Of Public Interest

Volume 1, Number 2
August 1999

Why Not #1?
by Richard E. Wagner

Throughout the world, the extent of economic freedom is the single most important determinant of the wealth of nations. The greater the extent of economic freedom, the wealthier the citizens of a nation will be. To be sure, the fit is not exact, among other things because the amount of time during which a particular level of freedom has prevailed is also important. Economic freedom generates faster economic progress. The wealthiest nations of the world are those that have had a good deal of economic freedom for quite some time. There are also a number of less wealthy nations that now rank high on measures of economic freedom. If those nations continue to embrace economic freedom, we should expect to find them among the world’s economic elite within a generation or so. There are also relatively prosperous nations whose indexes of economic freedom could now be considered only fair. Should this state of restricted freedom continue for a generation or so, we should expect those nations to move downward in economic prominence.

One might wonder if economic freedom really matters all that much. It surely does, and this can be seen most dramatically on a global scale. Since 1995, the Heritage Foundation and the Wall Street Journal have published annually an Index of Economic Freedom. (This is available at <http://www.heritage.org>.) This Index seeks to rank nations throughout the world according to the economic freedom their citizens possess, and to relate those rankings to actual economic performance.

Since the 1776 publication of Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, it has been often argued by economists that economic freedom is the primary source of the wealth of a nation. There is plenty of evidence to broadly support this claim. One can compare eastern and western Europe, North and South Korea, and Taiwan and China, to mention just three of many possible types of comparison. What all such studies show is that economic success has little to do with endowments of natural resources and much to do with the extent of economic liberty.

The wealthiest nations in the world are those that have possessed a good deal of economic liberty for quite some time. The most rapidly growing nations are those that currently have the greatest extent of economic liberty. Wealth and growth, of course, are distinct concepts. A wealthy nation may increasingly restrict economic liberty. The more it does so, the slower will be its rate of economic growth. A wealthy nation can endure a fair period of poor economic performance and remain among the world’s elites, even if its position is slipping. Similarly, a poor nation that embraces economic liberty may remain relatively poor for some time, despite its having a high rate of economic growth.

The ten nations with the highest measures of economic freedom are, in order, Hong Kong, Singapore, Bahrain, New Zealand, Switzerland, the United States, Ireland, Luxembourg, Taiwan, and the United Kingdom. The ten nations with the lowest measures of economic freedom are Cuba, North Korea, Iraq, Laos, Libya, Bosnia, Somalia, Congo, Iran, and Vietnam. The nations that score in the highest category of economic freedom have had average annual growth rates of 2.9 percent since 1980. Those nations in the lowest category of economic freedom, suffered economic declines that averaged 1.4 percent annually. Intermediate nations also fit the pattern just described. Those that were ranked as "mostly free" have grown at just under one percent, while those that were ranked as "mostly unfree" have suffered an average annual decline of 0.3 percent.

It’s clear that economic freedom matters, and a great deal. These small differences in rates of growth can make a strong difference in just one generation. Consider just the difference between the free and the mostly free nations. Current per capita income in the United States averages around $25,000. If $25,000 grows for 30 years, it would become $60,700 after 30 years at 3 percent, but only $33,700 at 1 percent. Moreover, $15,000 growing at 3 percent would become $36,400 after 30 years. A fast-growing underdeveloped nation could catch up with a slow-growing advanced nation within a generation. Alternatively, a slow-growing developed nation could become relatively underdeveloped after a generation. If you doubt the arithmetic, just look at what happened to Argentina during the early decades of this century.

The United States is rich and in sixth position, and for this we can be thankful. We are rich enough to absorb some slippage without it showing much very quickly. Should not, however, we aim to be number one?

A Publication of:
Public Interest Institute at Iowa Wesleyan College
600 North Jackson Street
Mt. Pleasant, Iowa 52641-1328
Phone: 319-385-3462 Fax: 319-385-3799
E-Mail: public.interest.institute@limitedgovernment.org Web Site: www.limitedgovernment.org