Foreign Aid Fails Poor Countries — Economic Freedom is Key

New report shows strong relationship between economic freedom and human development indicators

September 7, 2006

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WASHINGTON—Economic freedom has a greater impact than foreign aid in helping people in poor nations escape poverty, according to the Economic Freedom of the World: 2006 Annual Report, released today by the Cato Institute in conjunction with the Fraser Institute of Canada.

In new research published in this year’s report, economist William Easterly of New York University compares the impact of economic freedom and foreign aid on economic growth in the poorest nations. Demonstrating that foreign aid has no positive impact on economic growth in the poorest nations, Easterly’s research shows that economic freedom has a positive impact on prosperity and helping lift nations out of poverty.

Once greater economic freedom is taken into account, poor nations, far from being caught in a “poverty trap,” grow faster than rich nations. “What the research in this edition of Economic Freedom of the World suggests is that economic freedom, rather than foreign aid, does have a powerful positive impact and is a better approach,” says co-author of the report, James Gwartney, professor of economics at Florida State University.

“Economic freedom is unambiguously good for the poor, not just in terms of incomes, but also in terms of the whole range of development indicators such as longevity, access to clean water, or the extent of child labor,” states Ian Vásquez, director of the Cato Institute’s Project on Global Economic Liberty.

In this year’s index, Hong Kong retains the highest rating for economic freedom, 8.7 out of 10, followed by Singapore at 8.5. New Zealand, Switzerland, and the United States tied for third with ratings of 8.2. The United Kingdom and Ireland are tied for the 6th   place, Canada ranks 8th, and Iceland and Luxembourg are tied for 9th place.  The rankings of other large economies are Germany, 17; Japan, 19; France, 24; Italy, 45; Mexico, 60; India, 53; China, 95; Brazil, 88; and Russia, 102. Chile ranks as the freest economy in Latin America (20), while Botswana ranks as the freest economy in Africa (35).

Nations that have made substantial gains in economic freedom since 1985 are Hungary, Iceland, El Salvador, Zambia, Poland, Bolivia, Israel, Ghana, Uganda, Peru, and Nicaragua. Nations that have registered significant losses in economic freedom since 1985 are Myanmar, Venezuela, and Zimbabwe. The bottom ten nations were the Central African Republic, Rwanda, Burundi, Algeria, Guinea-Bissau, Venezuela, Democratic Republic of Congo, Republic of Congo, Myanmar, and Zimbabwe.

Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property.

The first Economic Freedom of the World Report, published in 1996, was the result of a decade of research by a team which included several Nobel Laureates and over 60 other leading scholars in a broad range of fields, from economics to political science, and from law to philosophy. This is the 10th edition of Economic Freedom of the World. This year’s publication ranks 130 nations for 2004, the most recent year for which data are available.

The report can be found at: http://www.cato.org/pubs/efw/