Economic Freedom

On Monday I went to the launch in London of the 2005 Index of Economic Freedom. It is published every year by the Washington-based think-tank, the Heritage Foundation, in conjunction with the Wall Street Journal. It ranks 155 countries by how economically ‘free’ they are, according to 10 criteria. Seventeen countries are classified as ‘free’, a further 56 as ‘mostly free’, 70 as ‘mostly unfree’ and 12 as ‘repressed’. Predictably, Hong Kong and Singapore are the two at the top, Burma and North Korea the two at the bottom. ‘Old’ Europe and Japan seem to be on the way down (with France clocking in at no.44) and ‘new’ Europe on the way up, with Estonia at no.4. Russia comes in at 124, in contrast to Ukraine, the ‘second most improved’ country, at no.88. Africa is the least free region of all.

Countries are scored from one to five on each criterion. The lower a country’s overall score –that is, the freer its trade, banking system, and labour markets, the lower its tax burden and level of corruption, and the lighter its regulation –the higher its ranking. Hong Kong with 1.35 comes closest to perfect freedom, defined as ‘the absence of government coercion and constraint’ on any economic activity ‘beyond the extent necessary…to protect and maintain liberty itself’.

Before we all jump onto the economic freedom bandwagon, a few words of caution are needed. The Heritage Foundation believes that the freer a country is economically, the faster will be its rate of growth. However, there is little evidence to support this faith.

To start with, it is bad history. Let me give just three examples. First, between 1950 and 1970 all parts of the world grew at roughly the same rate, whatever their economic systems. Moreover, world growth rates were higher during these twenty years than they have been since, though the Heritage Foundation would now classify nearly all the countries as ‘repressed’ or ‘mostly unfree’. Second, the trend annual growth rate of the UK for the last 100 years has been just over 2 per cent, and this was so even when its top marginal tax rate was 90 per cent. Third, the United States grew fastest –at the end of the 19th century –when it was the most highly protected country in the world. The most one can say is that economic freedom is good for economic growth at some times and in some places, but not all the time and everywhere.

The Index notes that ‘countries which have more economic freedom are wealthier than those that are economically repressed’. Similarly, ‘countries that have the highest level of political rights and civil liberties also have more wealth’. So there is a ‘strong relationship between economic freedom, political and civil freedom, and wealth’. So indeed there is, but a correlation is not a cause. Are countries wealthy because they have economic and political freedom, or do they have these things because they are wealthy? Or are both freedom and wealth caused by something else –like religious and cultural values as Max Weber supposed?

Some scepticism about the Index is in order because it is one expression of a gigantic US effort to re-make the world in the image of neo-conservative ideology. The Heritage Foundation’s view that government interference is the ‘roadblock’ to economic development dominates current US policy. Thus President Bush’s Millenium Challenge Account makes US aid conditional on countries adopting policies ‘consistent with good governance and economic freedom’ –that is, with the prescriptions of the Heritage Foundation.

Obviously a lot more that can be said on all these maters. I am in favour of economic freedom because I am in favour of freedom in general. The case for freedom should not be bolstered by bad economic arguments.