Economic freedom drives growth, reduces poverty – not the other way around

Hong Kong night skyline from Bowen Road (Credit: barnyz / Flickr)

Without economic freedom from suppressive interference, economic growth does not necessarily mean less poverty or a higher quality of life, a recent report reminds governments around the world.

Once again, Hong Kong tops the charts as “the most economically free jurisdiction in the world,” according to the annual Economic Freedom of the World report – a position it has held since the Fraser Institute first began publishing the report in 1996. Other nations have not maintained their positions so well: The U.S. is ranked 16th for the second year in a row, down from its peak of second in 2000; Venezuela is dead last.

“Economic freedom leads to prosperity and a higher quality of life, while the lowest-ranked countries are usually burdened by oppressive regimes that limit the freedom and opportunity of their citizens,” said Fred McMahon, research chair in economic freedom at the Fraser Institute and co-author of the paper, in a press release.

This year’s report analyzed data from 2014 to measure the degree of economic freedom in 159 countries and territories based on five broad indicators: the size of the government as a reflection of personal choice, a legal system that protects people and their rightful property, currency that is not subject to high and volatile inflation rates, freedom to trade internationally, and limited regulation to enter and compete in business.

Top and bottom rankings from the 2016 Economic Freedom of the World report. (Credit: Fraser Institute)

Top and bottom rankings from the 2016 Economic Freedom of the World report. (Credit: Fraser Institute)

According to the report, corresponding studies are consistently in agreement that “countries with institutions and policies more consistent with economic freedom have higher investment rates, more rapid economic growth, higher income levels and a more rapid reduction in poverty rates.” This is true especially in developing countries.

The paper also points out that countries in the top quartile of economic freedom, including Singapore, Canada and Chile, had an average per-capita GDP of $41,228 in 2014, compared to $5,471 for the bottom quartile, which included Venezuela, Iran and Zimbabwe.

But even the poorest 10 percent in the top countries had an average per-capita income ($11,283) twice that of the overall average income in the bottom quartile ($5,471). That is not even compared to the average income of the poorest 10 percent of those at the bottom, which was only $1,080 per year.

Additionally, life expectancy in the most economically free countries is 80.4 years, compared to 64 years in the least free. Political and civil liberties were also unsurprisingly higher in economically free nations.

However, the authors address the need to adjust for gender bias in future reports, because many countries restrict women’s access to property ownership, business and legal rights.

The report delved into Venezuela and the U.S. in particular to demonstrate the correlation between reduced economic freedom – a “stunning slide” in Venezuela – and poor economic performance. Ireland, conversely, picked itself up after the 2008 financial crisis to re-enter the top 10 in economic freedom rankings and enjoy economic growth.

Economic freedom ratings in Asia and the Pacific (Credit: BRINK Asia / Fraser Institute)

Asia-Pacific ratings (Credit: BRINK Asia / Fraser Institute)

Asia’s rankings also served as a stark reminder that unprecedented growth does not necessarily translate to economic freedom. Although Hong Kong and Singapore consistently top overall economic freedom rankings year after year, the three major emerging economies in the region all performed poorly: Indonesia was 79th, India was 112th and China was 113th. Vietnam, one of the fastest growing economies in 2015, came in even lower at 116th.

In essence, policies and institutions that uphold economic freedom can drive growth, reduce poverty and improve the quality of life; but growth on its own does not guarantee freedom and well-being.

Although countries did not experience improvements evenly across the board, the documented progress over time is still encouraging, especially for developing nations. Since 1985, the average chain-linked economic freedom rating for advanced economies has improved 0.8 points, from 6.9 to 7.7. On the other hand, developing countries improved from 5.0 to 6.7, an increase of 1.7 points.

As economists Milton and Rose Friedman wrote in their book, Free to Choose, “…a society that puts freedom first will, as a happy by-product, end up with both greater freedom and greater equality. …It preserves the opportunity for today’s disadvantaged to become tomorrow’s privileged and, in the process, enables almost everyone, from top to bottom, to enjoy a fuller and richer life.”

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About Author

Joanne Lu

Joanne Lu is a South Carolina-based writer and editor dedicated to global development, poverty alleviation and social justice. After a year in Rwanda, she now covers the Asia-Pacific and economics. Find her on Twitter @joannelu or email joanne@humanosphere.com.

  • Eugene

    Thanks for the article, Joanne; how confident are you that these observations are causal and not just correlations? I did not see anything really addressing that possibility in your article, which I would think is important given that the report is coming from the Fraser Institute.