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Posts Tagged ‘Economic Rankings’

Since I’ve been writing a column every day since 2010, you can imagine that there are some days where that’s a challenge.

But not today. The Fraser Institute has released a new edition of Economic Freedom of the World, which is like a bible for policy wonks. So just like last year, and the year before, and the year before, and so on (you may sense a pattern), I want to share the findings.

First, here’s what EFW measures.

The cornerstones of economic freedom are personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights. …The EFW measure might be thought of as a measure of the degree to which scarce resources are allocated by personal choices coordinated by markets rather than centralized planning directed by the political process. It might also be thought of as an effort to identify how closely the institutions and policies of a country correspond with the ideal of a limited government, where the government protects property rights and arranges for the provision of a limited set of “public goods” such as national defense and access to money of sound value, but little beyond these core functions.

Now let’s get to the good stuff.

Unsurprisingly, Hong Kong is at the top of the rankings, followed closely by Singapore. Those jurisdictions have been #1 and #2 in the rankings every year this century.

The rest of the top 5 is the same as last year, featuring New Zealand, Switzerland, and Ireland.

The good news for Americans is that we’re back in the top 10, ranking #6.

Here’s what the report says about the United States.

…the United States returned to the top 10 in 2016 after an absence of several years. During the 2009–2016 term of President Obama, the US score initially continued to decline as it had under President Bush. From 2013 to 2016, however, the US rating increased from 7.74 to 8.03. This is still well below the high-water mark of 8.62 in 2000 at the end of the Clinton presidency.

It’s important to understand that the improvement in the U.S. score has nothing to do with Trump. The EFW ranking is based on America’s economic policies as of 2016 (there’s always a lag in getting hard data).

President Trump’s policies may increase America’s score (think taxes and regulation) or they may decrease America’s score (think trade and spending). But we won’t know for sure until we see future editions.

Here’s what’s happened to economic liberty in America between 1970 and 2016.

As you can see from the historical data, the U.S. enjoyed progress through the Reagan and Clinton years, followed by decline during the Bush years and early Obama years. But we’ve trending in the right direction since 2013.

Let’s look at other nations that get decent scores.

Here are the other nations that are in the top quartile.

Canada and Australia were tied for #10, so the rest of the rankings start with the under-appreciated success story of Taiwan at #12.

All the Baltic nations do well, especially Estonia and Lithuania. Chile also remains highly ranked, as is the supposedly socialist nation of Denmark.

Luxembourg, which was ranked #1 as recently as 1985, is now #25.

I also noticed that Rwanda (#40) has eased past Botswana (#44) to become the highest-ranked nation in Sub-Saharan Africa.

By the way, I’m not going to bother showing the bottom nations, but nobody should be surprised to learn that Venezuela is in last place.

Though that may simply be because there’s isn’t adequate data to include North Korea and Cuba.

Let’s close by including a chart that hopefully will show why economic liberty is important.

Simply stated, people enjoy much higher living standards in nations with free markets and small government. Conversely, people living under statist regimes suffer from poverty and deprivation.

The bottom line is that Economic Freedom of the World shows the recipe for growth and prosperity.

Sadly, very few nations follow the instructions because economic liberty is not in the interests of politicians.

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Whether I’m writing about a rich country or a poor country, my research starts with a visit to Economic Freedom of the World. Published by the Fraser Institute in Canada, EFW uses five major factors (fiscal, regulatory, monetary, trade, and quality of governance) to rank nations based on the overall amount of economic liberty.

The rankings go as far back as 1970, so you can see how a country has changed over time (and the good news is that scores have improved in most nations).

Today, let’s look at a history of the freest nations. We’ll start with the table from 1970.

Unsurprisingly, Hong Kong was at the very top. But who would have guessed that Luxembourg would be second? Canada ranked #3 and the United States was in 4th place, followed by Japan and four European nations.

Perhaps the most shocking bit of news is that Venezuela was ranked #10.

All the more reason that Venezuela’s last-place status in the most-recent edition is so depressing. That must be a record for the biggest-ever decline for a country.

If we look at the data for 1975, 1980, and 1985. Luxembourg continues to get very high scores, along with Hong Kong and the United States.

Panama and Guatemala ranked amazingly high in 1975, while the United Kingdom finally appears in 1985 (thanks to Margaret Thatcher’s reforms).

Here’s the data for 1990, 1995, and 2000. You’ll notice that New Zealand and Australia enter the top 10 while Luxembourg begins to drop (at least relatively speaking) and Singapore begins to climb.

Now let’s look at what has happened this century.

