Economic Freedom and Political Freedom

It is widely believed by many that economic freedom and political freedom are separate and unrelated concepts.  Freedom of press, speech, and assembly are generally considered to fall under the umbrella of political freedom.  Taxes, wages, tariffs, and government regulation of business are economic issues.  The supposition is that society needs to simply decide on which type of political system it wants and combine it with the preferred economic system.  This mix-and-match arrangement will give the country its preferred political system and its preferred economic system.  The result is often called “democratic socialism” or the “mixed economy”, where government has substantial involvement and regulation over the free market.

Years of studying political economy have convinced me that political freedom and economic freedom are directly related to one another.  I know of not one example of a society that has enjoyed a large amount of political freedom that hasn’t relied upon the free market to organize its economic activities.  While present day politicians believe that they can manipulate the free market without compromising political freedom, the evidence speaks otherwise.  In this column I will present evidence in support of two propositions:  (1) there is a direct relationship between economic freedom and political freedom and (2) there is direct relationship between economic freedom and per-capita income.

Since 1995 the Wall Street Journal and the Heritage Foundation have hired researchers to calculate the annual “Index of Economic Freedom” (IEF) for each of the world’s 161 countries.  The Index looks at the degree of economic freedom for ten “broad factors of economic freedom”.  The ten factors are:  Trade policy, Fiscal burden of government, Government intervention in the economy, Monetary policy, Capital flows and foreign investment, Banking and finance, Wages and prices, Property rights, Regulation, and Informal market activity.  Each country receives an economic freedom score between 1 and 5 for each factor.  The best possible score is 1.  A score of 5 indicates extensive intrusion of the government into the economy.  Therefore, for the IEF, a low score means more economic freedom and a high score means less economic freedom.

For example, in the area of trade policy the IEF researchers would examine a country’s tariff structure.  If a country has high tariffs on imported goods, IEF score would be high.  A country with low or non-existent tariffs would receive a low IEF score.  In the area of banking and finance, if a country had all state-owned banks it would receive a high IEF score.  A country with deregulated private banking would receive a low IEF score.

The results for the 2005 Economic Freedom Index are complete.  They appear on the web in detail at:  http://www.heritage.org/research/features/index/index.cfm.  From this site you may view scores in detail for each of the world’s 161 countries.

The most economically free country in the world is Hong Kong, with a score of 1.35.  Rounding out the top ten are:  Singapore, Luxembourg, Estonia, Ireland, New Zealand, United Kingdom, Denmark, Iceland, Australia, Chile, and Switzerland.  Sadly, for the first time ever, the USA did not make the top ten.  We are ranked eleventh in the world’s economically free countries, with a score of 1.85.

The country with the lowest degree of economic freedom is North Korea with a dismal score of 5.00.  Rounding out the bottom ten are:  Venezuela, Uzbekistan, Iran, Cuba, Laos, Turkmenistan, Zimbabwe, Libya, and Burma.

Economic Freedom and Political Freedom:

If you look at the top ten and bottom ten IEF countries above and ask yourself which group of countries allows the most political freedom, you wouldn’t have much of a challenge.  However, I invite you to look at the rankings of all of the world’s countries on the website.  That ranking is found below: http://www.heritage.org/research/features/index/countries.cfm

Look at the countries with free economies and ask yourself if those places are politically free.  Look at the countries with un-free economies and ask yourself if you would like to live in them.  There can be no question that economic freedom is directly related to political freedom.

Below you will find a graph with the degree of economic freedom on the horizontal axis and the per-capita income on the vertical axis.  Each of the 160 countries is plotted on the graph.  There is a distinct, unmistakable direct relationship between economic freedom and per-capita income.

The next time a well-meaning politician wants to raise your taxes, increase regulation of your business firm, or increase tariffs, challenge him.  He will reply that he is “not taking away any of your political freedom, but is just taking a small bit of your economic freedom”.  Tell him unabashedly that economic freedom and political freedom are not un-related.  And while you’re at it, kick him out of office during the next election.

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