Journal