The compelling case for greater economic freedom

Originally appeared on Daily FT

By Alexander C. R. Hammond

The Fraser Institute, a Canadian think tank, published the 22nd edition of its annual Economic Freedom of the World (EFW) report. For a long time, we’ve known that, on average, freer economies are richer, grow faster and have longer life expectancies.

But the 2018 edition of the EFW gives us more insight than ever before into the intrinsic link between economic freedom and other measures of human wellbeing — such as infant mortality, equality, happiness and extreme poverty rates. 

To rank the level of freedom for 162 economies, the EFW analyses 42 indices across five major areas (size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation), using figures from 2016 — the most recent data available.

Yet again, Hong Kong takes the top spot in the EFW rankings — a position it has held since 1980. Singapore remains second, as it has since 2005. The remaining top 10 most free nations are: New Zealand, Switzerland, Ireland, the United States, Georgia, Mauritius, the United Kingdom, Australia, and Canada, the latter two being tied for 10th spot. The three least free countries are Argentina, Libya, and Venezuela. Out of the 162 countries the EFW report measures, Sri Lanka ranks in 106th place. Sri Lanka’s position in the report is a staggering 10 places lower than it was in 2017. Of all the areas the report analyses, Sri Lanka experienced the steepest decline in ‘Legal Systems and Property Rights’ – a drop from 5.28 to 4.93. Sri Lanka specifically lags behind in judicial integrity, openness to trade, and access to sound money. 

The positions of the economies in the EFW matter because there is a significant correlation between economic freedom and human wellbeing. To analyse this, the Fraser Institute splits the 161 measured countries into quartiles (i.e. each quartile represents a quarter of the economies) based on their level of economic freedom.

The average income in the freest quartile of nations is a staggering 7.1 times higher than the average income in the least free quartile ($40,376 and $5,649 respectively). The bottom 10% of income earners in the freest countries make, on average, 7.9 times more than the poorest 10% in the least free quartile. 

Comparatively, extreme poverty (as defined by the World Bank as an income of than $1.90 per day) is almost non-existent in the freest countries. By comparison, almost a third of all people in the bottom quartile of economies live in extreme poverty. It is clear, then, that for the absolute poorest in any given society, it is unimaginably better to live in a freer economy.

Of the four quartiles, Sri Lanka belongs to the third quartile, which is suitably titled “Non-Economically Free Countries”. With an average GDP per capita of $3,842, Sri Lanka’s average income is an incredible 2.9 times lower than the average income in this quartile ($11,465). As the freest nations have an average income of $40,376 it undeniable that on average, freedom and prosperity are heavily correlated.

But economic freedom isn’t just about money. Take life expectancy for example. In the freest countries, people live on average 15 years longer than those in the most restrictive systems. For many people, that amounts to a difference between knowing one’s grandchildren—or dying before their birth.

Infant mortality is another measure that highlights the immeasurable human cost of isolationist economic policies. Measured in the number of deaths per 1000 births, the devastating death rate in the least economically free nations is 6.8 times higher than the rate in the freest —42.2 and 6.2, respectively.

Problems of misogyny also creep in. When looking to the United Nations (UN) Gender Inequality Index, where zero represents complete gender equality and one represents complete inequality, the least free countries have an average score of just 0.46–compared to 0.18 for the freest quartile.

Free people are also happier people. The UN World Happiness Index asked respondents to rank their lives on a scale of zero to 10, with 10 representing the best possible life and zero representing the worst imaginable. The most economically liberal countries once more win out: the EFW shows that the freest quartile has an average score two points higher than the least free – 6.5 compared to 4.48.

There is more good news. Despite our tendency toward pessimism about the current state of the world, the EFW shows that economic freedom has increased substantially over the last 25 years and that the largest gains have been made in developing nations.

In 1990, the average economic freedom score for a “high-income industrial” country was 7.18 out of 10, compared to just 5.28 for the average “developing” country—a gap of 1.90. By 2016, that gap had narrowed by 46%: developing economies were a mere 1.06 points behind the industrial nations. The rapid increase in the EFW score by many developing economies was primarily driven by gains in the area of trade liberalisation and sound money (meaning the stabilisation of purchasing power by combating inflation.)

The result of these advances is that, when weighted for population, the average person now lives in a far freer economy. Consider this: if the world of 1980 were a country today, its economic freedom score would place it at 160 out of 163 nations — ranking two places below war-torn Syria. But if a 2016 world was a nation in 1980, it would be the 12th freest, with a score of 6.62 — slightly above 1980 Australia.

The latest EFW once again shows the deep and continued link between economic freedom and important indicators of human wellbeing, including; wealth, poverty alleviation, life expectancy, inequality, infant mortality and happiness.

It is clear that despite the many challenges that remain, the poorest in society continue to benefit the most from secure property rights, loosened regulatory barriers, and greater trade liberalisation. Long may policymakers remember this so that the march toward greater economic freedom continues.

(The writer is the Research Assistant for HumanProgress.org. He writes about economic freedom, globalisation, and human wellbeing. Hammond is a graduate of History and Politics, from the University of Exeter in Great Britain).