July 2000 Fraser Forum: Free to Solve Environmental Problems

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Laura Jones and Dexter Samida

In 1984, The Fraser Institute began working on an index to quantify objectively the extent of government restrictions on the ability of individuals to engage in economic activity. The index now rates 123 jurisdictions worldwide on 23 indicators of economic freedom for the period 1970 to 1997.1 For the purposes of this index, when economic freedom is present,"individuals are free to make economic choices such as how to use their time and other resources, what goods to consume, and what business and investment alternatives to pursue" (Gwartney and Lawson, 1997, p. 2). In practice, allowing individuals to make their own choices means limiting government involvement in those choices by allowing goods and services to be produced, distributed, and exchanged through markets. In an economically free country, there are only limited controls on a citizen's ability to make his own choices. These controls ensure that the rule of law is maintained and that private property is protected. Of the 123 jurisdictions rated in the index, Hong Kong, Singapore, New Zealand, and the United States come closest to meeting this ideal. On the other end of the spectrum, Sierra Leone, the Democratic Republic of Congo, and Myanmar are among the least free countries in the world.

Is economic freedom broadly desirable? High levels of economic freedom are clearly financially beneficial. Those nations that have maintained institutional structures consistent with economic freedom have experienced higher rates of economic growth and achieved higher levels of income than those countries that have not.2 Countries rated in the top 20 percent on the freedom index have an average per capita GDP of $18,108 ($US) (see figure 1).3 During the 1990s, they experienced an average annual growth in per capita GDP of 2.27 percent (see figure 2). The bottom 20 percent of countries in the index, however, have a much lower standard of living, with an average per capita GDP of just $1,669 ($US). During the 1990s, when the freest countries were growing, the least-free economies actually shrank by an average of 1.32 percent annually.

But despite the evidence that economic freedom can dramatically improve economic conditions, it is far from universally recognized as a worthwhile policy objective. In particular, environmentalists are among the harshest critics of economic freedom. It is the major virtue of freedom - allowing people to make their own choices in markets - which many environmentalists feel is its fatal flaw. According to Michael M'Gonigle, a long time Greenpeace activist, "the market - the very nature of the free market - is inherently anti-environmental. Free trade and the growth mechanism ... we can tag all the environmental caveats [onto them] that we want, but the direction of ever increasing free trade is by its very nature, anti-environmental."4

But are economic freedom and environmental quality really incompatible?

The connection between economic freedom, economic growth and the environment

Freedom allows people to exchange goods and services both domestically and internationally. This, in turn, leads people to specialize in what they are relatively good at producing and trade for what they are not as good at producing. This process of specialization contributes to economic growth. But radical environmentalists see economic growth as the primary enemy in the war to protect the earth from pollution. Their reasoning is simple: if you produce more, you must pollute more.

However, economic progress is not the enemy of environmental progress, but its ally. Rising incomes not only increase the demand for goods and services such as cars, refrigerators, and haircuts, but they also fuel the demand for environmental amenities. This demand gets expressed in a variety of ways, including support for stricter environmental laws, demand for cleaner products, and an increased willingness to donate money to conservation groups. As a result, studies find that once a country reaches a per capita income of around US$8,000, most indicators of pollution have already begun to fall (Grossman and Krueger, p. 370). According to World Bank research, some indicators of environmental quality, such as access to safe drinking water and access to sanitation, improve immediately as incomes increase (World Development Report, pp. 10-11). It is therefore not surprising that freer countries have greater access to both sanitation and safe drinking water (see figure 3 and figure 4). While over 95 percent of people living in the freest countries in the world have access to safe drinking water and sanitation, a quarter of the population in the least free nations lack similar access to these important services. Other indicators of environmental quality also improve as freedom increases. In the freest jurisdictions, nationally protected areas accounted for 12 percent of total land mass, while only 7 percent of total area was protected in the least free nations.5 Deforestation is also occurring at a faster rate in the least free countries than in the most free nations; the percentage of total area deforested is six times greater in the least free nations.

How do these productivity differences translate into environmental benefits? If Canada had the same low level of agriculture productivity as the Central African Republic, a nation with low levels of economic freedom, maintaining the current Canadian cereal yield would require an additional 29,469,936 hectares of production. This is equivalent to 44 Banff National Parks, or an area larger than Italy. The percent of land in Canada devoted to agriculture would rise from 2.1 percent to 5.3 percent. There are also substantial productivity differences in energy use. Figure 6 shows the dollar value of GDP produced by a kilogram of oil equivalent.6 In the freest jurisdictions, $5.42 worth of GDP is produced with each kilogram, while only $1.28 is produced with an equivalent amount of energy in the least free countries. This allows the freest jurisdictions to enjoy an average per capita GDP that is almost 11 times higher than the least free while consuming only 2.6 times as much energy.

Contrary to the opinions of radical environmentalists, the movement of countries from low levels of economic freedom to higher levels is likely to spawn environmental improvements. This is perhaps captured most poignantly in life expectancy statistics. Life expectancy reflects a number of important factors such as access to health care, nutrition, and environmental conditions. As figure 7 indicates, life expectancy is a full 20 years longer in the freest jurisdictions versus the least free. Twenty years can mean the difference between knowing one's grandchildren or not.

1. These indicators include the size of government, maintenance of the rule of law, monetary policy, access to alternative currencies, and restrictions on trade.
2. Several studies have linked economic freedom with income and income growth. For a listing of many of these papers, see http://www.freetheworld.com/papers.html.
3. Income figures refer to 1995, 1996, or 1997. 1997 data are used where available. Dollars are in purchasing power parity terms.
4. Michael M'Gonigle, as quoted in Stephen Dale (1996), McLuhan's Children: The Greenpeace Message and the Media, Toronto: Between the Lines, pp. 5-12.
5. This calculation excludes those areas protected by private individuals and organizations. Including these areas would likely increase the difference between countries with different levels of economic freedom.
6. In order to add oil, natural gas, and coal, the latter two are converted to their "oil equivalent."

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