Hong Kong and Singapore have a lock on the top-two slots, with New Zealand and Switzerland controlling the third and fourth positions. Luxembourg, meanwhile, has vanished.

In 2010 and 2015, we see some nations appear from the developing world and the post-communist world. Most notably, Chile, Estonia, and Georgia.

For a policy wonk, these are fascinating numbers. I enjoy looking how relative rankings have changed, as well as what’s happening to absolute scores.

It’s such good source of data that I’ve always wished there were pre-1970 numbers as well.

Well, my wish has been granted. Ryan Murphy and Robert Lawson, two of the scholars who put together Economic Freedom or the World, have cranked out estimates for the entire post-World War II era.

Based on their retroactive assessment, they show that the United States had the world’s freest economy back in 1950.

Switzerland was in second place, followed by a bunch of European and Anglosphere nations.

If you want to understand why Luxembourg, Belgium, Norway, and Sweden are rich today, notice that they have a history of being among the world’s most pro-market nations.

Incidentally, due to inadequate data, Singapore wasn’t included in the retroactive data until 1960 and Hong Kong is complete absent from this historical dataset.

We don’t have top-10 lists for the other years, but the authors shared a table with all their numbers, so I created my own versions for 1955, 1960, and 1965.

As you can see, congratulations to Switzerland and Luxembourg (twice). The United States and Canada get very high marks. And Belgium and the Netherlands get good scores as well.

There are so many implications to this data, but I’ll close with three simple observations.

  • First, these numbers help to explain why Europe is a relatively rich continent. European nations traditionally have dominated the top-10 rankings. It’s not a good continent for fiscal policy, but those countries dominate the scores in other policy areas.
  • Second, you can fall behind by standing still. If you take a close look at data for Luxembourg, Belgium, and the Netherlands, you’ll notice their absolute scores haven’t really changed. But all of those nations have dropped out of the top 10 because other countries improved.
  • Third, global economic liberty is increasing. The top scores in the 1950s and 1960s wouldn’t get a country into the top 10 this century.

P.S. A Spanish academic also has produced some very interesting historical estimates for economic freedom, but his numbers are only averages for western nations.

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My favorite annual publication is the Fraser Institute’s Economic Freedom of the World, which measures the amount of economic liberty that exists in 159 nations. The rankings are based on five equally weighted categories, though I’ve always viewed “Legal System and Property Rights” as being the most important because even low taxes and light regulation won’t produce much growth if investors and entrepreneurs have no faith in the rule of law or the quality of governance.

This is why the annual International Property Rights Index is another one of my favorite publications. It provides a detailed look at why the right to own, utilize, and trade property is essential to a free society.

Property rights are accepted as a linchpin for human beings’ liberty, acting as a catalyst for economic and societal growth , and as a defense against authoritarian temptations. …Property is the basis of the freedom to contract, which is simply liberty in action. Without freedom to exchange, a third party, generally the government, intervenes through the political-bureaucratic ruling class. Freedom is more than the right to own property or the right to make transactions, to exchange, to buy and sell. Once citizens lose the right to own, they lose the ability to control their own lives. …This Index was developed to serve as a barometer of the state of property rights in all countries of the world.

Here’s the methodology of the Index. There are three main categories, each of which is comprised of several indices.

Now let’s get to the rankings.

As you might expect, Nordic nations and Anglosphere jurisdictions dominate, along with a smattering of other European countries.

…the top 15 countries for this year’s IPRI edition. Finland leads the 2018 IPRI (8.6924)… New Zealand ranks second (8.6322)… Next come Switzerland (8.6183), Norway (8.4504), Singapore (8.4049), Sweden (8.3970), Australia (8.3295), Netherlands (8.3252), Luxembourg (8.2978), Canada (8.2947), Japan (8.2315), Denmark (8.1640), United Kingdom (8.1413), United States of America (8.1243), and Austria (8.0050).

Congratulations to Finland, New Zealand, and Switzerland for winning the gold, silver, and bronze medals.

If you peruse the full rankings below, you’ll see that the United States is #14 (the same as last year).

Haiti is in last place, below even Venezuela.

It’s also worth noting that Chile is the highest-ranked Latin American nation.

Now let’s look at the nations with the biggest movement in the right direction and wrong direction. It’s easy to make a big jump for nations that are ranked very low, so Cyprus (which is now near the top of the 3rd quintile) probably deserves the most applause.

This year, five countries show the highest absolute improvement in their IPRI score: Azerbaijan (1.09), Ukraine (0.86), Russia (0.85), Moldova (0.82), and Cyprus (0.79); while the ones with highest decreases in their 2018 IPRI scores were South Africa (-0.65), Ethiopia (-0.3), Liberia (-0.27), Uganda (-0.25), and Uruguay (-0.22).

