The United States has regained its position as one of the most economically free countries in the world, ranking ninth on the 2006 Index of Economic Freedoms. After falling to 12th place the previous year, the U.S. increased economic freedom by narrowly cutting government spending as a percentage of Gross Domestic Product (GDP) and lowering tariff rates (as a weighted average). Overall, not only are Americans freer today than they were a year ago, so are people all over the world.
Of the 157 countries graded in the 2006 Index, 99, including the U.S., improved their overall scores, compared to 51 whose scores worsened and five that remained unchanged. Overall, 20 are classified as “free”, 52 as “mostly free”, 73 as “mostly unfree” and 12 as “repressed”.
Countries are rated on a scale of one-to-five, with one being the best, on 10 broad measures of economic freedom: trade policy; fiscal burden of government; government intervention in the economy; monetary policy; capital flows and foreign investment; banking and finance; wages and prices; property rights; regulation and informal (or black) market activity. Those scores are averaged to create an overall score. The top finishers are classified as free economies, followed by mostly free, mostly unfree and repressed economies.
For the 12th straight year, Hong Kong and Singapore finished first and second in the rankings, followed by Ireland, which overtook Luxembourg and Estonia to claim the third slot. Tiny Luxembourg did hang onto the fourth position, while Iceland climbed three spots to tie for fifth with the United Kingdom. Estonia and Denmark came in at seventh and eighth, respectively, The United States tied with Australia and New Zealand for the ninth spot, rounding out the list. Canada and Finland tied for 12th.
The link between countries that embrace economic freedom and prosperity are long established. Individuals living in “repressed” or “mostly unfree” economies such as those in North Korea (157th), Iran (156th), Burma (155th), Zimbabwe (154th), Venezuela (tie 152nd), Libya (tie 152nd), Belarus (151st), Cuba (150th), Laos (149th), and Turkmenistan (148th), earn 70 percent less than individuals living in “mostly free” economies. Individuals living in “free” economies, including the U.S., enjoy a per capita income more than twice what individuals in “mostly free” economies earn.
“In recent decades, the United States has excelled at human development,” Edwin Feulner, President of the Heritage Foundation, a Washington-based public policy research institute, stated in a commentary published on the foundation’s website at www.heritage.org. “In 1959, 22 percent of Americans lived below the poverty line. Today, only 12 percent do. That’s the power of a growing economy – it lifts its citizens and improves lives. And as economies grow, people have more money to spend to make their country cleaner and healthier.”
Over the last decade, more and more countries have embraced policies promoting economic freedom. Countries showing the greatest improvement in economic freedom include Pakistan, Romania, Kygyz Republic, Suriname, Armenia, Turkmenistan, Georgia, Turkey, Tajikistan and Kazakhstan. As a result of these and other gains in economic freedom, the average Index score, 2.98, falls into the “mostly free” category (the cutoff is 3.00).
Unfortunately the median Index score, 3.04, remains in the “mostly unfree” category, indicating that while countries in the North America/Europe region show consistent improvement, perhaps spurred by the rapid moves of former Soviet bloc nations towards economic freedom, countries in the Latin American, Middle Eastern and Sub-Saharan Africa regions lag behind in prosperity, though many do continue to improve. Those countries where economic freedom declined this year include: Iran, Italy, Guinea, Bolivia, United Arab Emirates, Oman, Equatorial Guinea, Sri Lanka, Egypt, El Salvador, and Nicaragua.
North America and Europe
The world’s most open economic region holds seven of the world’s 11 freest economies and 15 of the top 20. Romania is the region’s most improved country, as well as the second most improved country in the world. In addition, 33 countries in the region improved, while only 10, including Denmark, Switzerland, Sweden, Hungary, Estonia and Ukraine, declined. For the first time, Cyprus joined the ranks of “free” economies and Georgia achieved “mostly free” status. Belarus remained the country with the least economic freedom in the region.
