The Link Between Freedom and Prosperity

By Rebecca Hagelin
Thursday, January 17, 2008

If there's one thing the American experiment proves, it's the power of freedom to transform lives. If you let people control their own destinies, there's no limit to what they can achieve. But if you bind them with the straitjacket of central planning, smother their creativity with over-regulation, fence them in with high tariffs and take their hard-earned money with high taxes, you kill their dreams even as you wreck an economy.

That's the central lesson of the "2008 Index of Economic Freedom," just released by The Heritage Foundation and The Wall Street Journal. A country-by-country survey of how free people are worldwide to direct their own economic fortunes, the Index repeatedly demonstrates the vital link between freedom and prosperity. Simply put, the freer people are, the more an economy grows -- and the more everyone benefits.

Take something as basic as income. In the world's most restricted economies, rated as "repressed" and "mostly unfree" by the Index editors, average income hovers around $4,000 a year. But in a "moderately free" economy, it's three times as much: $12,830. If you're in a "mostly free" one, you can double even that amount: $26,630 annually. And in a "free" economy? $33,579 -- more than eight times the money you'd earn in an unfree economy. Turns out you can put a price on economic liberty.

So which country has the freest economy? It may surprise you to learn that it's not the United States. In fact, the U.S. isn't even in the top three. We come in at No. 5 -- a bit disappointing, perhaps, but not bad when you notice that the Index editors graded more than 150 nations. Hong Kong took the top spot for the 14th year in a row, followed by Singapore, Ireland and Australia. New Zealand (6th) and Canada (7th) are the only other countries rated "free," which means they average 80 percent or better on the Index scale of 0-100.

Now, what exactly do we mean when we say that an economy is "free"? Every country is different, of course, with various strengths and weaknesses, but it generally means several things. It means that taxes and inflation are low. It means that the government doesn't spend too much or control the banks. It means property rights are protected, businesses are easy to start, and the court system -- which is largely free from corruption -- enforces contracts. It means tariffs are low, foreign investment is welcomed, and regulations are kept to a minimum.

The Index editors carefully study the data for each of these areas to assign a grade to each country. Small wonder that only seven make the cut as "free." Most of the world's economies fall in the "moderately free" (51) or "mostly unfree" (52) categories. The rest are divided up pretty evenly between "mostly free" (23) and "repressed" (24). Which means that most of the world's population isn't very free, economically speaking.

But don't despair. For one thing, although the level of overall economic freedom held fairly steady over the last year, the overall trend since the inaugural Index in 1995 has been up. Plus -- and here's the most hopeful part of the whole enterprise -- countries can, and many do, improve. The history of the Index is filled with success stories. Ireland is a prime example, as is Chile. Both nations have made clear-cut changes over the years -- changes that have given people more economic freedom and therefore helped their economies grow.

This connection between freedom and wealth is by no means new. In fact, the Index can be viewed as a new tool to prove an old truth. As the editors note in the introduction to the 2008 Index: "Economic theory dating back to the publication of Adam Smith's The Wealth of Nations in 1776 emphasizes the lesson that basic institutions that protect the liberty of individuals to pursue their own economic interests result in greater prosperity for the larger society."

Economic freedom is about more than just the bottom line. When you give people the liberty they crave, you do more than boost an economy -- you make it possible for men and women to improve their lives. In the words of the Declaration of Independence, they're free to engage in "the pursuit of happiness." And as the Index proves, it's a virtuous cycle that leaves everyone better off than they were before.