Tuesday, January 16, 2007

The Poor Get Richer

January 16, 2007 - WSJ

Here's bad news for those who oppose global free trade: Not only did the world-wide trend toward greater economic liberty hold steady over the past year, but the incomes of poor individuals across the globe are rising as result. The world isn't only growing richer. The gap between the per-capita income of have-not populations and that of the developed world is narrowing.

This good news for human progress is documented in the 2007 Heritage Foundation/The Wall Street Journal 2007 Index of Economic Freedom, released today. Neither another year of Islamic terrorism, nor record high oil prices, nor fear mongering on Capitol Hill about the China peril have been able to reverse a gradual global shift that reflects the basic human longing for individual liberty. While not all of mankind is participating in this advance, in those places where freedom has increased, people are becoming decidedly better off.


See a ranking of 157 freest economies in the world.
The average freedom score this year for the 157 countries ranked is the second highest since we began measuring economic freedom 13 years ago. It is down a fraction from last year, but each region of the globe enjoys greater economic freedom than it did a decade ago. Hong Kong, Singapore and Australia are the three freest economies in the world this year, in that order. The U.S. ranks No. 4. Among the 20 freest economies in the world, Europe holds 12 places.

This year the Index has some important changes. One is the addition of a 16-member academic advisory board to oversee methodology, one of the most critical aspects of the annual survey. That methodology also has some changes. The annual survey still grades countries on a combination of factors including property rights protection, tax rates, government intervention in the economy, and monetary, fiscal and trade policy. But this year we have renamed the "regulation" factor "business freedom" in order to reflect our emphasis on liberty. Thanks to data from the World Bank's annual "Doing Business" report, we expect this factor to better capture the varying levels of entrepreneurial freedom around the globe. We have also crafted a new category to measure "labor freedom," meaning the flexibility of labor laws. Finally, the Index scoring scale will now be 0 to 100 instead of 1 to 5, to allow a more nuanced overall measure.

As it has in past editions, the 2007 Index also looks at income levels around the globe and finds that economically free countries enjoy significantly greater prosperity than those burdened by heavy government intervention. The per capita GDP of the top quintile of countries, ranked according to economic freedom, is now almost $28,000 while the bottom quintile is less than $5,000. The associated higher GDP rates that come with economic freedom "seem to create a virtuous cycle, triggering further improvements in economic freedom. Our 13 years of Index data strongly suggest that countries that increase their levels of freedom experience faster growth rates," says the report.

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This year the Index again includes important essays on world economic trends. In a piece titled "Global Inequality Fades as the Global Economy Grows," Columbia University professor of economics Xavier Sala-i-Martin destroys the myth that the income gap is widening. While it is true that some countries are being left behind, when population weights are factored into the equation, the evidence shows that "individual income inequality declined substantially during the past two decades. The main reason is that incomes of some of the world's poorest and most populated countries (most notably China and India, but also many other countries in Asia) converged rapidly with the incomes of OECD citizens." Of course both China (ranked 119) and India (104) have a long way to go toward economic freedom but both have made big gains in recent years. Mr. Sala-i-Martin finds that the inequality gap would be even narrower if not for the "dismal performance" of African countries.

A second essay is by Swedish economist Johnny Munkhammar on "The Urgent Need for Labor Freedom in Europe -- and the World." The more advanced economies in Europe restrict labor freedom at the cost of low growth and high unemployment, he argues, while "many Eastern and Middle European countries experiment successfully with freedom." Contrary to socialist views, labor freedom and improving social conditions actually go together. What he concludes could be applied to the rest of the globe in all areas of economic policy: "If the world wants to achieve both more jobs and better living standards, freedom is essential."

Ms. O'Grady is member of the Journal's editorial board. She is co-editor, with Tim Kane and Kim R. Holmes, of the 2007 Index of Economic Freedom (408 pages, $24.95), available at 1-800-975-8625.

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