Economic Freedom Is “Contagious”

Hong Kong remains first in economic freedom; U.S. ties for fifth place

September 4, 2007

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 WASHINGTON—Economic freedom in one country can spread to another and when neighboring countries implement simultaneous reforms to encourage economic freedom the impact is broader, according to the Economic Freedom of the World: 2007 Annual Report, released today by the Cato Institute in conjunction with Canada’s Fraser Institute.

“Countries ‘catch’ about 20% of their average geographic neighbors’ and trading partners’ levels of, and changes in, economic freedom,” reveals new research by contributing authors Russell S. Sobel of West Virginia University and Peter T. Leeson of the Mercatus Center at George Mason University.

These findings included in a study in the yearly report shed light on the “domino theory” that guided U.S. foreign policy during the Cold War and has been cited by President George W. Bush as one of the principles influencing his intervention in Iraq. According to Mr. Bush, a post-Saddam Iraq “would serve as a dramatic and inspiring example for other nations in the region.” 

However, when it comes to economic freedom the authors provide a caution, arguing that while economic freedom can spread from country to country it does not do so “as strongly as might be suggested by the emphasis this idea has been given in U.S. foreign policy.” 

Using spatial econometric models, the study’s authors concluded that “while changes in the economic freedom in one country have only a modest impact on neighboring countries, when multiple neighbors experience simultaneous changes in economic freedom, the impact is much greater. Thus broad regional changes in freedom can and do have significant impacts on surrounding countries.”

The annual peer-reviewed report uses 42 different measures to create an index ranking countries around the world based on policies that encourage economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange of goods and services, freedom to compete and security of privately owned property. The lead authors of the overall report are James D. Gwartney, Professor of Economics at Florida State University, and Robert A. Lawson, Professor of Economics at Capital University in Columbus, Ohio. 

Countries’ economic freedom scores are telling as the report has found that nations that are economically free out-perform non-free nations in indicators of well-being.

“Weakness in the rule of law and property rights is particularly pronounced in sub-Saharan Africa, in many parts of the Middle East, and for several nations that were part of the former Soviet bloc although some of these nations have shown improvement,” said James Gwartney.

“At a time when countries around the world are experiencing high growth, this report is a strong reminder that to achieve and sustain high living standards over the long term requires the protection of property rights and personal choice,” said Ian Vasquez, director of Cato’s Center for Global Liberty and Prosperity.

Hong Kong maintains the first place in economic freedom with a score of 8.9 out of 10. The other top six scores are: Singapore (8.8), New Zealand (8.5), Switzerland (8.3), Canada (8.1), United Kingdom (8.1), United States (8.1), Estonia (8.0), Australia (7.9), and Ireland (7.9).

On the opposite end of the scale, the majority of nations ranked in the bottom ten are African with the exception of Venezuela and Myanmar. These are: Zimbabwe (2.9), Myanmar (3.8), the Democratic Republic of Congo (4.0), Angola (4.2), the Republic of Congo (4.3), Central Africa Republic (4.6), Venezuela (4.9), Burundi (5.0), Chad (5.1), and Niger (5.1).

In Latin America, the countries with the highest economic freedom rankings are Chile (11 out of 141) and El Salvador (18). In continental Africa, Botswana had the highest ranking (38).

The first Economic Freedom of the World Report was published in 1996. It was the result of a decade of research by a team that included several Nobel Laureates and over 60 leading scholars in a broad range of fields.

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