NCPA - National Center for Policy Analysis

ECONOMIC FREEDOM

July 30, 2004

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. Using the 10 of the major findings of the EFW, the authors show that in freer economies:

  • 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.
  • 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.
  • The productivity of investment is higher -- more than 70 percent higher than in the group of least free economies.
  • 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.

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, say the authors.

Source: James Gwartney and Robert Lawson, "Ten Consequences of Economic Freedom," National Center for Policy Analysis, Policy Report No. 268, July 30, 2004.

For text http://www.ncpa.org/pub/st268/

 

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