Chapter 1 Economic Freedom in Uncertain Times Ambassador Terry Miller ince the second half of 2008, the world but steady advances throughout the world, the economy has been undergoing a period 2010 Index has measured a small decline—one- Sof uncertainty and slowing economic tenth of a point (0.1 point)—in the world aver- growth. While some proclaimed the death of age economic freedom score.1 capitalism, the free market system has, in fact, The recession of 2008–2009 was the first demonstrated an impressive level of resilience major worldwide economic disruption of the during 2009 and now shows vital signs of an age of globalization. Economically free coun- economic upturn. Policy choices made at this tries are typically more open and engaged with critical juncture of the global recovery will the world economy than their more repressive unquestionably shape the growth trajectory for counterparts. Many of the most economically the world economy in the years ahead. free were among the first to feel the effects of the crisis, which spread through the financial Countries on Diverging Paths system. Those that are most open to trade, and The financial crisis and recession that afflict- particularly those that are most dependent on ed the world economy in 2008 and 2009 resulted export-oriented growth, were among the most in, and may even have been caused by, signifi- cant reductions in economic freedom in a num- 1. The average score in the Index declined from ber of countries around the world. At the same 2008 to 2009 because of the addition in 2009 of time, many other countries have held firm on a substantial number of countries with below average freedom scores. For countries covered the path to greater economic freedom and the in both the 2008 and 2009 editions, the average greater prosperity that it brings. After five years overall economic freedom score increased by one- in which economic freedom had shown modest tenth of a point in 2009. 9 vulnerable to economic downturns in other more intrusive regulations, government take- countries. overs of businesses, government subsidies and On the other hand, the economically free bailouts of private firms, loose monetary pol- countries, which over the years have grown icy, tax increases, and protectionist measures faster and accumulated more wealth than their to reduce trade. (See “Can Trade Protectionism repressed counterparts, were in a better posi- Save Jobs?”) tion to withstand a temporary downturn. The Interventionist measures that harm eco- economically free have more durable and trans- nomic freedom are detrimental to economic parent economic institutions, more diversified growth, with effects that in some cases will economies, and more flexibility in responding show up immediately, and sometimes after a to a crisis. Thus, we would expect to see less delay, but in all cases can endure for years to harmful permanent impact from the crisis and come. Though bailouts and subsidies may pro- recession in the economically free countries. vide short-term relief for some chosen firms, We also would expect to see faster and more the impact on the overall economy quickly pronounced recovery from the negative effects turns negative as governments have to finance that do occur. spending through increased taxation, borrow- The 2010 Index of Economic Freedom is based ing that crowds out private investment, or on data reflecting conditions from July 2008 monetary expansion that fuels inflation. through June 2009 (and sometimes earlier years With countries diverging so strongly in their when later data are not available). Thus, the policy responses to the crisis, more countries effects of the recession and the policies through than usual show significant movements either which governments have tried to respond are up or down in the Index rankings. Though the not fully captured in the rankings. Indeed, the full effect of some of the policies undertaken by Biggest Gainers and Losers in 2010 governments, such as the inflationary impact of expansionary monetary policy and various Nations that gained or lost at least 2.5 points governments’ stimulus programs, may not in their Index of Economic Freedom score show up for several years. Gainers Losers Montenegro 5.4 Timor-Leste –4.7 Diverging eConomiC São Tomé and Bolivia –4.2 FreeDom Scores Príncipe 5.0 Libya –3.3 Rwanda 4.9 Many countries, despite the economic dif- Barbados –3.2 Macedonia 4.5 ficulties they may be experiencing, have held Ecuador –3.2 Croatia 4.1 Eritrea –3.2 true to the principles of economic freedom and Belarus 3.7 Solomon Islands –3.1 Bangladesh 3.6 have continued to adopt measures to liberal- The Bahamas –3.0 Colombia 3.2 ize and deregulate economic activity. Eighty- Uzbekistan –3.0 Qatar 3.2 one countries—almost half of all those ranked Bosnia and Mongolia –2.8 in the Index—showed