U.S. Is World’s Sixth-freest Economy, Yearly Study Says

September 14, 2009

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WASHINGTON — The United States is the sixth-freest economy in the world, according to yearly rankings released today by the Cato Institute and the Canada-based Fraser Institute.

The same report concludes that economic freedom worldwide will decline in the short term, as governments move to respond to the global recession with new spending measures and regulations.

The U.S.’s overall freedom score changed negligibly compared to last year, according to the criteria used by the annual Economic Freedom of the World. But the U.S. trend this decade has been one of steady decline in economic freedom, with the United States having ranked second freest economy in the world in the year 2000. The decline has occurred because of a deterioration in the legal and property rights score and because of increases in government spending and regulation.

Hong Kong retained the top spot as the world’s freest economy, a position it has held since the report was first issued in the mid-1990s.

“The report’s findings — that economic freedom is strongly related to prosperity, growth and improvements in human well-being — are especially important at time when countries around the world are making changes in spending and regulatory policies that affect the long term,” said Ian Vasquez, director of the Cato Institute’s Center for Global Liberty and Prosperity.

This year’s report also includes new research that examines the likely impact of the global recession on levels of economic freedom. It suggests that the short-term response of governments to the global economic downturn will almost certainly reduce economic freedom, but that this need not be the case over a longer time frame. Jakob de Haan, Jan-Egbert Sturm, and Eelco Zandberg show that several countries that have experienced financial crises have moved toward greater economic freedom in subsequent years.

The study looked at banking turmoil that took place in Norway and Sweden during the 1990s and found that although economic freedom may decline in the short term in response to crises, over a longer time, economic freedom had a tendency to increase after a banking emergency. In the case of Norway and Sweden, the banking crisis did not distract these countries from continuing with their market-based reform policies

The Economic Freedom of the World report uses 42 different measures to create an index ranking countries around the world based on policies that encourage economic freedom. Economic freedom is measured in five different areas: (1) size of government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labor and business.  The 2009 report ranks 141 nations representing 95 percent of the world’s population using data from 2007, the most recent year for which comprehensive data available.                                                                                                            

In this year’s main index, Hong Kong’s rating for economic freedom is 8.97 out of 10. The other top scorers are: Singapore (8.66), New Zealand (8.30), Switzerland (8.19), Chile (8.14), United States (8.06), Ireland (7.98), Canada (7.91), Australia tied with the United Kingdom (7.89), and Estonia (7.81).

Several countries have substantially increased their ratings and improved their relative levels of economic freedom during the past decade. Estonia has increased by nearly 2.0 since 1995 and it is now one of the freest economies in the world, ranking 11th overall. Lithuania and Latvia have increased their ratings by similar magnitudes since 1995 and their 2007 ratings are now greater than 7.0. The ratings of Cyprus, Hungary, Kuwait, and Korea have also improved substantially and their ratings are now 7.25 or more. Two African economies, Ghana and Zambia, have become substantially freer with ratings of 6.97 and 7.16, respectively.

But not all of the news is good. Economic freedom is regressing in several other countries. The rating of Zimbabwe has fallen by 3.18 while Argentina has declined by 0.80 since 1995. During the same period, the ratings for Malaysia and the Philippines have also fallen. Since 2000, the rating of Venezuela has declined by more than 1.5, down to 4.07. During the same period, Nepal’s rating dropped to 5.18 from 5.62.

Economic Freedom of the World: 2009 Annual Report is authored by Professor James Gwartney, who holds the Gus A. Stavros Eminent Scholar Chair at Florida State University, and Robert Lawson, Associate Professor of Finance at Auburn University.