Latin America and the Caribbean
Economic freedom increased slightly in Latin America and the Caribbean, with 15 countries in the region improving and 10 declining. Chile remains the regions lone “free” economy. Haiti was singled out by the editors of the Index as a “case study of how inept, corrupt governance can destroy an economy.” Reversing the slide of recent years, Argentinians experienced greater economic freedom as result of lower inflation and reduced tariff rates. Unfortunately, El Salvador fell from “mostly free” to “mostly unfree” and Cuba remains weighted down by a wide array of economic anchors such as high non-tariff barriers to trade, high taxes, weak property rights and wage and price controls. Although Cuba showed some improvement, it, along with Haiti and Venezuela, remain in the “repressed” category.
North Africa and the Middle East
Economic freedom has eroded in this region, which has not had an economy in the “free” category since 2001. Seven countries in the region did improve, according to the 2006 Index, however, 10 declined and two, Libya and Iran, remain in the “repressed” category. The freest economies in the region belong to Bahrain and Israel. Bahrain’s economic freedoms declined for the second straight year, despite a pro-business environment with an excellent banking and finance system, low regulation and low barriers to foreign investment, which is offset by an unhealthy level of government involvement in the economy because it receives more than 80 percent of revenues from state-owned enterprises, mostly oil and gas. It remains the region’s freest economy. Israel’s score improved thanks to a 2 percent decline in tariff rate and despite a 50 percent personal income tax rate. Libya, although remaining a “repressed” economy due to state-dominated industry, trade protectionism and heavy regulation, registered the most improvement in the region for the second straight year, thanks to better scores in fiscal burden of government, capital flows and foreign investment and banking and finance. Recording its lowest score since 2002, Iran continued its downward spiral.
No region has made more progress toward economic freedom since 1997 than the Sub-Saharan Africa region. Although this region still lacks a “free” economy, Botswana vaulted into the top 30, with improved scores on government intervention and the fiscal burden of government. Twenty-five of the region’s countries improved their scores, while only 12 declined. Ratings were suspended for two countries, Congo and Sudan; however, Angola and Burundi were both rated for the first time since 2001. Most of the countries in the region fall into the “mostly unfree” category, but only two, Nigeria and Zimbabwe, are rated “repressed”. Benin showed the most improvement of any country in the region and Uganda transitioned from “mostly unfree” to “mostly free”. Tanzania also improved, despite increased government spending, due primarily to a lower tariff rate and greater openness to foreign investment. Guinea declined more than any other country in the region, recording lower scores in the areas of trade policy, monetary policy and banking and finance.
Asia, home to Hong Kong and Singapore, the two freest economies in the world, and two of the most repressed economies in the world, North Korea and Burma (Myanmar), remains a study in contrasts. Still, economic freedom continues to grow in the majority of countries in the region, improving in 19 of the region’s countries while only nine countries lost ground. Most of the countries in the region are rated “mostly unfree”, although New Zealand and Australia made the top ten list of freest economies, tying for ninth place with the U.S. China, a familiar topic in the news, lopped an impressive 0.17 off its total Index score despite high taxes and barriers to foreign investment and state-ownership of the most important banks. Pakistan, Kyrgyz Republic, Turkmenistan and Kazakhstan are among the 10 most improved countries in terms of economic freedoms in the world. Both Uzbekistan and Tajikistan have improved enough that they no longer qualify as “repressed”.
The editors of the Index call Hong Kong the “poster economy for economic freedom around the world.” Hong Kong improved on its score again this year by decreasing government spending as a percentage of GDP, lowering its fiscal burden of government and having a lower government intervention in the economy score. Singapore also improved this year by cutting corporate tax rates, beginning to divest of non-strategic government linked companies and cutting the percentage of government expenditures as a percentage of GDP. Meanwhile, North Korea has taken baby steps towards reform in recent years, allowing some semi-private markets, shops and small businesses, abandoning its old food distribution system and letting prices and exchange rates float, all of which has resulted in the highest level of trade volume, $2.85 billion, since 1991. Unfortunately, North Korea continues to score poorly on every rating factor and is again ranked last in the world in economic freedom.
The Index was edited by Marc Miles, director of the Center for International Trade and Economics at the Heritage Foundation, Kim Holmes, Heritage’s vice president for foreign affairs, and Mary Anastasia O’Grady, who is a member of the Wall Street Journal’s editorial board and edits the “Americas” column. Copies of the 2006 Index (422 pp., $24.95) can be ordered at heritage.org/index or by calling 800-975-8625.