And South Africa’s decline is very tragic since it historically has been one of the best African nations.

By the way, if you want to know why property rights are so important, this chart is all the evidence you need.

And we’ll close today’s column with a bit of good news.

We don’t have decades of data, but the numbers that do exist show continuous improvement.

And since we also have evidence that overall global economic liberty is increasing, there are reasons for optimism.

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Move over, Crazy Bernie, you’re no longer the left’s heartthrob. You’ve been replaced by Alexandria Ocasio-Cortez, an out-of-the-closet socialist from New York City who will enter Congress next January after beating a member of the Democratic leadership.

Referring to the boomlet she’s created, I’ve already written about why young people are deluded if they think bigger government is the answer, and I also pointed out that Norway is hardly a role model for “Democratic socialism.”

And in this brief snippet, I also pointed out she’s wrong to think that you can reduce corporate cronyism by giving government even more power over the economy.

But there’s a much bigger, more important, point to make.

Ms. Ocasio-Cortez wants a radical expansion in the size of the federal government. But, as noted in the Washington Examiner, she has no idea how to pay for it.

Consider…how she responded this week when she was asked on “The Daily Show” to explain how she intends to pay for her Democratic Socialism-friendly policies, including her Medicare for All agenda. “If people pay their fair share,” Ocasio-Cortez responded, “if corporations paid — if we reverse the tax bill, raised our corporate tax rate to 28 percent … if we do those two things and also close some of those loopholes, that’s $2 trillion right there. That’s $2 trillion in ten years.” She should probably confer with Democratic Socialist-in-arms Sen. Bernie Sanders, I-Vt., whose most optimistic projections ($1.38 trillion per year) place the cost of Medicare for All at roughly $14 trillion over a ten-year period. Two trillion in ten years obviously puts Ocasio-Cortez a long way away from realistically financing a Medicare for All program, which is why she also proposes carbon taxes. How much she expects to raise from this tax she didn’t say.

To be fair, Bernie Sanders also didn’t have a good answer when asked how he would pay for all the handouts he advocated.

To help her out, some folks on the left have suggested alternative ways of answering the question about financing.

I used to play basketball with Chris Hayes of MSNBC. He’s a very good player (far better than me, though that’s a low bar to clear), but I don’t think he scores many points with this answer.

Indeed, Professor Glenn Reynolds of the University of Tennessee Law School required only seven words to point out the essential flaw in Hayes’ approach.

Simply stated, there’s no guarantee that a rich country will always stay rich.

I wrote earlier this month about the importance of long-run economic growth and pointed out that the United States would be almost as poor as Mexico today if growth was just one-percentage point less every year starting in 1895.

That was just a hypothetical exercise.

There are some very sobering real-world examples. For instance, Nima Sanandaji pointed out this his country of Sweden used to be the world’s 4th-richest nation. But it has slipped in the rankings ever since the welfare state was imposed.

Venezuela is another case study, as Glenn Reynolds noted.

Indeed, according to NationMaster, it was the world’s 4th-richest country, based on per-capita GDP, in 1950.

For what it’s worth, I’m not familiar with this source, so I’m not sure I trust the numbers. Or maybe Venezuela ranked artificially high because of oil production.

But even if one uses the Maddison database, Venezuela was ranked about #30 in 1950, which is still impressive.

Today, of course, Venezuela is ranked much lower. Decades of bad policy have led to decades of sub-par economic performance. And as Venezuela stagnated, other nations become richer.

So Glenn’s point hits the nail on the head. A relatively rich nation became a relatively poor nation. Why? Because it adopted the statist policies favored by Bernie Sanders and Alexandria Ocasio-Cortez.

I want to conclude, though, with an even better example.

More than seven years ago, I pointed out that Argentina used to be one of the world’s richest nations, ranking as high as #10 in the 1930s and 1940s (see chart to right).

Sadly, decades of Peronist policies exacted a heavy toll, which dropped Argentina to about #45 in 2008.

Well, I just checked the latest Maddison numbers and Argentina is now down to #62. I was too lazy to re-crunch all the numbers, so you’ll have to be satisfied with modifications to my 2011 chart.

The reverse is true as well. There are many nations that used to be poor, but now are rich thanks to the right kind of policies.

The bottom line is that no country is destined to be rich and no country is doomed to poverty. It’s simply a question of whether they follow the right recipe for growth and prosperity.

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What’s the best argument against statism?

As a libertarian, my answer is that freedom is preferable to coercion. Freedom also ranks higher than prosperity. For instance, the government might be able to boost economic output by requiring people to work seven days a week, but such a policy would be odious and indefensible.

