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Economic Freedom Advances Globally, Study Shows

  Industry Statistics published in DM Direct Special Report
November 19, 2002 Issue
 
  By DMReview.com Web Editorial Staff

Economic freedom advanced throughout the past year, The Heritage Foundation and The Wall Street Journal report in the 2003 "Index of Economic Freedom." The study shows that 74 of the 156 countries graded became more economically free and 49 became less free. Economic freedom has increased every year since the index was first published in 1995.

Despite the continuous improvement, most of the world's economies remain relatively "unfree." Overall, 71 economies were rated as "free" or "mostly free," while 85 earned ratings of "mostly unfree" or "repressed." The index was edited by Gerald P. O'Driscoll Jr., director of Heritage's Center for International Trade and Economics, Edwin J. Feulner, Heritage president, and Mary Anastasia O'Grady, editor of The Wall Street Journal's "Americas" column.

Ratings on the "Index of Economic Freedom" are based on an analysis of 50 different economic variables, grouped into 10 categories: banking and finance, capital flows and foreign investment, monetary policy, fiscal burden of government, trade policy, wages and prices, government intervention in the economy, property rights, regulation and black-market activity. Countries are rated one to five in each category, one being the best, five the worst.

The index editors stress the relationship between economic freedom and per capita income. The latest available data from the World Bank show that per capita income for "mostly unfree" or "repressed" economies averaged only about $3,400 in 2000. That figure nearly triples, to $12,569, for "mostly free" economies and more than doubles again, to $26,855, for "free" economies.

Hong Kong retained its status as the world's freest economy, but just barely. Its score worsened because government consumption (as a percentage of GDP) increased. Singapore, still No. 2, moved within striking distance of the top slot by cutting taxes. Luxembourg improved enough to pull even with New Zealand for the No. 3 spot. Ireland lowered tax rates, making up some of the ground it lost in the previous year, to take sole possession of the No. 5 position.

The scores for the United States and Estonia remained the same, tying them for sixth overall with Denmark, which improved its score - and broke into the index top 10 for the first time. Australia and the United Kingdom took ninth place overall.

Six countries in the bottom 10 improved their scores; the rest declined or stayed the same.

The Most Free

The Least Free

Hong Kong (1st)

North Korea (156th)

Singapore (2nd)

Cuba (155th)

Luxembourg (3rd)

Zimbabwe (153rd)

New Zealand (3rd)

Laos (153rd)

Ireland (5th)

Libya (151st)

Denmark (6th)

Belarus (151st)

Estonia (6th)

Yugoslavia (149th)

United States (6th)

Uzbekistan (149th)

Australia (9th)

Burma (148th)

United Kingdom (9th)

Turkmenistan (146th)

Figure 1: Index of Economic Freedom's Top 10 and Bottom 10 Countries

Of all the factors graded in the index, the "fiscal burden of government" score (which essentially measures how much a government taxes and spends) showed the most improvement worldwide. The cost of government fell in 37 nations and rose in only 22. The index also indicates that more governments are refraining from intervening in their economies and a higher number are easing restrictions on their banking industries.

But in a trend the editors consider troubling, the protections afforded property rights continue to erode, with three nations weakening their safeguards of such rights and only one - out of all 156 graded - strengthening them. "It's impossible to attract investment capital without strong property rights," the editors point out. "Nations that hope to grow economically must realize that the two are inseparable."

The editors were unable to grade four countries now in a "prolonged state of anarchy or civil unrest": Angola, Burundi, Congo and Sudan. A lack of basic economic data also made it impossible for them to grade Iraq, whose centrally planned economy has been "devastated" over the last two decades by dictator Saddam Hussein.

The 2003 "Index of Economic Freedom" is the ninth edition of the popular survey. The full text, including all charts and graphs, will be available online at www.heritage.org/index/.

North America and Europe

North America/Europe remains the most economically free region, home to six of the world's freest economies. This year's index shows 18 of its 45 countries getting better scores and 12 posting declines. Estonia maintained last year's impressive score, while Denmark continued to rise in the rankings, spearheading a movement toward increased economic freedom among Scandinavian countries. Indeed, Iceland and Sweden joined the "free" category for the first time. Slovenia moved from the ranks of the "mostly unfree" into the "mostly free" category. Ukraine vaulted past an economically static Russia. Turkey logged the region's biggest decline.

Asia and the Pacific

The Asia-Pacific region also made gains in economic freedom, with 15 of its 30 economies earning better scores and nine getting worse. Mongolia and Sri Lanka slid into the "mostly unfree" category and South Korea's score also declined considerably. The Kyrgyz Republic and Turkmenistan, however, tied for most improved and Indonesia made great strides as well. But the region continues to be the world's most economically schizophrenic, boasting four of the world's freest economies - Hong Kong, Singapore, New Zealand and Australia - and five of the most repressed - Turkmenistan, Burma, Uzbekistan, Laos and North Korea.

Sub-Saharan Africa

Sub-Saharan Africa posted as many gains in the 2003 index as North America/Europe and two other regions, with 19 countries improving (thanks mostly to better banking and finance scores) and 13 declining. Despite some significant gains - Botswana, for example, is one of the most improved nations in the world and Madagascar and Uganda became "mostly free" - none of the region's 42 countries earned a "free" rating. Zimbabwe is the sub-Saharan Africa's least free country and continues to deteriorate, although Rwanda saw the biggest decline.

North Africa and the Middle East

The North Africa/Middle East region made far more impressive gains in economic freedom last year than it did the year before, with 11 of its 18 countries improving, two staying the same and only five declining. Bahrain remains first in the region, well ahead of three other nations - Israel, Kuwait and Qatar - that nevertheless posted markedly improved index scores. Both Morocco and Saudi Arabia are now "mostly free." Yet some of the most remarkable gains were recorded among the region's least free economies, including Egypt, Yemen, Syria (now "mostly unfree"), Iran and Libya - which tied Madagascar as the world's most improved.

Latin America and the Caribbean

Economic freedom advanced in the Latin America/Caribbean region last year, but just barely, with 11 out of 26 countries posting gains and 10 showing declines. Increased government intervention in the economy and more regulation caused Chile to lose its status as a "free" country and El Salvador continued the slide it began last year. Argentina racked up the biggest regional deterioration, with restrictions on banking and barriers to foreign investment that wound up precipitating an economic crisis. Nicaragua and Brazil both improved and are on the cusp of being "mostly free."

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For more information on related topics visit the following related portals...
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This piece has been brought to you by the DMReview.com Web Editorial staff.

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