14 September 2021

The freedom dividend: why economic liberty and well-being go hand in hand

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Over the last 18 months, most governments have intervened in their economy more heavily than at any other time in the previous generation. Huge government spending, quantitative easing, trade restrictions, an inflated welfare bill, closed borders, and increasing calls for national self-sufficiency became the norm all over the world. Regardless of one’s opinion on whether the abnormality of the last 18 months warranted such intervention, a new report out this morning shows just how high the cost of intervention can be.

The 25th edition of the Fraser Institute’s annual Economic Freedom of the World (EFW) report shows once again the intrinsic link between economic freedom and prosperity. It highlights that, on average, freer economies are richer, grow faster, and score better across almost all metrics of well-being than their least free counterparts.

To determine the level of economic freedom for the 165 economies measured, the EFW report analyses 42 indices across five major areas (size of government, legal systems and property rights, sound money, freedom to trade internationally, and regulation), using figures from 2019 – the most recent year data is available. To analyse the correlation between economic freedom and global well-being, the countries are split into quartiles based on their level of economic freedom.

The results are staggering.

Average incomes in the freest (i.e. most capitalist) quartile of countries are more than 8.5 times higher than average incomes in the least free quartile ($50,619 and $5,911, respectively.) Indeed, the gap between the freest and least free economies is so vast that the average incomes of the poorest 10% of people in the freest economies are more than twice average incomes in the least free nations.

Similarly, the bottom 10% of income earners in countries with the least amount of government intervention in their economy make, on average, nine times more than the poorest 10% in the most interventionist economies. When it comes to poverty, more than one-third of people in the least free economies live in extreme poverty (as defined by the World Bank as living on an income of less than $1.90 per day). By comparison, less than 1% of people in the freest economies live in extreme poverty – of course, this figure is still far too high, but it’s about 36.2 times lower than the level in the least free economies.

However, the benefits of economic freedom extend far beyond money. The EFW report found that that on average, those in the freest countries live 15 years longer than those in the most interventionist and restrictive nations. It is not an exaggeration to say that for millions of people, that difference would amount to knowing one’s grandchildren, or indeed great-grandchildren, or dying before their birth.

Compared to the least free quartile, infant mortality rates are almost 10 times lower, and secondary school enrollment is more than twice as high in the freest nations.

The good news is that in 2019 – the year most recent data is available – the world reached new heights of economic freedom and, therefore, prosperity. However, the bad news is that our long-term prospects look increasingly bleak unless governments stop endlessly tinkering with their economies.

By the time the 2020 and 2021 data becomes available for the 2022 and 2023 report, respectively, given nearly every government’s response to Covid-19, global economic freedom will have declined. This won’t just mean that those of us in the west will be a few pounds shorter each month, but rather it means that millions of the world’s poorest people who might have otherwise become richer will remain trapped in abject poverty.

And what about the UK? We rank a respectable 12th (up one position from last year), but are still a long way from the impressive 4th position we held in 2000. In four of the five components that make up the EFW ranking, the UK scores in the top quartile, however, in ‘size of government’ the UK comes an embarrassing 95th position – down 11 positions from last year. Indeed, in some metrics within the ‘size of government’ area, such as ‘transfers and subsidies’ and ‘top marginal income tax rates’ the UK ranks among the worst countries in the world.

The challenge of nearly all governments is to try and return to some degree of normality and create a space whereby free exchange is no longer curtailed, intervention in the economy is reduced, and the spending taps are turned off. Worldwide, countries should be hesitant about following the in our government’s footsteps by raising taxes to pay off, or even maintain, high spending. Ultimately, increasing taxes is a foolish way out of the situation we find ourselves in as tax increases work to reduce our future economic freedom and stunt economic growth.

Despite the many challenges that remain, the upside is that as nearly all countries begin to emerge from the worst of the pandemic, we have an opportunity to return to our pre-2020 economic freedom trajectory. Pushing back the encroachment of the state on nearly all economies since March 2020 won’t be politically easy, but it is economically necessary. As highlighted in the data above, if we are successful in doing so, the economic future will be a brighter one for us all.

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Alexander Hammond is the Director of the Initiative for African Trade and Prosperity, and a Policy Analyst at the Institute of Economic Affairs.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.