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The Numbers Tell The Story: Economic Freedom Spurs Growth

Economic Viewpoint


The collapse of communism and the success of the Asian Tigers stimulated a worldwide movement to privatize and deregulate, for these events appeared to indicate that economic freedom is much more effective than government control in promoting growth. Revisionists have questioned this conclusion, but it receives resounding support from a major new study by three economists.

The book, Economic Freedom of the World, uses 17 categories to measure the degrees of freedom during the past 20 years in more than 100 countries. The authors estimate restrictions on international transactions in goods and capital, the extent of price controls, the incidence of government-operated enterprises, the importance of government subsidies and transfers, the level of the top tax rate, the freedom to hold money abroad, and the extent of inflation. These factors were then combined into overall indices of economic freedom that rank countries and show changes since 1975.

The indexes provide the most convincing evidence yet that nations are unlikely to continue to grow without appreciable economic freedom. Per capita gross domestic product in the top 10 nations on the freedom scale grew at an average rate of 2.3% per year from 1980 to 1994, compared with a miserable 1.3% per year for the 27 countries at the bottom. The closer to the top, the faster tended to be a country's rate of growth.

Real per capita income levels are also generally much higher for countries with greater economic freedom. The half-dozen freest countries had several times the per capita incomes of countries in the middle, and more than 20 times the incomes of those at the bottom.

BAD RECORD. The evidence shows why many African nations have had the lowest growth of any continent. African nations there occupy half the lowest 20 positions--including Somalia, Zaire, Nigeria, and Zimbabwe--while only Mauritius and Botswana rank in the top 50. South Africa is in the 54th position, followed by Gabon and Chad at 60 and 61.

Apologists blame Africa's bad record on its extended period of domination by colonial powers, but that is not the major reason. Rather, the main cause appears to be that after independence, many African nations were led astray by imitating the government-dominated economies of communist and socialist countries.

Since most nations had rather stable freedom rankings during the past two decades, the growth experience of countries that made major changes in the openness of their economies is especially pertinent. Output in the 10 economies with the largest increase in economic freedom had an average rate of growth of 2.7% per year from 1980 to 1994, whereas the 10 nations with the biggest fall in freedom had negative growth. Chile, Portugal, Pakistan, and Mauritius, the four less-developed countries that became significantly freer, grew much more rapidly than the four less developed nations--Honduras, Iran, Nicaragua, and Venezuela--that greatly raised government involvement.

A growing number of economists deny that the fast-growing Asian economies are evidence of the importance of freedom, claiming that governments there guided economic activities. They point out that Korea used government banks to allocate capital at subsidized rates to large companies, Taiwan controlled imports and financial markets, and Singapore subsidized foreign investments.

Nevertheless, these new indexes confirm that despite these and other government interventions, Asian economies have generally been much freer than those elsewhere. They hold many of the top rankings on the freedom scale: Hong Kong is No.1, Singapore No.3, and Japan No.10. Even Taiwan and South Korea appear to be laissez-faire compared with most countries, for at 16th and 20th, respectively, they rank well above the world average, partly because both nations raised their rankings since the 1970s.

Unfortunately, politicians usually are unwilling to take unpopular measures to reduce governmental interventions in the economy. As I recently illustrated (BW--Apr. 8), despite high unemployment rates in Western Europe during the past few years, even conservative governments in France, Germany, and other European countries have done little to deregulate, apparently because they fear the reactions of voters.

These new estimates provide persuasive evidence that economic freedom is essential for economic growth. Countries suffer unnecessarily because their energies and imagination are not allowed to flower in a free environment.BY GARY S. BECKER

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