improvements in their Herzegovina 3.1 Venezuela –2.8 Equatorial Guinea –2.7 overall economic freedom scores this year. Peru 3.0 Poland 2.9 United States –2.7 Regrettably, the levels of economic freedom Saint Vincent and United Kingdom –2.5 in 90 other countries, as measured in the 2010 the Grenadines 2.6 Yemen –2.5 Index, have declined. United Arab Emirates 2.6 Many of the countries whose scores have Mexico 2.5 dropped have responded to the economic cri- Source: Terry Miller and Kim R. Holmes, 2010 Index of Economic Freedom (Washington, D.C.: The Heritage sis with policy moves that, whether intended Foundation and Dow Jones & Company, Inc., 2010), at or not, add up to a fundamental assault on www.heritage.org/index. economic freedom. In the United States, for Table 1 heritage.org example, policies or proposals have included 10 2010 Index of Economic Freedom Can Trade Protectionism Save Jobs? Trade protectionism is simultaneously soft, which had introduced the Windows one of the most popular and least effective 3.0 operating system in 1990 and had added measures in response to a recession. Few 2,888 employees to its payroll between 1992 things in economics are as well established and 1993. By 2009, Microsoft had created as the idea that trade increases prosper- over 92,000 jobs, more than 55,000 of which ity and that the freer the trade, the greater were in the United States.2 the benefits to all parties. Sadly, few ideas Those new jobs, which epitomize the are also less well understood among mem- value to society of economic freedom that bers of the general public and even among permits and promotes rapid economic politicians. evolution and growth, fly below the radar It is easy to focus on those whose jobs are screen in the public and political debates lost when economies grow and develop and on trade, but they are the lifeblood of our harder to see the new jobs that are created in increasing wealth and well-being. We can- a dynamic environment. For example, Smith not know what would have happened had Corona’s closing of its last U.S. typewriter the protectionists in Congress succeeded in plant in 1992, costing 875 jobs in Cortland, 1992 in protecting Smith Corona’s typewrit- New York, “fanned concerns in Congress er business, but it is clear that protection- and organized labor about the loss of jobs ism is always about protecting the status to foreign competition.”1 No notice was quo, while growing prosperity depends on taken of emerging corporate giant Micro- embracing the new production and commer- cial possibilities of the future. 1. Keith Bradsher, “Smith Corona Plant Mexico Bound,” The New York Times, July 22, 1992, at http://www.nytimes.com/1992/07/22/business/ 2. “Facts About Microsoft,” at smith-corona-plant-mexico-bound.html?pag http://www.microsoft.com/presspass/ (November 9, 2009). inside_ms.mspx (November 9, 2009). change in the global average economic free- scores deteriorated by at least 2.5 points. dom score in the 2010 Index is small, 30 coun- • Timor-Leste lost the most economic free- tries gained or lost at least 2.5 points in their dom in the 2010 Index, down 4.7 points. Mon- economic freedom scores. (See Table 1.) golia, Uzbekistan, and the Solomon Islands Montenegro improved the most, gaining 5.4 were the only other Asia–Pacific countries to points on the economic freedom scale. Other lose so much freedom. European countries that did notably well • Five Latin American or Caribbean coun- included Macedonia, Croatia, Belarus, Bosnia tries, including Bolivia, Barbados, Ecuador, and Herzegovina, and Poland. Qatar and the the Bahamas, and Venezuela, lost significant United Arab Emirates made significant gains amounts of economic freedom, as did Eri- in the Middle East, as did Colombia, Peru, and trea and Equatorial Guinea in Sub-Saharan Mexico in Latin America. Saint Vincent and Africa. the Grenadines was the biggest gainer in the • In the Middle East and North Africa, Caribbean. Bangladesh topped the list of gain- Libya and Yemen lost significant amounts of ers in Asia, as did São Tomé and Príncipe and economic freedom. Rwanda in Africa. • Finally, and perhaps of most concern, There were 15 countries this year whose perennial Top 10 performers the United States Chapter 1 11 and the United Kingdom both lost at least 2.5 points Progressing and Regressing Nations in overall economic free- dom, with the U.K. drop- A comparison of nations whose economic freedom categories changed since the 2009 Index of Economic Freedom ping out of the Top 10 in the Index for the first time PROGRESSING ever. Countries’ policy choices Category Change Countries in the various areas of eco- Mostly Free to Free Switzerland nomic freedom that are Moderately Free Saint Lucia, Georgia, GDP Growth Rate rated in the Index diverged to Mostly Free Taiwan, Botswana 2007 2008 5 Years significantly.