McClaughry: Economic Freedom of the World 2018

By John McClaughry

For a century or more politicians and economists and have argued about the relationship, if any, between economic freedom and human wellbeing. The Fraser Institute, Canada’s leading market-oriented think tank, has just released its 2018 report on Economic Freedom of the World (EFW) to provide hard data to answer this question. These reports have been issued annually since 1980.

Fraser’s authors write “The EFW index provides a comprehensive measure of the consistency of a country’s institutions and policies with ‘economic freedom.’” They measure that using 42 data sets for calendar year 2016, mostly drawn from international organizations like the World Bank.

John McClaughry

John McClaughry is vice president of the Ethan Allen Institute.

“The index is designed to measure the degree to which the institutions and policies of 162 countries are consistent with economic freedom. … Governments enhance economic freedom when they provide an infrastructure for voluntary exchange, and protect individuals and their property from aggressors using violence, coercion, and fraud to seize things that do not belong to them. … The country’s legal institutions must protect the person and property of all individuals from the aggressive acts of others and enforce contracts in an even-handed manner.”

“Access must also be provided to money of sound value. But governments must also refrain from actions that restrict personal choice, interfere with voluntary exchange, and limit entry into markets. Economic freedom is reduced when taxes, government expenditures, and regulations are substituted for personal choice, voluntary exchange, and market coordination.”

The index measures the degree of economic freedom using indicators in five areas: [1] Size of Government (spending, tax rates, transfers and subsidies), [2] Legal System and Property Rights (judicial independence, law enforcement, contracts), [3] Sound Money (inflation rate), [4] Freedom to Trade Internationally (tariffs and other trade barriers), and [5] Regulation of credit, labor, and businesses (market entry, labor participation, licensing). Fraser selected the data sets through an intensive process involving economists from several different countries.

Lest one should conclude that countries with very minimal governments will thus score higher on the index, the authors write “small fiscal size of government is insufficient to ensure economic freedom. The institutions of economic freedom, such as the rule of law and property rights, as well as sound money, trade openness, and sensible regulation, are also required.”

Critics will point out the EFW doesn’t include environmental protection, civil rights, education, health care and “quality of life”. True, but the rejoinder is that increased economic freedom almost certainly correlates with better outcomes on those criteria as well.

And now for the results: The 15 most economically free countries are, in order, Hong Kong, Singapore, New Zealand, Switzerland, Ireland, the U.S., Georgia, Mauritius, UK, Australia, Canada, Taiwan, Estonia and Chile. Of our other trading partners, Germany is 20, Japan 41, France 57, Mexico 82, Russia 87, and China 108.

The U.S. ranked well except on size of government, where it came in at 86. Some might also wonder why we rank 3rd in “sound money,” when our central bank’s policy is to allow a dollar’s purchasing power to shrink to 98 cents a year from now, and the country has a $22 trillion national debt, plus three times that much in unfunded obligations. The answer is that banks, businesses and people all over the world prefer the U.S. dollar over other currencies available to them, notwithstanding its annual 2% shrinkage.

The five most economically unfree countries are Syria, Algeria, Argentina, Libya and – far below these four – rapidly collapsing socialist Venezuela. Sadly, four of these five, other than Argentina, have petroleum wealth, and Algeria and Argentina are fairly stable politically. They are poor because their government policies have strangled the efforts of their people to produce wealth.

The authors observe that the United States returned to the top 10 in 2016 after an absence of several years. Our highest ranking occurred in 2000 at the end of the Clinton presidency. “During the 2009–2016 term of President Obama, the U.S. score initially continued to decline as it had under President Bush”. From 2013 to 2016, however, the U.S. ranking increased to its present 6th position.

Here are some other interesting conclusions from the index. Economic freedom is directly linked to higher per capita incomes. The difference in life expectancy between the top quartile and bottom quartile is twenty years. There is more gender equality in economically free countries, and much less poverty, less infant mortality, more political rights, and more civil liberties.

These findings will displease socialists, but it’s hard to avoid the conclusion that more economic freedom, as thus defined, is a powerful propellant for economic and social wellbeing.

John McClaughry is vice president of the Ethan Allen Institute.

Images courtesy of Fraser Institute and John McClaughry

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