Canada falls to number thirteen on rankings of economic freedom
Hong Kong ranks first
Contacts:
Michael Walker, Executive Director
The Fraser Institute
Telephone: (604) 714-4545
Email: michaelw@fraserinstitute.ca
Suzanne Walters, Director of Communications
The Fraser Institute
Telephone: (604) 714-4582
Email: suzannew@fraserinstitute.ca
Mobile phone: (604) 809-2230
Release Date: 18 April 2001
VANCOUVER, BC—Hong Kong is the most economically free jurisdiction in the world, while Canada has dropped to number thirteen, according to the Economic Freedom of the World: 2001 Annual Report, released today by The Fraser Institute.
The Annual Report, published by The Fraser Institute in conjunction with the US-based Cato Institute, and 49 other independent institutes from around the world, ranks 123 countries on their level of economic freedom. The core ingredients of economic freedom are personal choice, protection of private property, and freedom of exchange.
"This publication is crucial for understanding the role that economic freedom plays in achieving prosperity and economic development. A careful examination of the research generated from this project clearly shows the benefits—both financial and non-financial—of high levels of economic freedom," says Michael Walker, Executive Director of The Fraser Institute.
Canada's score drops and we lose ground to other countries
For the most part, Canada has enjoyed moderately high levels of economic freedom since 1970. During this period Canada has consistently ranked as one of the twenty freest economies in the world. This has been due mainly to the quality of the legal structure and security of property rights, good monetary policy, the freedom to use alternative currencies, and the freedom of exchange in financial markets. Canada has also received high scores in the freedom to engage in international trade variable.
However, Canada's ranking has dropped from number seven on the 2000 rankings, and our overall rank has been on the decline since 1980. This reflects the reality that many other nations have been improving their level of economic freedom at a greater pace than ours.
Canada has been losing ground to other developed countries such as the United States and Ireland. For example, fifteen years ago Canada's per capita GDP was 2.5 times that of Ireland and we ranked higher in economic freedom. Today, Ireland's per capita GDP is 10-15% higher than Canada's. As Canada's economic freedom has declined, so has our rate of growth.
"Comparatively speaking, Canada continues to have damagingly high levels of government spending, transfers and subsidies, and tax rates," notes Walker.
International Rankings
Following Hong Kong and Singapore, the next freest economies are New Zealand (3), the United Kingdom (4), and the United States (5). Australia, Ireland, Switzerland, Luxembourg, and the Netherlands round out the top 10. Rankings of other large countries include Canada (13), Germany, (15), Japan (20), Italy (24), France (34), Taiwan (38), Mexico (62), China (81), India (92), Brazil (96), and Russia (117).
Myanmar, Algeria, the Democratic Republic of Congo, Guinea-Bissau, and Sierra Leone rated the lowest among the 123 countries for which data were available.
A legal system capable of protecting property rights and enforcing contracts in an even-handed manner is central to both economic freedom and progress. So too is the freedom to compete in business. Almost all of the countries with the weakest legal systems and most highly-regulated business sectors were either Latin American or former socialist countries.
The ten lowest-rated countries in the legal area were Peru, Indonesia, Ecuador, Venezuela, Ukraine, Russia, Bolivia, Mexico, Columbia, and El Salvador. The ten with the most restrictive business regulation were Russia, Venezuela, Ukraine, Mexico, El Salvador, Bulgaria, Bolivia, Indonesia, Argentina, and Columbia. This highlights a very important point: Inadequate legal systems and a restrictive regulatory environment are stifling economic progress throughout much of Latin America and among the former socialist countries.
However, big government does not always mean hostility toward business. Hong Kong, Singapore, and the United States had regulatory environments that were favorable for business competition and market allocation, but so too did big government countries like Finland, Netherlands, Denmark, and Sweden.
"Modern economic growth is primarily about discovery, innovation, and brain power. Thus, the strong relationship between economic freedom and strong growth should not be surprising," says James Gwartney, noted academic and co-author of the Report.
Western European countries generally ranked high in all areas of study, except two: size of government and labour market regulation.
Economic freedom leads to greater prosperity
One of the most compelling results of the study is the relationship between economic freedom and prosperity.
Countries that score in the top quintile of the "most economically free" countries had an average per capita GDP of $25,051 (1995 US$) and an average growth rate of 3.0% (1998 real GDP). As economic freedom declined, so did the average per capita GDP, as well as the average growth rate. The least free 20 percent of countries had an average per capita GDP of $816 (1995 US$) and an average growth rate of 1.8% (1998 real GDP).
Free economies have higher per person incomes and grow more rapidly. They also have less poverty and political corruption, achieve higher scores on the United Nations Human Development Index, and their citizens live 21 years longer.
Methodology
This fifth edition of Economic Freedom of the World updates data from the earlier editions and presents an economic freedom index for the 123 countries ranked.
Data on twenty-one variables was gathered for the most recent year (1999). These variables attempt to quantify the restrictions on economic freedom imposed by governments in a variety of areas. A score from 0 to 10 (0 being least free, 10 representing freest) based on the data was assigned to each variable for each country. Principal component analysis was used to attach weights to the component data which ultimately combine to create a summary rating.
Survey data was used to supplement the components of the main index to develop a more comprehensive index of economic freedom in 58 countries and integrates regulatory factors that are difficult to quantify objectively.
The seven major categories of variables included in the index are: (1) size of government, (2) the structure of the economy and use of markets, (3) monetary policy and price stability, (4) freedom to use alternative currencies, (5) legal structure and property rights, (6) freedom to trade with foreigners, and (7) freedom of exchange in capital and financial markets.
This comprehensive index, constructed under the leadership of The Fraser Institute and Nobel Laureate in Economics, Milton Friedman, is the most objective and accurate measure of economic freedom published to date by any organization.
"More than ever, prosperity is about getting the institutions and policies right. This report highlights both the strengths and weaknesses of countries. It indicates key areas where countries need to improve if they are to realize their full potential," concludes Gwartney.
Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver, with offices in Calgary and Toronto.
For further information contact:
Suzanne Walters, Director of Communications,
The Fraser Institute
(604) 714-4582
Email: suzannew@fraserinstitute.ca