Commentary

Hong Kong: World’s Freest Economy

Since 1970, Hong Kong has ranked as the world’s freest economy. In the just released Economic Freedom of the World, 2004 Annual Report, Hong Kong remains number one. The report, published by The Fraser Institute in conjunction with the Cato Institute and other think tanks around the world, ranks countries on their adherence to a set of policies that measure the degree of economic freedom. Those countries that safeguard property rights, enforce contracts, allow free trade, maintain low marginal tax rates, ensure sound money, and limit the size and scope of government will score well on the Economic Freedom of the World (EFW) index.

Out of a possible score of 10 on the EFW index, Hong Kong achieved 8.7; Singapore came in a close second at 8.6; while New Zealand, Switzerland, Britain, and the United States tied for third with a score of 8.2. (There is a two-year lag in the data, so those scores are for 2002, not 2004.)

Japan, one of the world’s richest economies from past growth, ranked only 36 out of 123 countries, with a score of 7.0; Taiwan placed 22nd, with a score of 7.3; China, the fastest growing economy in the world, ranked 90th with a score of 5.7; while India, another high-growth country, placed 68th, with a score of 6.3; Russia came in at 114th, with a score of 5.0. The lowest scoring countries were the Central African Republic (4.5), the Democratic Republic of Congo (4.4), Zimbabwe (3.4), and Myanmar (2.5). North Korea and Cuba were not ranked because of lack of data.

The authors of the 2004 report, economists James Gwartney and Robert Lawson, construct a “chain-linked” EFW index to allow comparisons over time in a country’s economic freedom rating. In doing so, they find that China has made substantial gains in economic liberalization since 1980 when its economic freedom rating was only 3.8. The increase in economic freedom would be even more impressive, however, if one focused on the coastal provinces, such as Fujian, Guangdong, and Zhejiang, which are highly marketized. Moreover, the current EFW index score of 5.7 does not recognize the liberalization that has occurred in China since 2002, including the recent amendment to the PRC Constitution that gives greater protection to private property rights.

Although China has made considerable progress, it still has a long way to go before it reaches the level of Hong Kong and other top scorers. But at least it is moving in the right direction, unlike Argentina whose rating has gone from 7.2 in 2000 to 5.8 in 2002. Unfortunately, Argentina, which was one of the world’s top industrialized countries prior to World War II, failed to maintain its commitment to free markets and free people. Could the same happen to Hong Kong?

In 1995, Hong Kong’s “chain-linked” EFW rating was 9.1. Since becoming a Special Administrative Region of China in July 1997, Hong Kong’s rating has fallen slightly to 8.7 in both 2000 and 2002. If one were to take account of more recent policy changes, Hong Kong’s rating might actually be lower. In particular, the government has increased in the corporate income tax from 16 percent to 17.5 percent, raised the standard tax rate on personal income from 15.5 percent to 16 percent, and will introduce a sales tax in the next several years. Hong Kong also faces serious political challenges as the mainland delays universal suffrage and more closely monitors activists.

When Hong Kong does achieve democracy, that political watershed could be a curse as well as a blessing. It would be a curse if it allowed voters to use the force of legislation to plunder private property by redistributing it to special interest groups in the name of “social justice.” The expansion of the welfare/regulatory state would endanger both economic and personal freedom in Hong Kong.

James A. Dorn is vice president for academic affairs at the Cato Institute.