The Prospects for Economic Freedom

The 2021 Economic Freedom of the World (EFW) rankings from Canada’s Fraser Institute show freedom essentially unchanged in the United States. But some important changes in the rankings will be coming soon.

Economic freedom is based on “the concept of self-ownership.” We should have “a right to choose – to decide how to use [our] time and talents to shape [our] lives.” What does economic freedom mean in practice? “Individuals are economically free when they are permitted to choose for themselves and engage in voluntary transactions as long as they do not harm the person or property of others.” With a high degree of economic freedom “the choices of individuals will decide what and how goods and services are produced.”

The EFW index turns this concept into a measure now applied to 165 countries. The index features five component areas: Size of Government (the levels of taxing and spending); Legal System and Property Rights; Sound Money; Freedom to Trade Internationally; and Regulation, which includes credit and labor markets as well as general business restrictions. Each element is scored from 0 to 10 (10 being more freedom) and the five area scores are averaged to generate a nation’s score.

The United States ranks 6th in 2021 (as in 2020) with a score of 8.24 which is a mere 0.02 points lower than last year. Hong Kong and Singapore take the top two spots, with scores of 8.91 and 8.81, with New Zealand, Switzerland, and the Republic of Georgia rounding out the top five. The bottom five nations are Zimbabwe, Algeria, Libya, Sudan and Venezuela in last. Socialist Venezuela is not necessarily the most consistent practitioners of Marxism today as a lack of date keep Cuba and North Korea from being rated.

Looking across the five areas of the index, the U.S. ranks 6th in regulation, 15th in Sound Money, 19th in Property Rights, 52nd in Size of Government, and 64th in International Trade. The Size of Government scores deserve comment. Many European nations have high taxes and spending but otherwise a lot of freedom. For example, Denmark ranks 10th overall despite ranking 150th in size of government. On the other hand, many weak governments tax and spend little while failing to protect property rights; Sudan ranks 7th in the size of government but next to last in overall freedom.

The 2021 EFW rankings use data from 2019 due to lags in compiling statistics and surveys. The rankings consequently are always somewhat backward looking. Two ongoing events will soon shake up the ratings.

The first involves China’s crackdown on Hong Kong. Hong Kong has always been rated separately from China (currently 116th), initially because it was a British colony and then because of its Special Administrative Region status. Yet China is now reneging on this deal. Hong Kong’s Legal System score should decline precipitously producing a new #1 for the first time in EFW history.

The current report also does not reflect policy responses to the pandemic. To me the freedom to trade internationally is most vulnerable. The pandemic has initiated what some are calling deglobalization. COVID-19 has made international travel and trade seem dangerous in a way it was not before.

Over the past 18 months the international shipment of goods has been disrupted but rarely strictly prohibited. Travel has been more restricted.

Quarantine rules and potential travel suspensions raise the cost of visiting suppliers in Malaysia or China. The relevant economic question is whether businesses can maintain global operations without frequent face-to-face interaction.

This likely depends on the oft-predicted “death of distance,” where technology eliminates the need for face-to-face interactions. Yet proponents have been predicting distance’s demise for two decades. The adequacy of distance communications probably depends more on psychology than economics.

Economist Adam Smith identified how the division of labor increases productivity with a bigger market allowing greater division of labor. A global market allows the greatest division possible, to our benefit. Our standard of living depends on the survival of international trade with diminished international travel.

-----------------------------------------------

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.