The level of economic freedom in the world dipped slightly in 2009 according to the 16th annual Index of Economic Freedom, released by The Heritage Foundation and The Wall Street Journal. One reason: To help ward off recession, many governments launched unsuccessful attempts to spend their way to prosperity.
The average economic freedom score for the 2010 Index is 59.4 (on a scale in which 100 represents the ideal), down 0.1 point from 2009. This is only the second time in the history of the Index that average scores for countries measured in successive years have declined.
"Our confidence in economic freedom is being tested," notes Heritage President Edwin Feulner in the book's preface. Indeed, led by the United States, governments in many developed countries stepped up spending aimed at promoting growth and employment. Yet, "the early evidence is that such spending did not work," the Index editors write.
Hong Kong and Singapore finished 1st and 2nd in the rankings for the 16th straight year. With Australia in 3rd place and New Zealand moving up to number 4, the Asia-Pacific region boasts a clean sweep at the top.
Europe registered three top 10 placements: Ireland, Denmark and Switzerland. As a cautionary tale about the dangers of government intervention, the United Kingdom dropped out of the top 10 for the first time in Index history. The United States also dropped significantly, to 8th place. Both countries increased government spending, and each lost more than 2.0 points on its Index score.
A number of European economies did well last year. Montenegro improved the most, gaining 5.4 points on the economic freedom scale. Other European countries that posted freedom gains included Macedonia, Croatia, Belarus, Bosnia and Herzegovina, and Poland.
Latin America, on the other hand, fared poorly. Five Latin American or Caribbean countries, including Bolivia, Barbados, Ecuador, the Bahamas and Venezuela, lost significant amounts of economic freedom in 2009.
There's a lesson in the 2010 Index: The global recession did less damage in countries that moved to a higher category of economic freedom and was worse in countries that moved lower. Overall 15 countries changed categories of economic freedom in this year's Index, including the U.S., dropping from "free" to "mostly free."
Overview
"Regrettably, attacks on the free market, fueled by the economic slowdown and the political appeal of quick interventionist remedies, gained strong momentum in some countries, with far-reaching effects," the Index editors write. "Exactly half of the major economies curtailed economic freedom to some degree through various interventionist measures. Perhaps more significant for the long-term progress of economic freedom, the other half did not."
Of the 179 countries graded in this year's Index, only seven scored 80 or higher -- the rating necessary to qualify as having a "free" economy. Another 23 earned 70-79.9 points, ratings that characterize them as "mostly free." Fifty-eight economies are classified as "moderately free" (with scores between 60 and 69.9), while 55 are classified as "mostly unfree" (scores from 50 to 59.9). The remaining 36 economies are classified as "repressed" (scores below 50).
"The 2010 Index provides strong evidence that economic freedom has far-reaching positive impacts on various aspects of human development. Economic freedom correlates with poverty reduction, a variety of desirable social indicators, democratic governance, and environmental sustainability," the editors write.
Economies classified as free or mostly free also do a much better job promoting human development, reducing poverty and protecting the environment. The editors found strong correlations between levels of economic freedom and these economic and social variables.
Regional Differences
Across the six regions, North America is the most economically free, with an average score of 75.6. Europe follows at 66.8. Next is the Middle East/North Africa region at 60.4. The South and Central America/Caribbean region came in at 59.7, while the Asia-Pacific and Sub-Saharan Africa regions trailed with average ratings of 57.0 and 52.9, respectively.
Asia-Pacific
Asia remains the world's most economically mixed region, home to some of the freest and the most repressed economies. Hong Kong and Singapore continue to lead the world, along with Australia and New Zealand. Japan (19th) and Macau (20th) earned places in the world's top 30 as well.
Meanwhile, Uzbekistan, Turkmenistan and Burma are classified as "repressed" economies, and North Korea remains the world's least-free economy. In all, 13 economies in the region improved their Index scores from 2009, while 27 declined.
Europe
Nine of the world's 20 freest economies are found in Europe. Ireland is the top regional performer, ranked 5th worldwide. It is followed by Switzerland (6th) and Denmark (9th). The other European economies holding spots in the world's top 20: United Kingdom, Luxembourg, The Netherlands, Estonia, Finland and Iceland.
