The Right Coast

July 27, 2004
Economic Freedom
By Mike Rappaport

The Cato Institute recently released its annual report on economic freedom. Like the similar study done by the Wall Street Journal and Heritage, the report is a highlight for me each year, as it does a great job of monitoring this important value and demonstrating its importance.

What is economic freedom? The reports looks at five factors: small government expenditures and taxes; secure property rights and the rule of law; access to sound money; freedom to trade internationally; and limited regulation of credit, labor and business.

Based on this definition, the reports assesses the degree of economic freedom over the last twenty years. Thankfully, economic freedom has grown internationally over this period. Countries from each part of the world have experienced significant growth in economic freedom, including Australia, Botswana, Chile, China, India, Ireland, and Trinidad.

The report also indicates that a range of social benefits are correlated with economic freedom. Countries with more economic freedom have substantially higher per capita incomes, higher growth rates, longer life expectancy, higher incomes for the poorest 10% of the population, greater access to clean water, less public corruption, and greater political rights (such as free elections) and civil liberties (such as freedom of speech). Moreover, economic freedom is not merely for the rich: poor countries that establish economic freedom also benefit from higher growth rates. Significantly, for those concerned with distributional matters, the share of income earned by the poorest 10% of the population is unrelated to the degree of economic freedom in a nation.

To my mind, economic freedom is one of the great things. In fact, if we have obligations to help others throughout the world, one of the best ways of doing so is to help them promote economic freedom.

One aspect of the study bears emphasis. Because economic freedom is based on various criteria, some countries that might be thought of as not having economic freedom score relatively well. For example, Denmark’s welfare state scores poorly in terms of the government expenditures component of economic freedom (112 out of 123 in the world), but it does so well in other categories, such as legal system (2nd) and access to sound money (9th), that it ends up 14th place overall. For similar reasons, socialist Sweden is 22nd in terms of economic freedom.

Thus, a large welfare state does not mean that a country cannot enjoy much economic freedom if the country does extraordinarily well in other areas. Of course, the better move would be to have a small welfare state and economic freedom in other areas. Still, those who are committed to a large welfare state need not be hostile to economic freedom in other areas.

Finally, since this is a legal blog, it is worth noting how important a sound legal system is to economic freedom. In fact, it is not at all clear that one can have sustained economic growth in a wealthy country without secure enforcement of property and contract rights. Lawyers and judges have an important role to play in promoting economic freedom. Unfortunately, they often do exactly the opposite.