Undeniably, it is governments function to determine policy regarding redistribution, affirmative action, and social delivery. Most would agree, however, that it is strong economic growth that will best finance such aspirations. And while ‘market failure’ is often mentioned when discussing ‘corrective’ state action, we may recall the well-established global wisdom about what causes growth.
Several decades of intense scrutiny of the roughly two-hundred national economies on planet Earth have confirmed a simple message – for sustained growth a country needs peace and economic freedom, and these conditions also improve the indicators of human and social development.
How much economic freedom is optimal? Thus far, no evidence has suggested that growth can be stifled by too much economic freedom. This is hardly surprising, as no modern country has yet reduced its government sector to below 12-15% of GDP, still much larger than western governments during the explosive growth phase of the nineteenth century and until the First World War.
A country’s economic freedom can be assessed in various ways. Institutions such as the Heritage Foundation, and the Economic Freedom Network of over one hundred institutes in as many countries, have constructed multi-component indices using various measured or rated components. These range from trade policy, the fiscal burden of government, and the security of property to inflation, conscription, price controls and the size of state-owned enterprises. Excluded are measures of civil liberty and individual freedom such as freedom of expression and immigration. Also excluded are outcomes such as growth and prosperity, health and longevity.
Whichever index is used, the results are unambiguous. Greater economic freedom allows faster growth, which gradually leads to massively greater prosperity. The 20% of countries enjoying the highest economic freedom produce per-capita income of over $18,000 growing at over 2% per-annum. The middle 20% average $7000 with slower growth. The 20% suffering under the lowest economic freedom produce under $2000 per capita, more often than not with shrinking economies..
Fortunately the worldwide trend in recent decades has been to greater economic freedom, so more and more of the world’s peoples are experiencing increasing prosperity. Nevertheless, more than half the world’s countries, mainly in Asia and Africa, are still rated as mostly unfree or repressed. Maybe a population does get ‘the government it deserves’, but it is sad that so many governments still condemn their citizens to poverty now that it is so well known how they can lift themselves to prosperity.
Material wealth measured by per-capita income is not the whole story. So we need to remember that quality-of-life factors also improve with greater economic freedom. Comparison of the most free 20% of countries with the least free 20% shows that improvements are by no means negligible.
Cereal yields of 4534kg per hectare as compared with 1615kg. Life expectancy of 76 years as compared with 55 years. Unemployment at below 7% as compared with 12%. Adult literacy of 92% as compared with 65%. Poverty (measured by combining deaths before 40, illiteracy, lack of access to clean water and health care, and malnourished children under 5) of 19% as compared with 40%. Less than half the income inequality, with the top 10% of incomes at 14.3 times the bottom 10% as compared with 32.5 times in the least free countries.
Naturally, similar findings emerge from studies of environmental factors such as air pollution, deforestation and erosion. Most of the improvements in human welfare with economic freedom, growth and prosperity should come as no surprise except to the most blinkered leftist ideologue. The finding that freedom and prosperity reduce income differentials may seem less than intuitive after over a century of socialist propaganda about the rich getting richer and the poor getting poorer. Now we know that market incentives certainly reward conspicuous success, but with nowhere near the obscenely disproportionate riches raked in by the despot and his henchmen in a slave state.
No room remains for informed debate about the relative merits of socialism, government intervention and mixed-economy ‘third ways’ versus economic freedom with small government and market capitalism. Economic freedom correlates with all the virtues. Those who devise ‘corrective’ action by the state should take care not to kill the golden goose.
Source: Leon Louw is the Executive Director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement. The patrons, council and members of the Foundation do not necessarily agree with the views expressed in the article.
