Commentary

Economic Freedom Needed To Alleviate Poverty Around The World

By Robert A. Lawson
July 3, 2002

Both as an ideology and as a practical system, communism has utterly failed to deliver the goods. Eastern European nations are now rushing to become members of the European Union, and China is undertaking market-oriented reforms. Cuba and North Korea stand as the last remaining communist stalwarts.

One would think that this failure of communist central planning would have unleashed a groundswell of support for its main ideological alternative: economic freedom or market capitalism. But as the anti-globalization protestors in Seattle and at last week’s G8 meeting in Canada demonstrate, economic freedom still has a long way to go to win over the hearts and minds of many people.

These protesters believe that free markets lead to widespread poverty, greater gaps between the rich and the poor, and environmental degradation. Only strong government planning through trade tariffs, expansive welfare states, and strict labor and environmental rules can protect the poor of this world from the ravaging forces of the market. These people are dead wrong.

A new study, co-authored by James Gwartney and myself, was recently released by a consortium of think tanks, which includes the Cato Institute in the United States. This publication, Economic Freedom of the World: 2002 Annual Report, presents an economic freedom index for 123 countries. Based on 37 data components drawn from a multitude of sources, this index measures the degree to which nations are pursing policies consistent with economic freedom or market capitalism. To score highly on this index, a nation should have low government spending and taxes, sound property rights and legal system, sound money, liberal trade policies, and few government regulations. Economic freedom means that each individual plays the primary role in his economic life, not the government or central plan.

The most economically free nation in the world remains Hong Kong followed by Singapore and the United States. The rankings of other major economies are the United Kingdom (4th), Canada (8th), Germany (15th), Japan (24th) Taiwan (30th), France (38th), Mexico (66th), and India (73rd). Most of the lowest ranked nations are in Africa and Latin America. Botswana has the best record for an African nation, tied for 38th with six other nations including France and South Korea. Chile, with the best record in Latin America, was tied with three other nations at 15th. Three former communist countries are in the bottom 10: Russia (116th), Ukraine (119th), and Romania (114th) all did worse than communist China (101st). Data for North Korea and Cuba are not available.

The study also shows that economic freedom is strongly linked with both higher levels of income and faster rates of economic growth. The people living in the top one-fifth of the most free countries enjoy an average income of $23,450 and a growth rate in the 1990s of 2.56 percent per year; in contrast, the bottom one-fifth in the rankings had an average income of just $2,556 and a -0.85 percent growth rate in the 1990s.

That economic freedom leads to more and faster wealth creation is no longer a controversial argument. But what of the argument that market capitalism leaves the poor behind? In fact, the poor gain a lot from economic freedom. The share of income going to the poorest 10% of the population is completely unrelated to economic freedom. But poor people are much better off with economic freedom. The poorest 10% of the population have an average income of just $728 in the least free countries compared with over $7000 in the most free countries. Simply put, it is much better to be poor in a free, rich country than an unfree, poor country.

Free people live longer too. The life expectancy of people living in the most free nations is fully 20 years longer than for people in the least free countries. This is quite literally the difference between knowing your grandchildren or not.

Other studies confirm that environmental quality is likely to be enhanced as poor countries become wealthy enough, through economic freedom, to invest in environmental amenities like water treatment plants.

People who are concerned about poverty and environmental issues around the globe must realize that economic freedom and the resulting economic prosperity, not oppressive government taxation and regulation, represent the best hope for the poor and the environment alike.

Robert A. Lawson is professor of economics and George H. Moor Chair in the School of Management at Capital University in Ohio. He is co-author of Economic Freedom of the World: 2002 Annual Report, produced jointly by the Fraser Institute and the Cato Institute.