WASHINGTON – Though faced with continuing fiscal challenges, more countries embraced greater economic freedom than shied away from it last year, according to the latest Index of Economic Freedom, released today by The Heritage Foundation and The Wall Street Journal.
The Index registered a widespread rebound for 2010, as the average score increased to 59.7 from the 59.4 registered in 2009. More than half the 183 countries now listed in the Index improved their scores. Scores had declined for the previous two years as countries responded to the global financial crisis with increased spending and regulations.
Index editors Terry Miller and Kim R. Holmes say the finding suggests leaders from around the world have begun to understand and appreciate the link between economic freedom, prosperity, and overall well-being. After two years of turmoil, “many governments rededicated themselves to fiscal soundness, openness and reform,” they write. “The majority of countries once again are on a positive path to greater freedom.”
Hong Kong and Singapore topped the ratings, finishing one and two, respectively, for the 17th straight year. But Singapore cut into Hong Kong’s lead significantly, mainly on the strength of a better score in anti-corruption and a significant gain in financial freedom. The third and fourth place finishers also remained the same: Australia and New Zealand, respectively.
Switzerland took first place among the European nations, claiming the No. 5 spot in the world rankings. Ireland, the previous fifth place holder, dropped to a seventh place finish. Iceland’s score plunged by 5.5 points – the most of any country last year; it plummeted to 44th place in the global rankings, from 18th place in the preceding year.
Canada retained its top ranking among North American states, moving up one slot in the world rankings to sixth. Meanwhile, the United States lost ground, with a ninth place finish.
The U.S. score of 77.8 was down 0.2 points from the previous year—largely the result of large government spending increases and passage of President Barack Obama’s health care plan, which severely restricts consumer choice and private health care markets while increasing the size and cost of government. The U.S. dropped from the ranks of economically “free nations” in the previous Index and is now relegated to the “mostly free” category.
Repressive regimes continued to dominate the bottom of the rankings. North Korea ranked last among all rated countries, with an overall score of just 1.00. Rounding out the bottom five were Zimbabwe at 22.1, Cuba at 27.7, Eritrea at 36.7 and Venezuela at 37.6.
The Most Free
Hong Kong (1st)
New Zealand (4th)
United States (9th)
The Least Free
D.R. of Congo (172nd)
North Korea (179th)
A joint project of The Heritage Foundation and The Wall Street Journal, the Index of Economic Freedom ranks countries on a 1-100 scale according to 10 categories that evaluate economic openness, competitiveness and the rule of law. The 10 scores then are averaged to produce an overall score for each country.
Countries that score well demonstrate a commitment to individual empowerment, non-discrimination and the promotion of competition. Their economies tend to perform better, and their populations tend to enjoy more prosperity, better health and more positive measures on a variety of quality-of-life indices.
Economies rated “free” (scoring 80-100) or “mostly free” (scoring 70-79.9) in the 2011 Index enjoy incomes that are more than three times the average levels in all other countries and more than 10 times higher than the incomes of “repressed” economies (scoring less than 50 points). The Index authors note that economic freedom is a potent tool for eliminating poverty. In countries that have expanded economic freedom over the last decade, poverty—as measured by the U.N.’s Human Poverty Index—has declined nearly twice as fast as in countries where economic freedom has been restricted.
In 2010, only six economies earned a rating of “free.” Another 27 were rated as “mostly free.” The categories “moderately free” and “mostly unfree” had 57 countries each. Thirty-two countries had “repressed” economies.
Progress Where It’s Needed Most
Many of those at the bottom of the world economic ladder seem to now recognize economic freedom as the path to prosperity. The Index findings confirm a strong relationship between gains in economic freedom and reductions in poverty. Of the 117 economies whose scores improved, 102 are developing or emerging economies, many in Sub-Saharan Africa and the South and Central regions of the Western Hemisphere. Every region except the richest two – North America and Europe – registered overall progress toward greater economic freedom last year.
Sub-Saharan Africa posted the largest average regional gain. It also boasted the world’s two most-improved economies: Rwanda and Djibouti. African and Middle Eastern nations accounted for 13 of the most-improved 19.
