Ten Consequences of Economic Freedom

Policy Reports | Economy

No. 268
Friday, July 30, 2004
by James Gwartney and Robert Lawson

Executive Summary

Since the time of Adam Smith, most economists have argued that free economies will outperform those that are less free. Is this proposition really true? Without a measure of economic freedom, researchers are in a weak position to address this issue objectively. The Economic Freedom of the World (EFW) index provides such a measure. During the last several years, researchers have used the EFW data extensively to analyze various topics. In this study, we summarize 10 of the major findings of their research, which show that, in freer economies:

  1. The rate of economic growth is higher; real gross domestic product grew an average of 2.4 percent per year in the freest economies over the 1993 to 2002 period and declined 0.5 percent per year in the least free economies. Case Studies: "Richer or Poorer: Economic Freedom and Growth in Poor Countries"
  2. There is more investment, and foreign direct investment per worker over the 1980 to 2000 period was an astonishing 45 times greater compared to the most unfree group.
  3. The productivity of investment is higher — more than 70 percent higher than in the group of least free economies.
  4. There is less poverty; average per capita income for the poorest tenth of the people in least-free countries in 2002 was about $823, while the poorest tenth of the people in freer economies earned about $6,877.
  5. The distribution of income is more equal — the income share of the poorest 10 percent is almost 20 percent higher in the freest economies than in the least free countries.
  6. People live longer; the average life expectancy at birth is 76 years in countries with the highest degree of economic freedom, compared with 54 years among countries at the bottom.
  7. The lives of children are improved; for instance, the infant mortality rate is nine times lower in the economically freest fifth of countries than in the least free group.
  8. There is more human development in terms of health, education, living standards and other measures of well-being.
  9. There is less corruption in business and government.
  10. Democracy is encouraged, as evidenced by a high degree of correlation between economic freedom and political rights and civil liberties.

Economic freedom raises incomes and improves living standards. It requires strong institutions and encourages their further development. Over time, poor developing countries that have adopted policies consistent with economic freedom have pulled ahead of their former peers.

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