News Release

April 19, 2001

Cato Institute issues fifth report on global economic freedom
Hong Kong remains in first place; United States slips to fifth

WASHINGTON-Hong Kong is still the world's freest economy, with Singapore coming a close second, according to the Economic Freedom of the World: 2001 Annual Report. But the United States has dropped from fourth to fifth position, according to the study, which is a comprehensive rating of 123 of the world's economies.

The Economic Freedom of the World Report is an annual project started with the help of Nobel laureate Milton Friedman. The report uses 21 objective criteria to produce an economic freedom index of the world, published by the Cato Institute, Canada's Fraser Institute and institutes from 50 other countries.

According to authors James Gwartney and Robert Lawson, the core ingredients of economic freedom are "personal choice, protection of private property, and freedom of exchange." After compiling the economic freedom index, they compared the data with various indicators of social progress. The result: more freedom translates into less poverty, faster economic growth, and higher scores on the United Nations Human Development Index.

"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 Gwartney.

How did they do?

The rankings of other major economies include Canada (13th), Germany (15th), Japan (20th), France (34th), Taiwan (38th), Mexico (62nd), and India (92nd). Among the lowest ranking countries were Myanmar (123rd), Algeria (122nd) and Sierra Leone (119th).

Also in the bottom 10 was Russia, which ranked 117th, just above Romania. As a post-communist country, Russia did considerably worse than communist China, which came in 81st.

"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," says Gwartney.

This year, the authors added several new features to the report, including a more comprehensive index of economic freedom and a Trade Openness Index.

Comprehensive index

The Comprehensive Index examines 58 countries in more detail. It integrates a number of new factors into the analysis in seven major areas: size of government; security of property rights; access to sound money; freedom to trade with foreigners; regulation of capital and financial markets; regulation of labor markets; and freedom to operate and compete in business.

In the Comprehensive Index, Hong Kong retains its No.1 position. Singapore is ranked second, with the United States just below in third place. The United Kingdom, which ranked above the United States in the main index, places fifth in the comprehensive index.

Western European countries ranked high in all areas except size of government and labor market regulation. Former socialist countries and much of Latin America ranked poorly in terms of excessive business regulation and quality of their legal systems.

Six of the 11 lowest-ranked countries were socialist or former socialist countries. Eight of the 11 highest-ranked countries inherited their institutional framework from the British. According to the authors, "this suggests that British common law and other English institutions are highly supportive of economic freedom."

Trade Openness Index

The Trade Openness Index is another new feature that was created to investigate the link between freedom to trade and wealth. Economic theory says that open economies will derive more output from their domestic resources, be more innovative and dynamic, and have a greater incentive to choose policies more consistent with investment and growth. Economies that are open over lengthy time periods should therefore achieve more rapid growth rates and higher levels of per-capita GDP than those which are persistently closed.

Using data from 1980 to 1998, the report's authors tested this theory. The result: "Persistently open economies have grown more rapidly than those with trade sectors that are more closed," the authors say. "This is true even after accounting for the effects of other factors such as price level instability and quality of legal system."

The index they created from the most recent data is revealing. Hong Kong and Singapore once again top the list. Several ex-communist countries do well, including Lithuania (19th), the Czech Republic (10th) and Estonia (3rd). And Europe does particularly well in the trade index: only five of the top 15 countries (Hong Kong, Singapore, Costa Rica, South Korea and Nicaragua) are non-European.

The complete text of Economic Freedom of the World: 2001 Annual Report is available by calling Paul Benjamin at 202-789-5263. It is also available online at www.cato.org/economicfreedom.

James Gwartney is a professor of economics at Florida State University and an adjunct scholar at the Cato Institute. Robert Lawson is an associate professor of economics at Capital University in Columbus, Ohio.

"Economic Freedom of the World Annual Report 2001"

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