The South and Central America/Caribbean region recorded the second-highest gain on average. The Middle East/North Africa and Asia-Pacific regions also registered improvements. Europe held steady overall. Only North America lost ground.
North America scores above the world average in eight of the categories of economic freedom analyzed in the Index. It lags only in property rights and freedom from corruption–problems mostly related to endemic corruption in Mexico.
But policy responses by the U.S. government to the economic slowdown have hurt the United States’ standing – and that of the region. Government bailouts, burdensome regulations, loose monetary policy and increasingly protectionist trade policy all contributed to North America’s continued slide in the rankings. Canada, meanwhile, has emerged as a world leader in pro-growth economic policies. It scores at least 75 on every measure except government spending, where its cradle-to-grave health care system and other social spending help produce a score of just 52.7.
Europe ranks above the average in seven of the 10 Index categories. It scores more than 15 points above world averages in both property rights and freedom from corruption categories and more than 10 points ahead in business and trade freedom categories.
But welfare-state programs in many countries mean governments consume a large share of GDP, which produces weak scores in government spending, fiscal freedom and labor freedom categories. Labor regulations hinder productivity, job creation and economic expansion, all of which exacerbate debt levels.
On the good news front, Denmark improved by 0.8 points and moved into 8th place overall, thanks to high transparency, low corruption, an efficient regulatory regime and judiciary independence. Bulgaria and Cyprus both improved by more than two points, thanks to gains in investment and labor freedom and reductions in corruption.
South and Central America/Caribbean
Led by Colombia’s 2.5-point gain, this region continued to improve across the board. Overall, 25 of its 29 countries recorded gains in economic freedom; and only three declined. Chile, ranked 11th, is the region’s lone representative in the top 20, but Belize, Costa Rica and even Haiti registered significant improvement in 2010.
Overall, the region continues to become more open to trade and investment and to address regulatory reform. But weakness in intellectual property, the courts and the rule of law keep most countries in the region mired in or slightly below the middle of the pack.
Middle East/North Africa
Oil is both a bane and a blessing for this region. It brings in vast wealth, but is largely controlled by government and does not generate enough incentives for societies to embrace the openness that drives broad-based economic growth.
The regional average remains slightly above the world’s largely because of the high degree of fiscal freedom needed in oil-rich nations. But other institutional problems that flow from extensive sovereign wealth continue to set back private-sector development, economic diversification and overall freedom.
Jordan and Oman led a steady increase in economic freedom in the region, and Bahrain, ranked 10th globally, continued to be the area’s bellwether for freedom. Qatar moved into the “mostly free” category for the first time, and reform-oriented states such as Saudi Arabia, Syria and Israel continued to make progress.
Two-thirds of the region’s countries improved this year, and the region again boasted the world’s top two overall finishers and the leaders in six of the Index’s 10 component categories. Hong Kong led in four categories, Singapore in one and New Zealand in another. Sri Lanka and Tonga were among the most-improved countries in the world in economic freedom, and New Zealand remained the least-corrupt country worldwide.
But two-thirds of the 41 countries ranked as “mostly unfree” or “repressed” economies. The world’s least-free country – economically and otherwise – remained North Korea. And Nepal’s overall score declined by a region-worst 2.6 points because of deterioration in freedom from corruption, property rights and investment freedom categories.
This region continues to rank at the bottom in overall economic freedom. It ranks last in seven of the 10 components, performs about 12 points below the world average in property rights and corruption, and is 10 points below average in the business freedom category.
Yet, no region made greater strides toward economic freedom in 2010. It gained 0.6 points on the overall scale. Its top-place finisher, Mauritius, ranks 12th overall and scores above the global average in eight of the 10 categories. Rwanda, which has enacted reforms aimed at improving its competitiveness and entrepreneurial environment, is the world’s most-improved country overall.
Djibouti, Guinea-Bissau and Cape Verde also showed significant improvement. Even Eritrea and Zimbabwe, the region’s two most “repressed” economies, showed some improvement.