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To be economically free, or not to be? That is the question.


Jessica Stone

By

October 3rd, 2013


Jessica Stone explores the concept of “Economic Freedom”, and draws out several conclusions made in the Fraser Institute’s report released last week.


Based in Canada, the Fraser Institute is often referred to as a “think tank”, and follows the motto “if it matters, measure it”. Initial efforts towards the Economic Freedom of the World (EFW) project began in 1989, with a meeting between Milton and Rose Friedman, and Michael Walker (founder of The Fraser Institute). The project is aimed at “clearly defining and measuring the consistency of institutions and policies with economic freedom for a large set of countries and territories”.

The Fraser Institute defines economic freedom as the “key to greater opportunity and an improved quality of life; the freedom to choose how to produce, sell, and use your own resources, while respecting others’ rights to do the same”.  In this report, a country’s economic freedom is measured using forty two variables, which fall under five broader areas: size of government, legal system and property rights, sound money, freedom to trade internationally and regulation.

What are the important take-away points from the 284-page report? Some of the countries found (and not found) to have the greatest economic freedom may surprise you. As expected, Hong Kong and Singapore ranked in first and second place respectively. The “Top 10” also includes (in order of ranking) New Zealand, Switzerland, United Arab Emirates, Mauritius, Finland, Bahrain, Canada, and Australia. Other notable mentions include the UK ranked 12th, Germany ranked 19th, and Japan tied with South Korea in 33rd place.

Australia’s tenth position this year marks an overall decline in its relative economic freedom ranking, falling from 5th place in 2009 and 2010. The Fraser Institute recognises this decline to be as a result of “larger size of government, increasing looseness of monetary policy, and more prescriptive regulatory burdens”.

China, Australia’s major trading partner, ranked 123rd in this index. One criticism of the EFW relates to how a developing country such as China, experiencing relatively high growth rates, can consistently have a low “economic freedom” ranking. However, this low ranking can be explained rather simply. Despite strong GDP levels, China’s economy is still considered to be “mostly unfree”, with limited liberalisation and economic reform. There is still significant political influence over the legal and regulatory system, and the Communist party authority throughout the economic system “undermines the rule of law and respect for contracts”. Further, the presence of corruption, institutionalised cronyism and overreliance on public investment play a role in preventing greater economic freedom. With undermined productivity growth due to state regulation and ownership of many enterprises, and state control over the financial sector through subsidies and credit manipulation, China has a long way to go to be considered “economically free”.

The US is noticeably absent from the “Top 10”. In fact, the US has dropped from 2nd to 17th place over the past twelve months.  The Fraser Institute finds that this is due to significant declines in the parameters regarding legal system and property rights, freedom to trade internationally, and regulation. Specifically, it is suggested that the “wars on terrorism and drugs, and the violation of the property rights of bondholders in the auto-bailout case” are contributing factors.

On the other end of the spectrum, the ten countries found to have the least economic freedom include Algeria, Democratic Republic of Congo, Burundi, Central African Republic, Angola, Chad, Zimbabwe, Republic of Congo, Myanmar and Venezuela. Interestingly, eight of these countries are African.  In fact, the final chapter of this report focuses solely on the majority of African countries included in the index. It is not necessarily all doom and gloom either, as six African countries ranked in the top 50% of the index, including Mauritius (in 6th place overall) , Rwanda, Uganda, Zambia, Botswana and Ghana.

Overall, the report finds that there is greater economic freedom world-wide, and a link between economic freedom, democracy and life satisfaction. It is concluded that “economic freedom not only makes people richer, but it also makes them happier”.

The EFW is not without its criticisms. For instance, there is some conjecture on the most appropriate way to measure a country’s economic freedom. Do you believe that laissez-faire policies are the most appropriate way of reducing poverty? Let us know what you think in the poll below

If you would like to read the 2013 Annual Report, click here [http://www.freetheworld.com/2013/EFW2013-complete.pdf]

 

[poll id=”73″]

 

References:

CATO Institute. “Economic Freedom of the World”. Accessed 26/09/13. Available at: http://www.cato.org/economic-freedom-world

The Fraser Institute. “Who We Are”. Accessed 26/09/13. Available at: http://www.fraserinstitute.org/about-us/who-we-are/overview.aspx

Chafuen, Alejandro, 2013. “Why Does The U.S. Economy Sag? Look No Further Than The Number 17”. Forbes. Available online at: http://www.forbes.com/sites/alejandrochafuen/2013/09/25/why-does-the-u-s-economy-sag-look-no-further-than-the-number-17/

The Fraser Institute. “Economic Freedom of the World: Annual Report 2013”. http://www.freetheworld.com/2013/EFW2013-complete.pdf

Heritage: 2013 Index of Economic Freedom. “China”. Accessed 27/09/13. Available at: http://www.heritage.org/index/country/china

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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