As an economist, I have a more utilitarian perspective. The best argument against statism is that it simply doesn’t work. Nations with bigger government and more intervention routinely under-perform compared to otherwise-similar countries with small government and free markets.

That’s why I often present my leftist friends with my two-question challenge. I ask them to name a country, anywhere on the planet and at any point in history, that either become rich with statist policies or has experienced superior levels of growth with statist policies.

They never have an answer. Or, to be more specific, they never have an accurate answer since Sweden (their reflex response) became rich when government was small and has stumbled ever since a large welfare state was imposed.

And if they are willing to have an extended discussion, my next step is to compare the long-run performance of market-friendly jurisdictions with statist jurisdictions. Whether we’re looking at Chile vs. Venezuela, North Korea vs. South Korea, or Hong Kong vs. Argentina, the results always show that economic liberty is the recipe for growth and prosperity.

When I ask them to show a statist nation with decades of good results, they don’t have an answer. Or, to be more specific, they never have an accurate answer since China (their reflex response) only started to grow once the economy was partially liberalized.

I’m pontificating on this topic because a reader sent me this very stark contrast between market-friendly Botswana and the statist hellhole of Zimbabwe. I can’t vouch for the specific numbers, though it appears some of them are from the Heritage Foundation’s Index of Economic Freedom.

The obvious lesson is that good policy is producing vastly superior results in Botswana.

But I wanted independent confirmation since not everything one sees on the Internet is true (shocking!).

So I checked Human Progress, the invaluable data portal created by Marian Tupy, and downloaded more than 50 years of data for inflation-adjusted ($2010) per-capita GDP in Botswana, Zimbabwe, and South Africa.

The results, to put it mildly, are stunning. Botswana has enjoyed much faster growth than South Africa and Zimbabwe has suffered horrible stagnation.

South Africa’s anemic performance doesn’t surprise me.

And I guess the gap between Botswana and Zimbabwe shouldn’t surprise me, either. After all, Marian wrote about the difference between Botswana and Zimbabwe back in 2008.

How different, I thought, was Zimbabwe from Botswana, the latter of which is safe and increasingly prosperous. But what accounts for such striking differences between the two neighbors? It turns out that much of the difference stems from the degree of freedom that each populace enjoys.

Here’s some of what he wrote about Botswana.

As Robert Guest of The Economist noted in his 2004 book, The Shackled Continent, “In the last 35 years, Botswana’s economy has grown faster than any other in the world…” According to Scott Beaulier, an economist at Beloit College, “Khama adopted pro-market policies on a wide front. His new government promised low and stable taxes to mining companies, liberalized trade, increased personal freedoms, and kept marginal income tax rates low to deter tax evasion and corruption.” …Economic openness served Botswana well. Between 1966 and 2006, its average annual compound growth rate of GDP per capita was 7.22 percent — higher than China’s 6.99 percent. Its GDP per capita (adjusted for inflation and purchasing power parity) rose from $671 in 1966 to $10,813 in 2005.

And here are some of his observations about Zimbabwe.

…almost all of the country’s 4,000 white-owned farms were invaded by state-organized gangs. Some of the farmers who resisted the land seizures were murdered, while others fled abroad. …The agricultural sector soon collapsed, and with it most of Zimbabwe’s tax revenue and foreign currency reserves. …the government ordered the Reserve Bank of Zimbabwe (RBZ) to print more money, sparking the first hyperinflation of the 21st century. …Mugabe’s answer to the falling economy was to increase state patronage and the intensity of the looting.

Needless to say, nothing has changed in the decade since that article was published. Though hopefully Mugabe’s recent ouster may lead to better policy in Zimbabwe (it would be difficult to move in the wrong direction, though Venezuela is evidence that further deterioration is possible).

Let’s conclude with a video I shared three years ago, but it’s worth a second look since we’re considering Botswana’s comparative success.

By the way, none of this suggests Botswana is perfect. Indeed, it’s not even close.

According to the Fraser Institute’s Economic Freedom of the World, it is ranked #50, which means it isn’t even in the top quartile. And its latest score of 7.37 (out of 10) is well below top-ranked Hong Kong’s score of 8.97.

But you don’t have to be fast to win a race. You simply need to be quicker than your competitors. And, on the continent of Africa, Botswana has the most economic freedom.

P.S. I fully expect South Africa to move in the wrong direction, at least in relative terms if not absolute terms.

P.P.S. If you liked the “story of two neighbors” comparison of Botswana and Zimbabwe at the beginning of this column, you’ll probably enjoy this comparison of Detroit and Hiroshima and this comparison of Hong Kong and Havana.

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