What Makes a Country Successful? Small Government, Economic Freedom

May 28, 2014

A look at per-capita incomes, economic growth, job creation and life expectancy indicates that small, not big, government works best, contends Richard W. Rahn, senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

The four richest and diverse economies in the world are Singapore, Switzerland, the United States and Hong Kong. This was not the case 50 years ago, when Singapore and Hong Kong were poor and had few natural resources. Today, however, their citizens have high standards of living and life expectancy (Singapore is ranked third, while Hong Kong ranks fourth for longevity).

How did they become so successful? Of 159 ranked countries, Hong Kong ranked first and Singapore took the number two spot for economic freedom.  Their government spending as a percentage of GDP is also low -- less than 20 percent.

And while Taiwan and South Korea are not as rich as the world's wealthiest economies, they have also adopted small government models, which has caused them to grow faster than comparable countries with big governments. Chile, a developing nation, has had similar success. All of this growth translates into a better quality of life for the citizens of these nations.

Switzerland's experience tells a similar tale. Switzerland and France are neighbors, but while France has vastly more resources and ports than Switzerland, Switzerland's unemployment rate is one-third the French unemployment rate, and the Swiss per-capita income is one-third larger than the French per-capita income. The difference? France's government is much larger -- 65 percent larger when measured as a percentage of GDP -- and it spends, taxes and regulates on a large scale. Switzerland, on the other hand, has a constitutional spending cap in place.

The majority of the time, rising per-capita incomes, economic growth and low unemployment are associated with small government and economic freedom. When government grows as a percentage of GDP, economic growth slows, as does job creation.

States within the U.S. are perfect examples of this trend: businesses and residents of California and New York -- big spending, high taxing states -- are fleeing to low-tax, low-spending states like Texas and Florida.

Source: Richard W. Rahn, "Economic Freedom Versus Big Government," Cato Institute, May 12, 2014.

 

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