May 2001
Economic Freedom of the World 2001
by Michael Walker
When the Economist magazine was reviewing the century in its "End of the Millennium" edition, it returned to a question which has held the fascination of economists and other worldly philosophers for three centuries. That is, why do some nations prosper while others decline? In particular, why does a very large fraction of the world’s population languish in poverty and despair?
The Economist considered a number of possible explanations, including the exploitation model, but concluded that the most fruitful explanation was to be found in a book published annually by The Fraser Institute. The book, the most recent edition of which has just been released in 55 countries, is the Economic Freedom of the World. This volume contains information on 123 countries comprising 91 percent of the world’s population, and it measures the comparative extent to which the countries permit their citizens to engage in capitalist acts.
The top-scoring countries inevitably get most of the attention since most journalists and their readers want to know which country won the race and which were the runners-up. But, as the Economist pointed out, the most interesting entrants are those at the bottom of the ranking, and those that have been doing less well as time passes. Invariably, countries with low levels of economic freedom and with governments that are reducing their comparative level of freedom are also countries experiencing low growth and declining living standards.
Far from being the inevitable result of population pressures or the niggardliness of nature, poor economic performance primarily results from the poor policy choices made by a country’s leaders. The recipe for economic stagnation is clear: impose comparatively high rates of taxation and regulation; stir in an oversized public sector; add a liberal portion of public ownership and regular expropriation of private property; serve on a bed of fluctuating and high rates of inflation. Some industries that are aimed largely at foreign markets may be able to survive this regime, so additional measures are required. To help stamp out any surviving sprouts of affluence, impose high and variable taxes on imports in combination with controls on capital transactions with foreigners, and procedures that make it very difficult to get foreign currency.
Given the compelling evidence that such policies destroy growth and impede economic development, why do governments pursue them? A partial answer can be found in the activities of groups like those who assembled in and around Quebec in April to protest the further elaboration of a hemispheric agreement for the liberalization of trade. While the motives of the demonstrators are wide-ranging, the effect of their efforts, if successful, would be to make it more difficult for citizens in the poorest countries in the hemisphere to trade or to engage in any other economic activities.
Governments in the Americas have been quite successful pursuing the stagnation recipe without the demonstrators’ aid. Brazil, for example, the largest country in America’s southern hemisphere, ranked 96 out of 123 in the Freedom Index, indicating that in most areas of economic endeavour, Brazilians are stymied by their government. Thus, one of the most naturally rich countries in the world bounces from one crisis to another, and millions of people exist in a state of desperation. Is this what the demonstrators had in mind when they sought to impede a trade agreement which might challenge this status quo?
Venezuela, a country that harbours one of the largest stocks of oil outside the Middle East, and one which used to enjoy a level of freedom comparable to Canada’s, ranked 77 out of 123 this year. Persistent efforts by a series of socialist governments has been required to drag this country down to its current torpor. Once ranking in the top 20, Venezuela now challenges Colombia for its spot as the 81st ranked nation.
The consequences of the policies which these Latin American countries pursue are devastating; they are measured in human misery and a decay of future possibilities. The goal of the meeting in Quebec was to develop a vision for enhanced transparency and trade in the region which might begin a process of opening and bring the hope of a better future to the people who live there. Did the demonstrators really want to deny that possibility to the least fortunate citizens of the hemisphere? If not, what alternative proposals do they have?
Those who oppose trade talks might want to peruse Economic Freedom of the World 2001 and its catalogue of the freedom-enhancing policies, including trade liberalization, that have been pursued by successful countries on all the continents—including Latin America.
[Economic Freedom of the World: 2001 Annual Report is available from The Fraser Institute for $48.64 per copy (s/h and GST incl.) Please call 1-800-665-3558 to order.]
Michael Walker (michaelw@fraserinstitute.ca) is Executive Director of The Fraser Institute. He received his Ph.D. in Economics from the University of Western Ontario. He has written, edited, or co-authored many Fraser Institute publications.
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