21 February 2017

Why economic freedom matters more than ever

By Anthony Kim

History demonstrates that in terms of ensuring opportunity and prosperity, the forces of individual freedom, limited government, and free enterprise will always trump statist policies that perpetuate favouritism in economics and politics.

Since 1995, the Heritage Foundation’s Index of Economic Freedom has documented these principles in operation around the globe and highlights why economic freedom matters.

The Index, a data-driven benchmark study of economic policies in countries on every continent, is about more than just country rankings. It is an exploration into the sources of enduring economic dynamism and how they relate to each other, ensuring opportunities for the greatest number of people.

The 2017 Index, our 23rd edition, has just been published – and once again provides ample evidence of the benefits of economic freedom, both to individuals and to societies. People in economically free societies have better jobs and are less likely to live in poverty. Per capita incomes are much higher in countries that are more economically free.

Economies rated “free” or “mostly free” in the 2017 Index generate incomes that are more than double the average levels in other countries, and more than five times higher than the incomes of people living in countries with “repressed” economies.

Not only are higher levels of economic freedom associated with higher per capita incomes, but greater economic freedom is also strongly correlated to overall wellbeing, taking into account factors including health, education, environment, innovation, societal progress, and democratic governance.

People in economically free societies live longer and have healthier lives. They enjoy greater political freedom and can better defend their human rights.

Indeed, economic freedom is a critical element of life that transcends market, opening the gates of greater wellbeing to ever more people around the world. Nations with higher degrees of economic freedom prosper because they capitalise on the ability of the free-market system not only to generate dynamic growth, but also to reinforce it through efficient resource allocation, value creation, and innovation.

Policies that promote freedom, such as improvements in the rule of law, the promotion of competition and openness, or suitable restraints on the size and economic reach of government, offer practical solutions to a wide range of economic and social challenges that face the world’s societies.

It is gratifying to see overall global progress in advancing economic freedom reflected in rising scores in dozens of countries. Hundreds of millions of people are emerging from poverty into the promise of a brighter future.

Despite varying levels of economic freedom across the regions, the fundamental relationship between economic freedom and prosperity holds true worldwide. No matter the region, per capita income levels are consistently higher in countries that are economically freer.

To give just a few examples from the 2017 Index, there is the United Arab Emirates (8th), where broad-based and dynamic growth has been underpinned by continuous efforts to strengthen the business climate, boost investment, and foster the emergence of a more vibrant and diverse private sector. The generally liberal trade regime has helped to sustain the momentum for growth. The same is true of Hong Kong, which tops the Index.

In the aftermath of the Brexit vote, the United Kingdom (12th) demonstrated good economic resilience with effective rule of law, an open trading environment, and a well-developed financial sector. Fiscal consolidation has progressed through spending cuts that have reduced the fiscal deficit to a more manageable though still high level.

Conversely, the United States (17th) continued its string of discouraging results, registering its lowest economic freedom score ever. The substantial expansion of the U.S. government’s size and scope, and increased regulatory and tax burdens in many sectors, have severely undermined America’s global competitiveness.

Some countries perform far below their potential, South Africa (81st) has seen its economy stifled by political instability and a weakening rule of law. Private-sector growth remains constrained by structural and institutional impediments caused by growing government encroachment into the marketplace.

By contrast, Vietnam (147th) has capitalised on its gradual integration into the global trade and investment system, transforming itself into a more market-oriented economy. Reforms have included partial privatisation of state-owned enterprises, liberalisation of the trade regime, and increasing recognition of private property rights.

It is regrettable that in China (111th) and India (143rd), advancement toward greater economic freedom has been both limited and uneven.

Overall, it is all too common these days for those who feel exploited by the market system to lash out at capitalism as the root cause of their economic woes. Yet when their complaints are examined, what stands out is not anger directed at an actual free-market capitalist system, but rather frustration with economic systems of government-supported privilege based on favouritism or various forms of cronyism.

This is why the imperative to advance economic freedom for a greater number of people is stronger than ever. Free-market capitalism built on the principles of economic freedom does not just conserve – in many cases it overturns and transforms. 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.

As Friedrich A. Hayek once observed, “If old truths are to retain their hold on men’s minds, they must be restated in the language and concepts of successive generations.” The Index of Economic Freedom provides the basis for such a dialogue and a foundation for economic revival in the years ahead.

Anthony Kim is research manager for the Index of Economic Freedom and senior policy analyst at the Heritage Foundation's Institute for Economic Freedom and Opportunity