Despite the recent global financial and economic turmoil, policy improvements including tax cuts and other structural reforms have resulted in overall score improvements in 24 small but reform-minded economies. By contrast, 18 economies, led by the United Kingdom, Ireland, and Iceland, have seen a significant erosion of their economic freedom.
North America
Just three economies comprise the Index region of North America: Canada (7th), Mexico (41th) and the United States (8th). Openness to international trade and investment has helped keep the level of economic freedom high in this region, with the North American Free Trade Agreement (NAFTA) connecting more than 400 million people in an economic area with about one-third of the world's total GDP.
This region has high levels of business freedom, trade freedom, monetary freedom and labor freedom. Weaknesses remain in investment freedom and freedom from corruption, as Mexico lags behind its two northern neighbors in these categories.
South and Central America/Caribbean
Chile (10th) edged back into the top 10 this year, the only regional economy to earn that honor. The South and Central America/Caribbean region's 29 economies enjoy an overall level of economic freedom slightly higher than the global average of 59.4.
Yet the editors warn that a "newly packaged but really old fashioned authoritarianism, backed by the oil revenue of an increasingly anti-democratic Venezuela, increases the risk, especially in the poorer countries of Central America or the smaller islands of the Caribbean, that economic freedom and long-term prosperity could be sacrificed for short-term payoffs and political expediency."
The Middle East and North Africa
Most economies in this region are not free. Its overall economic freedom has increased by 0.4 point since the 2009 Index, yet many of its economies remain only "moderately free" or "mostly unfree."
Bahrain (13th), the only Middle East/North Africa economy to land in the top 20, raised its overall Index score by 1.5 points. Qatar (39th) logged a greater improvement (3.2 points).
Sub-Saharan Africa
The Sub-Saharan Africa region continues to be characterized primarily by poverty and instability. In this region, a majority of nations in the region are ranked either "mostly unfree" (with scores between 50 and 60) or "repressed" (with scores below 50).
Mauritius (12th) remains a rare success story. It boosted its score by 2.0 points. At the other end of the scale, Eritrea recorded the region's biggest overall score reduction and Zimbabwe's economy has continued to crumble under the tyrannical and oppressive rule of Robert Mugabe.
The Index measures economic freedom within 10 specific categories: labor freedom, business freedom, trade freedom, fiscal freedom, government spending, monetary freedom, investment freedom, financial freedom, property rights and freedom from corruption. Scores in these categories are averaged to create an overall score.
The 2010 Index was edited by Ambassador Terry Miller, Director of Heritage's Center for International Trade and Economics, and Dr. Kim Holmes, Heritage's Vice President for foreign affairs. Copies of the 2010 Index (485 pp., $24.95) can be ordered at www.heritage.org/index or by calling 1-800-975-8625.
About The Wall Street Journal
Founded in 1889, The Wall Street Journal is the world's leading business publication. Boasting more than two million subscribers, the Journal is the largest newspaper by total paid circulation and has the largest individually paid circulation of the top 25 U.S. newspapers. The Wall Street Journal franchise, with a global audience of 3.8 million, also comprises The Wall Street Journal Asia, The Wall Street Journal Europe and The Wall Street Journal Online at WSJ.com, the leading provider of business and financial news and analysis on the Web with more than one million subscribers and 26 million users per month. WSJ.com is the flagship site of The Wall Street Journal Digital Network, which also includes MarketWatch.com, Barrons.com and AllThingsD.com. The Wall Street Journal Radio Network services news and information to more than 375 radio stations in the U.S. The Journal holds 33 Pulitzer Prizes for outstanding journalism, and, in 2009, was ranked No. 1 in BtoB's Media Power 50 for the 10th consecutive year.
About The Heritage Foundation
The Heritage Foundation is the nation's most broadly supported public policy research institute, with more than 582,000 individual, foundation and corporate donors. Founded in 1973, Heritage now has a staff of 244 and an expense budget of $61 million.
The Heritage Foundation
CONTACT: U.S. Contacts: Jim Weidman, +1-202-675-1761,jim.weidman@heritage.org, or Robert Christie, +1-212-416-2636,robert.christie@dowjones.com, Europe Contact: Kate Dobbin, +44 207 8429684, kate.dobbin@dowjones.com, Asia Contact: James Yang, +86 1391 0112759, james.yang@dowjones.com, all for The Heritage Foundation
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