NCPA - National Center for Policy Analysis


January 4, 2006

The 2006 Index of Economic Freedom, published today by the Heritage Foundation and the Wall Street Journal, provides powerful clues why some countries have been able to radically restructure their economies while others have been left in the clutches of special interests. The annual report surveys 157 countries, grading property rights protection, the regulatory environment, tax rates, fiscal policy, government intervention in the economy, monetary policy, black markets and trade policy, assigning each a numerical rating. Each country falls into one of four categories: "free," "mostly free," "mostly unfree" and "repressed."

As they do every year, the index authors observe the average per capita income of countries in each category. Not surprisingly, over the years, they have found a strong relationship between economic freedom and prosperity. Yet there is something more that can be observed in this pattern, says Mary Anastasia O'Grady, one of the index's authors:

  • Countries that liberalize quickly and thoroughly achieve resounding successes, politically and economically.
  • Conversely, gradualism risks stagnation and even reversals, because the benefits are not evident enough to impress the electorate and generate a momentum in their favor.

Take, for example, the difference between the wealth of "repressed" economies and "mostly unfree" economies:

  • The per capita gross domestic product (GDP) of the former is $4,239 while of the latter it is a tad lower at $4,058. This suggests that reforms that move a country one step up in economic liberty, on average, produce no material benefit to the population.
  • The jump from "mostly unfree" to "mostly free" yields a much better return but still leaves a country not particularly well-off; "mostly free" countries have a per capita GDP of $13,530, while "free" countries have, on average, a per capita GDP of over $30,000.

Source: Mary Anastasia O'Grady, "Wish They All Could Be Like Estonia," Wall Street Journal, January 4, 2006; and Marc A. Miles, Kim R. Holmes and Mary Anastasia O'Grady, "2006 Index of Economic Freedom," Heritage Foundation and Wall Street Journal, January 4, 2006.

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