Article by John Blundell in The Business
2005 Index of Economic Freedom is a forensic examination of the economies of every country on the planet. It manages to be a fine reference book and a guide on how to impoverish a nation – or equally how to enrich it.
Here is a recipe book to liberate and enrich everyone. How many officials of the European Union will read this book? It may be too painful for them. Economies that used to dazzle like Germany and Japan stutter. Others start to surge. This book lifts the secrets. The details may be complex but here is the simple formula for wealth and health: low, simple taxes, light regulation, secure property, rule of law and free trade. Press those buttons and nations flourish.
I would like to see this extraordinary study on the reading list of every business school and read by everyone remotely near policy-making.
We all have a fair idea of what is going on in China, Brazil or India, but there are scores of nations about which we barely hear anything. The team that compiled this arresting book takes 50 different measures of each state, from the fiscal burdens, government regulation, monetary policy, wages and prices and property rights. This amazing inventory of data broadly confirms what we all perhaps know by instinct: in the liberal market economies homo sapiens flourishes. In the “kleptocratic” nations all but the elite starve or are brutalised.
Yet there is no shortage of surprises. The US is ranked only 12th by the capitalist virtues. America may have the most colossal economy, but it is losing its free market credentials as federal expenditures rise and protectionism tempts the policymakers.
At the top of this bold attempt to calibrate economic liberty come those two anomalous city states Hong Kong and Singapore. The sweat and dexterity that make these Asian tigers surge may be Chinese, but the mystery that lifts them above the rest of us may be claimed to be British – free trade and the rule of law.
Third is Luxembourg, but it is so tiny it is perhaps no more that a curio. Estonia comes fourth. The former Soviet republic has relished its freedom and restored its liberal economy to rather better shape than the day the Red Army tanks trundled in. The present hazard for the small Baltic nation seems to be its accession to the EU. It is having to add EU taxes and regulations. Like all EU members Estonians have to comply with the absurd Common Agricultural Policy, to its great cost and the despair of its neighbour Russia, which could feed it far more cheaply.
Britain ranks the seventh most free nation by these computations, just below New Zealand. Perhaps most startling is France. It is ranked 44th and falling. It is criticised for the 54% of its gross domestic product that is state spending and 25% of its workforce in the public sector. The index argues France is slowly strangling itself in regulations. It is now among the top 10 declining economies over the duration of this index… or rather bottom 10. Membership of the EU seems no indication of vitality. Rather the opposite, as Iceland, Switzerland and Norway – outside the club – are doing better than most members of the union.
Six nations are so troubled no meaningful data could be collected by the Heritage Foundation. They are Angola, Burundi, Congo, Iraq, Serbia and Sudan. The lesson could not be more blunt. Civil wars are disastrous. Angola, Congo and Iraq are fabulously wealthy in mineral resources, but they have not got the institutions to spread their latent prosperity.
Burma, Sierra Leone, Nigeria and Bangladesh seem to be receding into deeper poverty but perhaps most vivid of the “English-speaking” failures is lawless and corrupt Zimbabwe at 151st in the table and falling fast. Twenty years ago it exported huge volumes of food. Now it is relapsing into something less than socialism and dependent on food imports.
Six out of the top 10 groups of humanity that are prospering best are English-speaking. The ingredients that explain their success are defined in the confidence and assurance of their property rights and the openness of their markets to other nations.
Hong Kong was nominally ceded to China a decade ago. Yet the truth is more that Hong Kong took over China. The conversion of the communist leadership to free markets seems to be rippling around the globe. China is sucking in every commodity and using the brains of its people to manufacture items for the rest of us.
Among the nations receding from past prosperity are Argentina, Venezuela and Japan. Japan? Yes. Tokyo may be the base of the world’s second largest economy but it is an ailing patient. It runs a national debt that is 160% of GDP. This tiger has tripped over its own tail.
There is no shortage of tyrannies or preposterous economic policies, but I think it is not Panglossian to believe we are all learning economic freedom is the key to the good things in life: not just a full belly and something more than rags. Free markets allow liberty to flourish.
So, I submit, capitalism – the consequence of freedom of contract and freedom to trade – is a triumphant force that ennobles its participants. I am making no new claim. Adam Smith taught us all we needed to know in his magisterial the Wealth of Nations. What this fascinating book allows us to see is just how subtle yet simple is the recipe for happiness. Domestic mercantilism is more dangerous than international terrorism.
John Blundell is the Director General of the Institute of Economic Affairs.
The 2005 Index of Economic Freedom – The Link Between Economic Opportunity and Prosperity, The Heritage Foundation.