Who's Free, Who's Not

By Gerald P. O'Driscoll Jr., Kim R. Holmes and Melanie Kirkpatrick. Messrs. O'Driscoll and Holmes, of the Heritage Foundation, and Ms. Kirkpatrick, of the Journal's editorial page, are co-editors of the "2001 Index of Economic Freedom."

There is good news and bad news in the annual Index of Economic Freedom, to be published today by the Heritage Foundation and The Wall Street Journal.

The good news is that economic freedom continues to grow world-wide, continuing the amazing spread of the past decade. This is the seventh edition of the Index and the seventh year in a row that economic liberty has increased. This is heartening news indeed.

The bad news is that unfree economies still outnumber free ones. Most of the world's economies -- 81 -- remain mostly unfree or repressed, compared with 74 that are free or mostly free.

The best way to understand what this means for ordinary people, not just for traders or investors, is to compare average per-capita incomes. The average man, woman or child living in a repressed or mostly unfree economy lives a life of poverty on only about $2,800 a year. Compare this with the prosperous residents of the world's free economies, where the average per-capita income is $21,200, or nearly eight times greater. Put simply, the difference between poverty and prosperity is freedom.

The annual Index of Economic Freedom ranks the world's economies according to 50 economic variables in 10 broad categories: banking and finance, capital flows and foreign investment, monetary policy, fiscal burden of government, trade policy, wages and prices, government intervention in the economy, property rights, regulation, and black markets. Data from the seven years we've been ranking the world's economies are now online at index.heritage.org.

Here, region by region, are the principal findings of the 2001 Index of Economic Freedom:

North America and Europe

This is the most economically free region, and the richest. It also made the most progress toward economic freedom this year, with 24 countries improving their scores. The U.S., Britain, Ireland, Luxembourg, the Netherlands and Switzerland are all in the top 10. Ireland, the Celtic tiger, has leapt into the #3 position.

A star here is Lithuania, which catapulted to #42 from #61 last year after an ambitious program of private sector development and lower government spending. It is also the most improved economy in the history of the Index. Of the former communist countries, Estonia (#14) is the closest to becoming a fully free economy, with lower taxes and lower inflation raising its score this year.

Contrast these with Moldova, whose score declined more than any other country in the world. It's now way down the list at #120, due to growing inflation, higher government spending, more regulations and a not unconnected rise in black market activity. Russia, #127 this year, has seen its score drop year after year.

Western European countries bear the marks of the 1992 Maastricht Treaty, which set strict monetary standards and fiscal disciplinary requirements for would-be member states of the European Monetary Union. This commitment to monetary union, which took place last year, presented a policy challenge for signatories. Some have barely tried to adhere to these policies, but others, such as Luxembourg, seized the opportunity to enact structural reforms. All 11 countries in the EMU rate our highest possible monetary score.

Latin America and the Caribbean

El Salvador leads the region, improving enough to be labeled "free" for the first time. This is the "Hong Kong" of Latin America.

Many Latin American countries saw their scores rise because of their success at lowering inflation. The most dramatic example is Uruguay, whose inflation dropped to 5.6% in 1999 from 112.5% in 1990. Improvements were also seen in Brazil, Haiti, Barbados, Bolivia, Costa Rica, El Salvador and Peru.

Paraguay fell into the mostly unfree category, tying Moldova for the biggest global drop in economic freedom this year. Argentina is still mostly free, but lost ground due to a decline in property rights. Economic liberty is waning in mostly unfree Venezuela, where tariff rates are up, regulations on business are growing and protection of private property is declining. Venezuela's score not only worsened last year, but it has one of the worst records over the seven-year history of the Index.

North Africa and the Mideast

Economic freedom declined overall here this year. The big exception is Bahrain, still in the top 10 even though its score fell this year; its high score is chiefly a result of the lack of taxation on personal income or corporate profits. Bahrain also has one of the world's lowest levels of inflation as well as a strong and efficient court system.

The United Arab Emirates has the second-freest economy in the region, followed by Kuwait, Morocco, Oman, Israel and Jordan. Tunisia and Lebanon improved to mostly free this year, while Saudi Arabia became mostly unfree. Other mostly unfree economies are Qatar, Algeria, Egypt and Yemen. The repressed economies -- no surprise here -- are Syria, Iran, Iraq and Libya.

Sub-Saharan Africa

There is actually some good news to report this year from this poverty-stricken part of the world. For the first time in the history of the Index, Sub-Saharan Africa shows a net improvement in economic freedom, albeit from a dismal base.

That said, this remains the world's most economically unfree region -- and by far the poorest. Of the 42 countries graded, none is free and only six are mostly free (Mauritius, Benin, Mali, Namibia, Zambia and Botswana). This year we suspended grading of six countries because of the unreliability of data. Mozambique, still mostly unfree, is the second-most improved economy over the history of the Index. South Africa's score worsened this year, due in part to restrictive labor regulations, putting it in the mostly unfree category.

Asia-Pacific

Schizophrenia is the word to describe economic liberty in this region. Four of the world's freest economies are here -- Hong Kong, Singapore, New Zealand and Australia. But the Asia-Pacific is also home to six of the most repressed economies: Vietnam, Laos, Burma, Turkmenistan, Uzbekistan and North Korea.

The world's single biggest improvement in economic freedom occurred in this region, with Thailand up to 27th place from 46. Its gain was thanks to lower inflation, less government spending and lower tariffs.

Hong Kong is still Number One, but government spending rose, which isn't a good sign; in determining Hong Kong's score, that was offset by a decline in inflation. Singapore remains in second place, but its overall score declined due to increasing evidence of government interference in the economy.

The Index is available in English and Spanish at (800) 975-8635, for $24.95 plus shipping and handling.