NCPA - National Center for Policy Analysis

Economic Growth And Freedom

January 2, 1996

A comparison of the national economies of more than 100 countries confirms that economic freedom, growth and higher incomes go hand-in-hand. The economists who authored the study also found that economic freedom has increased since 1985.

They used an index of 19 indicators to rank countries on their protection of private property, personal choice and freedom of exchange. They examined the progress or decline of the economies from 1975 to 1995, and awarded them letter grades based on current conditions.

  • Hong Kong now has the freest economy in the world, earning a letter grade of A+.
  • New Zealand, Singapore and the United States are next with a grade of A.
  • Ten countries earned a B letter grade -- Switzerland, the United Kingdom, Canada, Australia, Ireland, Japan, Netherlands, Germany, Belgium and Malaysia.

According to the study, the 14 countries that earned a summary grade of either A or B for the 1993-1995 period had average annual growth in per capita real Gross Domestic Product (GDP) of 2.4 percent from 1980 to 1994 and 2.6 percent from 1985 to 1994.

The six countries with high ratings throughout the last 20 years were all in the Top Ten in terms of 1994 per capita GDP, and none of them failed to achieve high levels of income per person.

  • The 17 countries where economic freedom increased the most during the 1975-1990 period experienced an average growth in per capita GDP of 2.7 percent from 1980 to 1990 and 3.1 percent from 1985 to 1994.
  • Among the changes that improved their ratings were greater price stability, improved credit market policies, lower top marginal tax rates, reductions in tariffs and fewer controls on currency exchanges and the movement of capital.

However, 27 countries earned a grade of F- because their policies and institutional arrangements were inconsistent with economic freedom in almost every area. Instead of growing, their economies shrank:

  • The average annual growth of per capita real GDP for these countries was -1.3 percent from 1980 to 1994 and -1.6 percent from 1985 to 1994.
  • The ten lowest-rated countries were Zambia, Uganda, Romania, Burundi, Brazil, Nicaragua, Syria, Algeria, Iran and Zaire.
  • And in the 16 countries where economic freedom fell the most from 1975 to 1990, the average real per capita GDP declined at an annual rate of 0.6 percent.

However, in both industrialized and developing countries, there was an average overall increase in economic freedom during the last 20 years, leading to improving economic conditions.

Source: James Gwartney, Robert Lawson and Walter Block, Economic Freedom of the World: 1975-1995 (Vancouver, B. C.: Fraser Institute, 1996).

 

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