Economic Freedom Breeds Prosperity

September 17, 2007 • Commentary
This article appeared in Caijing on September 17, 2007.

The key lesson from Hong Kong’s “small government, big market” model of development is that economic freedom is the best path toward sustainable development, understood as increasing the range of choices open to people. In the latest Economic Freedom of the World (EFW) report, Hong Kong continues to be number one, with a score of 8.9 out of 10.

The ability of Hong Kong to maintain its free‐​market system and its number one ranking for the 11th consecutive year is testimony to its people’s desire to expand their opportunities by adhering to an open trading system, low taxes, sound money, minimal government regulation, and the rule of law.

As a Special Administrative Region after 1997, Hong Kong has continued to prosper by protecting property rights and limiting the size of government. To its credit, the Mainland has honored its pledge not to intervene with Hong Kong’s system of market liberalism — the success of which no doubt influenced China to liberalize its own system. The booming Greater Pearl River Delta is proof that when people are free to trade and to profit from that trade, entrepreneurs will flourish and new wealth will be created for all to enjoy.

The 2007 EFW report, published by the Fraser Institute in Canada, in conjunction with the Cato Institute in the United States and other members of the Economic Freedom Network, ranked 141 countries based on the relative size of government, the security of property rights, the soundness of money, the openness of trade, and the regulatory regime. Because of lags in the extensive data series used, the 2007 report is for economic freedom as measured in 2005. Singapore, with a score of 8.8, is a close second to Hong Kong, followed by New Zealand (8.5), Switzerland (8.3), and the US, UK, and Canada — all tied for fifth place with 8.1.

India the world’s largest democracy ranked 69th, with a score of 6.6. China ranked 86th, with a score of 6.3; Vietnam (6.1) ranked 97th; Russia (5.8) ranked 112th; Zimbabwe, with its total disregard for economic freedom, came in last with a score of 2.9. (North Korea and Cuba were not included.) Most African nations fared poorly, except for Botswana (7.2), which ranked 38th.

In the 1950s most of the world’s poor were concentrated in Asia, now they are in Africa. That reversal of fortune is due in large part to the lack of economic freedom in many African nations while many Asian nations opened up to the outside world and gained from foreign trade and investment.

Real per capita income more than quadrupled in China since 1978, and the Middle Kingdom is now the world’s third largest trading nation. Although China is not yet recognized as a market economy by the United States, most prices now reflect supply and demand, and people’s choices have dramatically expanded. In this sense, China’s EFW score and ranking are somewhat misleading.

Indeed, if one compares the degree of marketization across China, it is evident that the coastal regions (for example, Fujian, Guangdong, and Zhejiang), in which the nonstate sector is dominant, would score much higher on the economic freedom scale than indicated by the countrywide EFW score.

Also, the 2007 EFW report does not take account of the important legal changes that have occurred in China since 2005, especially the new Property Law (“The Real Rights Law”), which the National People’s Congress passed in March and goes into effect on October 1. That law will better protect private property rights and strengthens civil society.

Although China is moving toward a rule of law, corruption is still endemic. If economic freedom is to advance on the Mainland, as it has in Hong Kong, then the first order of business must be to improve the legal system, allow the free flow of information, and develop an independent judiciary to protect people’s rights. Those changes do not necessitate democracy but do require limited government.

Africa is full of examples where democracy has led to unlimited government and the loss of economic and personal freedom. Hong Kong teaches us that limited government along with economic freedom is a recipe for prosperity and a humane society. But who is to choose the leaders and how can they lead without the consent of the people?

About the Author
James A. Dorn

Vice President for Monetary Studies, Senior Fellow, and Editor of Cato Journal