Wednesday, September 19, 2012

Economic Freedom Report shows how far the US has fallen

The Fraser Institute - a Canadian libertarian think tank - has produced a fairly comprehensive assessment of the ranking of about two-thirds of countries on the basis of economic freedom over a wide range of indicators.  It produces it every year.  This year the story it tells is of a world where economic freedom is still correlated to wealth, but also relief from poverty and, despite the scaremongering of the left, proportions of wealth owned by the poor relative to the rich.

Peter Cresswell pipped me to the post in writing about it,  describing why economic freedom means more than just wealth, but also wealth for the poor (who are many times better off in free economies) but I thought it deserved a longer review.

The report measures a wide range of indicators such as:

- Size of government:  This includes the extent of government consumption, levels of transfers/subsidies, the share of government presence in the market as an owner and investor in business and top tax rates.  No doubt socialists would regard this as being an invalid measure of success or failure, as they would see a large state participant in the economy as positive.

- Legal System and property rights:  Independence of the judiciary, impartiality of courts, protection of property rights, military interference in rule of law, integrity of the legal system, enforceability of contracts, restrictions on sale of land, reliability of the police and the business costs of crime are included here.  I'd have thought most of these would be seen by even those on the centre-left as being critical components of any good state.

- Sound money:  Measures here include growth in money supply, inflation and freedom to hold foreign currency accounts.  Of course those of us who believe that fiat currencies are fundamentally flawed wont be satisfied, but it is a good measure of the management of a key policy that can be so destructive to the wealth and savings of the vast bulk of the population of a state.

- Freedom to trade internationally: Tariffs, regulatory barriers to trade, the usage of black market exchange rates and controls on the movement of capital and people (including travel restrictions) are all considered here.  Again those on the left would be supportive of restrictions on many of those points. 

- Regulation:  Regulations on bank ownership, credit and interest rates.  Labour market regulations ranging from hours of work to conscription, and regulations on starting, licensing and tax for business are all included.  It also measures the need to pay bribes.  Once again, those on the left would be keen to have more of most of these.

The full report is here, and I'll leave it to others to do a more depth distillation of specific results, but for me there are some notable trends and statistics.

Key overall rankings

Hong Kong and Singapore are the top two, followed by New Zealand.  Yes NZ is number three, the freest "proper" liberal democracy.  It shows both how far NZ came in the 1980s and 1990s, but also how far others have not come.

Australia is fourth, but the UK is 12th and the USA 18th.  The last of those should be a clarion call warning to Americans who believe in capitalism that warnings about Obama making America like Europe are optimistic - for six European countries are more free, economically, than the USA.  It is noted the US was ranked 2nd in 2000, and fell to 8th in 2005.  No sign of Bush "neo-liberalism".

In Europe, Switzerland tops clearly, at 5th,  Finland at 9th, Ireland at 12th equal with the UK,  Estonia 14th and Denmark at 16th.   Of the other big European economies it is telling that Germany is 31st (below the likes of Sweden and Austria), Spain 34th,  France is 47th (barely above Poland but behind Albania - yes Albania), Greece is 81st,  Italy is 83rd, all beating Russia at 95th.  Ukraine is the worst in Europe at 122nd.

In the Americas, Canada is 5th equal with Switzerland.  Yes, more economic freedom north of the border.  Chile soars ahead of the rest of the Americas at 10th.  Mexico 91st, Brazil 105th, Ecuador 126th and Argentina 127th.  Venezuela naturally is 144th (bottom rated of those measured). 

In Asia, Taiwan gets 15th, Japan 20th and South Korea 37th. China 107th.  India and Pakistan both 111th.  Myanmar is bottom in Asia at 143rd (yes I know another would be worse). 

In Africa, the best performer is Mauritius at 8th, but then it is a long drop to Rwanda at 45th.  South Africa is 85th.  Most of the bottom rated countries are in Africa, still, with Zimbabwe at bottom on 142nd.

The Middle East has Bahrain topping at 7th, proving that economic freedom does not necessarily mean political freedom.  UAE is 11th and Qatar 17th.  Algeria is bottom of the Arab world at 137th, with Syria at 119th.  Israel is 52nd.

What of New Zealand's ranking?

NZ might be third overall, but it is 95th on size of government (95th smallest out of 144), which shows how highly ranked NZ is on most other measures. 

Yet NZ was ranked far more highly on size of government recently.  In 2009, the year after the current National led government stopped the Helen Clark juggernaut, it was ranked 73rd on size of government.   So National has led the growth in the state, relative to others.  Of course Labour achieved a lot on that front, as NZ was ranked 47th freest in 2000 just after it was elected, but that's a far cry from 1995 when it was 18th.   You can thank Jim Bolger, Jenny Shipley and Winston Peters for that.   You can go further back and see Ruth Richardson saw NZ rise from 66th to 18th in five years and now drop to a ranking last seen in 1985 when Roger Douglas was only starting to unwind Muldoonism.

Beyond that measure, NZ's score on legal system and property rights has slipped a little from a high point in 1995, although it would be interesting to probe into the detail behind the scores here (and elsewhere).

On sound money it remains about as highly rated as it always has been.  However on freedom to trade internationally it is now scored the lowest since the 1980s, with compliance costs on trade, foreign investment limits and limits on capital flows reducing the score.

The overall regulatory score is the best it has been since it has been measured, but on labour market regulations NZ is ranked 9th, its lowest ranking besides size of government.

