Thursday, January 06, 2005

U.S. Falls Out of Top Ten in Heritage Economic Freedom Index

Economic Freedom On The March

WASHINGTON, JAN. 4, 2005—Cultures may differ around the globe, but the pursuit of prosperity is universal. Might the key to prosperity be universal as well?

It is, according to the editors of the 2005 Index of Economic Freedom, and it can be summed up in one word: Freedom. Now in its 11th edition, the annual country-by-country report on the openness of economies worldwide demonstrates that the countries with the greatest degrees of economic freedom also enjoy the highest living standards.

During the last nine years, countries that have done the most to improve their scores on the Index’s 10 measures of economic freedom have, in general, experienced the highest rates of economic growth. Iceland, for example, has improved steadily, producing a compound growth rate of 3.5 percent.

Published by The Heritage Foundation and The Wall Street Journal, the Index documents the correlation between freedom and prosperity. Countries that improve their scores in the 10 categories measured—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—tend to see their standards of living and per capita incomes rise.

The new report finds that more and more people are enjoying the fruits of economic freedom. Over the last nine years, the number of people living in economies that Index editors Marc A. Miles, Edwin Feulner and Mary Anastasia O’Grady classify as “free” has increased by 32 percent, from 361 million to 478 million. At the same time, the number of people in “repressed” economies has fallen by 38 percent, from 391 million to 242 million.

Data gathered for the 2005 Index show a net increase in global economic freedom. Of the 155 countries analyzed, 86 scored better this year than last year and 12 had unchanged scores. The scores of 57 countries were worse than last year. Overall, 17 countries are classified as having “free” economies, 56 as “mostly free,” 70 as “mostly unfree” and 12 as “repressed.”

Perhaps the greatest surprise in this year’s Index is the failure, for the first time, of the United States to make the top 10. Although its score remains unchanged from last year, and it is still classified as free, the United States—now in a tie for 12th place with Switzerland—has been “treading water,” according to the editors and hence has been surpassed by countries willing to open their economies still further.

North America/Europe has the highest number of free economies, and Asia-Pacific is home to the global Nos. 1 and 2: Hong Kong and Singapore. Yet, the Index editors note, no region has made greater strides over the past several years than sub-Saharan Africa. Although it remains the least free region, its average and median scores have improved by 0.32 point since the 1997 Index.

The news is far less positive for North Africa and the Middle East, where economic freedom is in sharp decline, and Latin America and the Caribbean, where it is stagnant. The most tragic decline in the last year, the editors say, was suffered by poverty-stricken Haiti, which not only suffered a political crisis this year but lost significant ground in the areas of fiscal burden of government, monetary policy, banking and finance, and informal (black) market activity. It is now a “repressed” economy.

The editors suspended grading for five countries now in a state of “civil unrest or anarchy”: Angola, Burundi, Congo, Sudan and Iraq. A lack of reliable data made it impossible for them to grade Serbia and Montenegro.

The full text of the 2005 Index, including all charts and graphs, will be available online at heritage.org/index. A Spanish-language edition also is being published.

North America and Europe

The world’s most economically open region has six of the world’s freest countries: Luxembourg, Estonia, Ireland, United Kingdom, Denmark and Iceland. By cutting taxes and scaling back regulations in its banking sector, Iceland was able to leapfrog the United States and tie Denmark for 5th place regionally and 8th place globally. Ukraine, though, logged the most dramatic improvement in the region, by reducing its tax burden, easing price controls and accelerating the pace of privatization.

Belarus, saddled with Soviet-era anti-market policies, remains the region’s least free country, although an improvement in its trade policy score pushed it into the “mostly unfree” category. North America/Europe is now the only region with no repressed economies.

Latin America and the Caribbean

Stagnation, unfortunately, is still common for countries in Latin America and the Caribbean. The 2005 Index shows that 12 countries improved, while 12 declined, for no net gain or loss of economic freedom. Hampered by widespread anti-market policies, the region features three repressed economies—Cuba, Venezuela and Haiti. Cuba became less economically free in the last year, reflected in worsening Index scores in trade policy, monetary policy and fiscal burden of government.

On a more positive note, Chile improved by cutting tariffs and is now the 11th freest economy in the world and the only free economy in the region. It accomplished this, the Index editors say, by pursuing free-trade agreements and liberalizing capital markets. El Salvador also improved, by cutting government spending, solidifying its status as the region’s second-freest economy.

North Africa and the Middle East

The only region to experience a net decline in economic freedom, North Africa and the Middle East saw only four countries improve their scores in the 2005 Index; 11 are worse. Bahrain, despite a worsening score, is still the freest country in the region. It features many of the characteristics that mark a prosperous economy: low inflation, strong property rights, low regulation and low barriers to foreign investment, among others factors. Israel is the second freest. But three countries declined enough to move from being “mostly free” to “mostly unfree”—Qatar, Tunisia and Morocco. Libya and Iran—once one of the most advanced economies in the Middle East—improved in the 2005 Index but remain repressed.

Sub-Saharan Africa

Although it boasts no free economies, Sub-Saharan Africa is the 2005 Index’s most improved region, with 21 countries seeing their scores improve and 15 declining. Indeed, the most improved country in the world is Madagascar, with better scores on trade policy, fiscal burden of government, informal market and monetary policy. Yet Sub-Saharan Africa also has the country that, globally speaking, declined the most: Ethiopia. Uganda fell into the “mostly unfree” category. Zimbabwe improved somewhat, but is still repressed. The region’s freest country, Botswana, also improved, its market-led economy generating one of the world’s highest average growth rates.

Asia-Pacific

Economic freedom continues to grow in the majority of countries in the Asia-Pacific region. The scores of 17 countries improved this year, while 10 countries lost ground. Still, the news for Asia-Pacific isn’t completely good. The region is the only one in which average and median freedom scores have declined over the past nine years, even as the rest of the globe has enjoyed a trend toward greater freedom.

Asia-Pacific once again presents a study in contrasts. It boasts the two freest economies in the world, Hong Kong and Singapore, as well as two others in the top 10, New Zealand and Australia. Still, most countries in the region are ranked “mostly unfree” according to the 2005 Index, and Asia-Pacific houses the two lowest-rated countries in the world, Burma (Myanmar) and North Korea.

The Most Free

Hong Kong (1st)

Singapore (2nd)

Luxembourg (3rd)

Estonia (4th)

Ireland (5th)

New Zealand (5th)

United Kingdom (7th)

Denmark (8th)

Iceland (8th)

Australia (10th)

The Least Free

Venezuela (146th)

Uzbekistan (147th)

Iran (148th)

Cuba (149th)

Laos (150th)

Turkmenistan (151st)

Zimbabwe (151st)

Libya (153rd)

Burma (154th)

North Korea (155th)

Top 10 Improved

Madagascar (48th)

Ukraine (88th)

Poland (41st)

Bulgaria (52nd)

Iceland (8th)

Indonesia (121st)

Hungary (35th)

Malaysia (70th)

Mongolia (50th)

Uzbekistan (147th)

Top 10 Worsened

Ethiopia (133rd)

Pakistan (133rd)

Uganda (74th)

Haiti (145th)

Bangladesh (141st)

Morocco (85th)

Qatar (81st)

Fiji (93rd)

Cuba (149th)

Tunisia (83rd)

For more info on the Heritage Foundation's 2005 Index of Economic Freedom.


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