The seventh edition of the Heritage Foundation and The Wall Street Journal’s Index of Economic Freedom was released this month and has confirmed, once again, that a positive relationship exists between economic freedom and living standards.
The index, which is increasingly being used by professional money managers, has become one of the most efficient tools in simplifying the asset allocation decision-making process. The index quantifies several variables that indicate a degree of freedom, and ranks the world’s economies in ten broad categories: banking and finance, capital flows and foreign investment, monetary policy, fiscal burden of government, trade policy, wages and prices, government in the economy, property rights, regulation, and black markets.
What comes, as no surprise to most investors is that North America and Western Europe are the most economically free regions in the world, and, subsequently, the richest. Moreover, North America and Western Europe have made the most progress over the past twelve months, with 24 nations being given improved scores. The most improved nation is probably Ireland, leaping into the number-three spot from number seven in 1999. Ireland is becoming known as the “Celtic tiger” by investors attracted by its low tax rates, pro-entrepreneurial spirit, and supply-side reforms. Indeed, at the number three positions, Ireland is the most economically free country in Europe.
However, the biggest kudos must go to Estonia, a Baltic nation formerly under the oppressive hand of the old Soviet Union. Estonia, along with other Eastern European nations such as Lithuania, the Czech Republic, and Hungary, came from further behind to get to where they are today, which is why any progress towards a free market economy is a major development. To place, as the world’s 14th most economically free nation should definitely help Estonia attract the foreign capital it needs to finance its economic growth and development.
What makes Estonia’s high score so pleasing from a pro-capitalist standpoint is how low its former overlord, Russia, placed in the running. Russia came in at 127 on the list and fell within the category of “mostly unfree”. As a matter of fact, Russia has been slipping lower and lower ever since the index was first published. Additionally, other former eastern block nations that have stymied economic reform have experienced falling scores. Moldova’ s score declined more than any other nation on the list. This economic basket case came in at an embarrassing 120 due to an exponential rate of inflation, profligate government spending, Byzantine regulation of business, and a concomitant increase in black market activity.
At the tail end of the index are the real economic dogs. Out of the seven nations that finished dead last, six are in sub-Saharan Africa and the other is North Korea. These economies, according to the Heritage Foundation, are so unfree that the category in which they have been placed is “repressed”.
To those who do not fully grasp the importance of economic freedom and its impact on economic growth and development, a visit to the Heritage Foundation’s web site could provide some important insight (www.index.heritage.org). In a nutshell, the index confirms the argument that economic activity flourishes when consumers, investors, and business people are left alone, and even suggests that economic freedom may be more important than democracy itself. Truly an enlightening observation.
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