Freedom's Steady March

By BRYAN T. JOHNSON,
KIM R. HOLMES,
and MELANIE KIRKPATRICK

The economic catchword of our era is freedom. Since the end of the Cold War, policy makers and investors around the globe increasingly understand that to be free is to grow and prosper. From Asia's tigers to the ex-socialist states of Central Europe to the most desperate outposts of Africa, people are talking the same language. Speak to leaders in Ulan Bator or Tallinn or La Paz and you'll hear the same recipe for growth.

It's a remarkable testament to the power of this idea that the link between freedom and prosperity is so widely understood. As recently as a decade ago this was not the dominant economic view-or even an acceptable one-in many of the world's capitals. But it is one thing to pay lip service to the idea of economic freedom and quite another to put it into practice lowering barriers to trade, abolishing restraints on the movement of capital, privatizing enterprises that government had previously taken it upon itself to run.

What countries are actually putting words into action?

The annual Index of Economic Freedom, published by the Heritage Foundation and The Wall Street Journal, aims to answer that question. It measures how well 156 countries shape up in the area of economic freedom, scoring each economy in five specific categories in 10 broad areas: trade policy, taxation, government intervention in the economy, monetary policy, capital flows and foreign investment, banking, wage and price controls, property rights, regulation, and the black market.

We think the task of, pulling together all these data in one handbook serves a useful purpose in and of itself; they are important indicators of a nation's overall economic health. But tile Index of Economic Freedom does more. It is also a careful analysis of the factors that contribute most to the institutional setting for economic growth.

The critical message of the index, now in its fourth edition, is that government coercion and control over the entrepreneurial process are deadly forces. The index recognizes the important role of govemment in protecting free markets - principally through its judicial, monetary and international functions. But the overall conclusion is that the most important factors in determining a nation's long-term growth and prosperity are policies that reduce, as much as possible, governments' constraints on economic activity. One of the dangers of the recent turmoil in Asian financial markets is that world leaders will wrongly conclude that their economies need more "protection" from the marketplace.

The 1998 index finds more than half - 83 - of the world's economies ranked as mostly unfree or repressed; 73 countries are free or mostly free. The trend, though, is in the direction of economic freedom, with 49 countries having improved their score from last year and 33 countries earning worse scores.

Here, region by region, are the principal findings of the 1998 Index of Economic Freedom:

North America and Europe:
Most of the world's freest economies are located here and it's no coincidence that it is also the world's richest region. Near the top of the list are the U.S. and Switzerland (tied at #5), Britain (#7), Ireland (#10), Belgium (#14) and Austria (#17). Former Marxist countries continue to make excellent progress toward economic freedom-most notably Estonia (#17) and the Czech Republic (#20). The good news about Russia is that its score has improved over last year, thanks to a 37% drop in its average tariff rate; the bad news is that it still lags in the bottom third (#104).

Germany's score (#24) has fallen for the third year in a row, due this time to increases in banking restrictions and government regulations. France (#35), the Netherlands (#20) and Denmark (#22) also score lower, reflecting a troubling trend: Wealthy countries tend to reintroduce restrictions on economic freedom by introducing extensive welfare and other social programs that were not affordable when they were poorer. When that happens, growth slows and living standards fall.

Latin America and the Caribbean:
This is a continuing success story. The pace of economic liberalization continued to quicken throughout the region in 1997, with 12 of the 26 countries graded improving their score this year. No region is progressing faster toward economic freedom.

The Bahamas (#10) and Chile (#17) are by far the freest economies here. Panama (#28), El Salvador (#32) and Argentina (#39) also score well, as do Barbados and Jamaica (both #39) and Trinidad & Tobago (#38). Mexico (#88) and Brazil (#96) made little progress and remain mostly unfree. Venezuela, leader of the so-called revolt against "neoliberalism," showed the biggest decline in economic freedom of any country in the world since the first index.

Asia:
This is the area of the greatest contrasts. Four economies make the top 10: Hong Kong (#1), Singapore (#2), New Zealand (#4), and Taiwan (#7). Also in the free or mostly free categories are Australia and Japan (both #12), South Korea (#24), Malaysia and Thailand (#28), the Philippines (#44) and Western Samoa (#53).

It's important not to draw the wrong lesson from the recent turmoil in Asian financial markets. The problems are occurring not because the economies are too open to the discipline of the marketplace but because they aren't open enough. It's no accident that Hong Kong and Singapore have weathered the crises so well. Their economies, the world's freest, are also the most resilient.

In the rest of Asia, even in those economies ranked as Mostly free, the pace of reform has been uneven. In the 1998 index, Malaysia, Thailand, the Philippines and Indonesia all show grave weakness in their banking systems, none is fully open to competition in financial services, and all still suffer from verying degrees of corruption and government regulation. South Korea's government-directed economy too often has overruled market forces, cozying up to the chaebol industrial groups and forcing banks to funnel huge loans to uncreditworthy companies.

Japan also scores poorly in the area of banking and openness to foreign investment. The fact that Tokyo Permitted Yamaichi Securities to fail is a positive sign: It signals investors that the government may no longer ride to the rescue of companies that can't make it in the marketplace. The challenge in all these countries is whether their leaders are courageous enough to take the political risks necessary for opening up their banking and financial-services sectors.

North Korea and Laos (#154) share the dubious honor (with Cuba) of being the world's most repressed economies. Despite the enthusiasm of many in the investment community, Vietnam (#147) has made next-to-no measurable progress toward opening its economy; it remains a centrally planned economy with a marginal, albeit growing, free market. India's score (#117) has remained the same, as has Indonesia's (#62). China's score (#120) has improved-though we call particular attention to its dismal performance in banking and financial services; the badloan problems in South Korea and Japan are nothing by comparison. The Central Asian economies, graded here for the first time, all fall near the bottom of the list.

North Africa and the Mideast:
Bahrain (#3) is the most economically free country here, chiefly the result of a lack of taxation on personal income and on corporate profits. It also has one of the world's lowest rates of inflation as well as a strong and efficient court system. The United Arab Emirates (#14) has the second-freest economy, followed by Kuwait (#28) and Oman (#44). Although Israel (#53) improved its mostly unfree designation to mostly free by the second edition of the index, it has made little progress since then. Egypt (#96) improved its score this year.

Sub-Saharan Africa:
This region remains the most economically unfree-and the poorest-area in the world. Of the 38 countries graded, none received a rating of free and only seven were ranked as mostly free. The highest-ranking economies in the region are Swaziland (#47), Botswana and Namibia (both #49), Uganda (#53) and South Africa (#66). On a per-capita basis, many sub-Saharan countries are among those receiving the highest levels of economic assistance. Yet the index demonstrates quite clearly that Africa's poverty is not the result of insufficient levels of foreign aid but of a lack of economic freedom, embodied in the policies these nations have imposed on themselves.