Hong Kong is the most economically free jurisdiction
in the world, while Canada has dropped to number thirteen,
according to the Economic Freedom of the World: 2001 Annual Report
released today by The Fraser Institute.
The Annual Report, published by The Fraser Institute in
conjunction with the US-based Cato Institute, and 49 other
independent institutes from around the world, ranks 123 countries
on their level of economic freedom.
The core ingredients of economic freedom are personal choice,
protection of private property, and freedom of exchange.
"This publication is crucial for understanding the role that
economic freedom plays in achieving prosperity and economic
development. A careful examination of the research generated from
this project clearly shows the benefits-both financial and
non-financial-of high levels of economic freedom," says Michael
Walker, Executive Director of The Fraser Institute.
Canada's Score Drops and We Lose Ground to Other Countries
For the most part, Canada has enjoyed moderately high levels of
economic freedom since 1970. During this period Canada has
consistently ranked as one of the twenty freest economies in the
This has been due mainly to the quality of the legal structure
and security of property rights, good monetary policy, the
freedom to use alternative currencies, and the freedom of
exchange in financial markets. Canada has also received high
scores in the freedom to engage in international trade variable.
However, Canada's ranking has dropped from number seven on the
2000 rankings, and our overall rank has been on the decline since
1980. This reflects the reality that many other nations have been
improving their level of economic freedom at a greater pace than
Canada has been losing ground to other developed countries such
as the United States and Ireland. For example, fifteen years ago
Canada's per capita GDP was 2.5 times that of Ireland and we
ranked higher in economic freedom. Today, Ireland's per capita
GDP is 10-15% higher than Canada's. As Canada's economic freedom
has declined, so has our rate of growth.
"Comparatively speaking, Canada continues to have damagingly high
levels of government spending, transfers and subsidies, and tax
rates," notes Walker.
Following Hong Kong and Singapore, the next freest economies are
New Zealand (3), the United Kingdom (4), and the United States
(5). Australia, Ireland, Switzerland, Luxembourg, and the
Netherlands round out the top 10.
Rankings of other large countries include Canada (13), Germany,
(15), Japan (20), Italy (24), France (34), Taiwan (38), Mexico
(62), China (81), India (92), Brazil (96), and Russia (117).
Myanmar, Algeria, the Democratic Republic of Congo,
Guinea-Bissau, and Sierra Leone rated the lowest among the 123
countries for which data were available.
A legal system capable of protecting property rights and
enforcing contracts in an even-handed manner is central to both
economic freedom and progress. So too is the freedom to compete
in business. Almost all of the countries with the weakest legal
systems and most highly-regulated business sectors were either
Latin American or former socialist countries.
The ten lowest-rated countries in the legal area were Peru,
Indonesia, Ecuador, Venezuela, Ukraine, Russia, Bolivia, Mexico,
Columbia, and El Salvador. The ten with the most restrictive
business regulation were Russia, Venezuela, Ukraine, Mexico, El
Salvador, Bulgaria, Bolivia, Indonesia, Argentina, and Columbia.
This highlights a very important point: Inadequate legal systems
and a restrictive regulatory environment are stifling economic
progress throughout much of Latin America and among the former
However, big government does not always mean hostility toward
business. Hong Kong, Singapore, and the United States had
regulatory environments that were favorable for business
competition and market allocation, but so too did big government
countries like Finland, Netherlands, Denmark, and Sweden.
"Modern economic growth is primarily about discovery, innovation,
and brain power. Thus, the strong relationship between economic
freedom and strong growth should not be surprising," says James
Gwartney, noted academic and co-author of the Report.
Western European countries generally ranked high in all areas of
study, except two: size of government and labour market
Economic freedom leads to greater prosperity
One of the most compelling results of the study is the
relationship between economic freedom and prosperity.
Countries that score in the top quintile of the "most
economically free" countries had an average per capita GDP of
$25,051 (1995 US$) and an average growth rate of 3.0% (1998 real
GDP). As economic freedom declined, so did the average per capita
GDP, as well as the average growth rate.
The least free 20 percent of countries had an average per capita
GDP of $816 (1995 US$) and an average growth rate of 1.8% (1998
Free economies have higher per person incomes and grow more
rapidly. They also have less poverty and political corruption,
achieve higher scores on the United Nations Human Development
Index, and their citizens live 21 years longer.
This fifth edition of
Economic Freedom of the World
updates data from the earlier editions and presents an economic
freedom index for the 123 countries ranked.
Data on twenty-one variables was gathered for the most recent
year (1999). These variables attempt to quantify the restrictions
on economic freedom imposed by governments in a variety of areas.
A score from 0 to 10 (0 being least free, 10 representing freest)
based on the data was assigned to each variable for each country.
Principal component analysis was used to attach weights to the
component data which ultimately combine to create a summary
Survey data was used to supplement the components of the main
index to develop a more comprehensive index of economic freedom
in 58 countries and integrates regulatory factors that are
difficult to quantify objectively.
The seven major categories of variables included in the index
are: (1) size of government, (2) the structure of the economy and
use of markets, (3) monetary policy and price stability, (4)
freedom to use alternative currencies, (5) legal structure and
property rights, (6) freedom to trade with foreigners, and (7)
freedom of exchange in capital and financial markets.
This comprehensive index, constructed under the leadership of The
Fraser Institute and Nobel Laureate in Economics, Milton
Friedman, is the most objective and accurate measure of economic
freedom published to date by any organization.
"More than ever, prosperity is about getting the institutions and
policies right. This report highlights both the strengths and
weaknesses of countries. It indicates key areas where countries
need to improve if they are to realize their full potential,"