How Economic Freedom Puts Money in Your Pocket
The emphasis on "economic freedom" is much more than the latest management fad. As far back as 1776, Adam Smith argued in the Wealth of Nations that basic institutions that protect the liberty of individuals to pursue their own economic interests are central to the greater prosperity of society.
Global Freedom: The State of Play in 2007
The 2007 Index of Economic Freedom measures 157 countries across 10 specific factors of economic freedom. For the 13th straight year, Hong Kong sits at the head of the class, just ahead of rival Singapore, the same one-two placement as last year. With Australia ranked as the third freest economy, the Asia–Pacific region is now home to the top three freest economies in the world. The U.S. was ranked fourth, after falling out of the top ten for the first time ever in 2006.
Twelve of the top 20 freest economies are European, led by the United Kingdom, Ireland, Luxembourg, and Switzerland. Despite holding the top three places, the Asia–Pacific region only holds five places in the top 20. The remaining three are from the Americas: the United States, Canada, and Chile.
Across the five regions, Europe is the most free, followed at some distance by the Americas. Asia–Pacific, the Middle East/North Africa, and sub-Saharan Africa are the laggards. Asia–Pacific boasts both the most free economies in the world (Hong Kong and Singapore) as well as some of the most unfree (India and China). The top 20 countries in the survey have held relatively steady since the first survey in 1995.
Why Economic Freedom Matters
Economic Freedom is more than just a moral issue. It also relates strongly to good economic performance. As a group, the world's freest economies are richer, boasting a per-capita income of more than twice that of the "mostly free" and more than four times that of the "mostly unfree." The freest economies also have lower rates of unemployment and lower inflation. Economic freedom also correlates to higher life expectancy, higher literacy, lower infant mortality, and less corruption.
Chip in the BRIC Wall -- Criticized by Both Left and Right
The index is not without its critics. A particular bugbear is taxes. Some of the highest ranking countries in the Index, such as Sweden, Denmark, Norway, and Iceland boast the world's most extensive welfare states. Statistically, "economic freedom" correlates most highly with lack of corruption and respect of property rights, not low taxes. This suggests that high taxes do not necessarily hurt economic freedom to the point of impairing standards of living. A closer study of Sweden's economic performance would yield different results.
Nor is the Index exempt from criticism from those on the right. Libertarians query how Hong Kong and Singapore, both of which operate under the watchful eye of big brother-style political regimes, can adduce compelling examples of economic freedom. Although both of these city-states are economically prosperous, there is little political freedom in either. Hong Kong does not elect its legislature or its chief executive. Internal security law threatens press and academic freedom, as well as political dissent. In Singapore, freedom of the press and the right to demonstrate are limited; films, TV, and other media are censored.
Particularly irksome are the glaring exceptions to the connection between economic freedom and strong economic growth rates. Today's hottest investments -- the fast-growing BRIC economies -- are hardly paragons of economic freedom and are classified as "unfree" across the board. India ranks 104th, China 119th and Russia 120th on this year's list. While all three countries have adopted market reforms in recent years that have improved their standing in the index, their economies remain "repressive" by the standards of the Index.
How Economic Freedom Puts Money in Your Pocket
Exceptions notwithstanding, countries with "free" economies tend to be strong economic performers. And so are their stock markets. Mark Skousen recently reported in his newsletter Forecasts & Strategies that Liberty Investment, headed by Stefan Spath and John Kirkscey, has just created an "investible" index of economic freedom. Chicago-based First Trust, in turn, constructed an Index of Economic Freedom Portfolio [IEFP], a unit investment trust consisting of country funds and the top foreign stocks of countries that the Heritage/Wall Street Journal Index designates as "free." In 1995, the IEFP consisted of six countries. Today, this number has swelled to 17.
Spath and Kirkscey back tested the performance of the IEFP for the 11 years between 1995 and 2006. Over this period, the Index of Economic Freedom Portfolio would have outperformed world stocks by close to 2 to 1. While the MSCI World Stock index rose 140% over these 11 years, the (back tested) IEFP rose a whopping 254%.
Green eyeshade-wearing critics can parse the statistics of the Heritage Foundation/Wall Street Journal study to conclude pretty much anything they want. But here's the elephant in the room. No native-born U.S. citizen ever risked his life in a homemade raft to escape to Cuba. And as far as freedom is concerned, that's probably the only statistic you need to know.
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This article has 3 comments:
- raylopez99
- 81 Comments
Feb 14 07:02 AM- Panskeptic
- 92 Comments
Feb 14 08:20 AMFor those who do not believe that the world begins and ends with money, political freedom is far more important than economic freedom. Ask former employees of Enron, where Lay and Skilling's "individual liberty to pursue their own economic interests" did nothing to enhance prosperity for the larger society.
- huangjin
- 266 Comments
Feb 14 10:46 AMScandanavian countries have lower corporate rates than the U.S., and many countries have 0% capital gains taxes, which can go a long way to offsetting high income taxes.
Pan, the conclusion of the survey is that in many countries, Enron is legal, and individuals are not protected. Take Venezuela, which has political freedom, versus Singapore, which does not. Where would you like to do business? Billions of dollars and many people vote with their feet everyday.