So what does this mean?  Simple.  Any claim this National-led government is implementing radical free market reforms falls flat on the evidence - it has grown the state.  In relative terms, NZ has been retreating from such reforms for around 17 years now.  The state grows faster under Labour, slower under National.

Yet despite slipping on some measures, especially size of government, NZ ranks well largely because others have slipped as well.   It becomes more apparent if one looks at key comparators like Australia, the US and the UK.

Australia

62nd in size of government, 66th on freedom to trade (a lot of protectionism), 29th on monetary policy, 11th on regulation overall, 13th on legal system and property rights.  Australia is 4th overall still, which is still the best position it has ever had.  However, under that Australia has slipped on size of government (had been 47th in 2009), slipped on legal system and property rights (was 3rd in 2000), slipped on monetary policy (10th in 2009), plummeted on freedom to trade (was 19th in 1990 and has slipped since, mainly because others have moved faster) and slipped a little on regulation (was 8th in 2009).  Disturbingly one area Australia has slipped back on is bribery.   Capital controls are also severely restricted.

In essence, Australia slipped back on protectionism some time ago, but the end of the Howard administration has been characterised by ongoing slippage in economic freedom.  Not entirely surprising, as this has been shrouded by the bubble of mineral prices that politicians have been riding on.

UK

117th in size of government, 41st on regulation, 19th on monetary policy, 15th on legal system and property rights and 5th on freedom to trade.   The UK has slipped badly in recent years as it was 5th overall as recently as 2005, being 12th today.  How has it dropped?  It was 58th on size of government in 1990, just after Thatcher had resigned.  It has fallen steadily since 2000. The legacy of the spending and regulatory measures taken after Blair won a second election is what is now apparent, with the Gordon Brown years particularly reducing economic freedom.  The hysteria over the barely apparent austerity (which is simply slowing the growth in spending) is just that, and the big emphasis now ought to be cutting the size of the state and regulation - but it's unlikely to happen under a Conservative coalition with a schizophrenic leftwing party.

USA

73rd on size of government.  Yes 73rd!  57th on freedom to trade.  31st on regulation.  28th on legal system and property rights and finally 7th on sound money (really??).  Where has the US come from?  It is 18th overall now, but was 2nd as recently as 2000.  By 2009 it was 15th (yes you can thank Bush for that) and the slide has continued under Obama.   On size of government it has dropped from 24th in 1990 to 73rd now, consistently.  That's through two Bushes, Clinton and Obama, and Congresses dominated by Democrats and Republicans.  On legal system and property rights it was 1st way back in 1980, yes before Reagan.  It slipped through to 1995, improved a little for 2000, and then kept slipping back, although is slightly better now than it has been since 2005.  In 2005 it was top for sound money, but it is no surprise that that has slipped with the printing presses.  Freedom to trade was once 7th in 1980, but has slipped back almost consistently since then - globalisation?  No, the US hasn't kept up with that.  The slide has been particularly intense since 2005, but Obama has never been a friend of free trade.  Finally, the US was once 2nd for regulation in 2000.  It has plummeted since then to 31st, notably it was 24th in 2009, showing once more that Bush was hardly a small government President.

Republicans in the US often talk about how they don't want to be like Europe because it is so socialist, but they need to look at themselves.  The US ranking on so many measures is worse than several European countries.  On size of government, Albania, Bulgaria, Lithuania, Moldova, Romania, Switzerland and Ukraine are all smaller than the US.  Yes, Albania, once the last bastion of true believers in Stalin.   This should blow any claims that the US is the bulwark of economic freedom of the world - it quite simply isn't.

Curious ratings

On size of government Madagascar gets the best rating, but given every other rating is 92nd or worse than 100th, it isn't really a fair indicator, much like Bangladesh at 3rd (which more shows an inept state rather than a good small one).  Hong Kong is 2nd though.  At the other end of that ranking, Algeria at 142nd sits near the Netherlands at 144th and Sweden at 143rd.  Big states that are offset by good legal systems, protection of property rights and lower levels of regulation.

Legal system and property rights ratings are more consistent.  Finland is 1st,  NZ 2nd and Denmark 3rd.  Every other top 10 country is either western European, Singapore or Hong Kong.  At the bottom are the likes of Venezuela, Haiti, DRC and CAR.  All other below 100 rated countries are developing countries in Africa and Asia, including the likes of Argentina.  

On monetary policy the leaders are the likes of Japan (yes really!), Portugal, Albania and the USA.  Bottom rated are Zimbabwe, Venezuela, Angola and DRC.  Still I've little confidence that monetary policy deserves a high rating anywhere nowadays.

On freedom to trade internationally, the best rated are the likes of Singapore and Hong Kong, UK, Uruguay, Guatemala, Ireland, Peru, Netherlands and NZ.  Not a consistent lot, but showing different levels of openness.  At worst it is Venezuela, Iran, Myanmar and DRC.  India is also ranked poorly at 114th, not great for a country seeking to emulate China (which itself is 104th).  Russia is 127th, but oddly Iceland is 118th!  A lot depends on what is protected and size of the domestic economy, obviously Singapore and Hong Kong would not thrive being closed economies.

Finally on regulation, the best rated are Hong Kong, but then Fiji, NZ and Singapore.  At bottom is Algeria, Brazil, Myanmar, Venezuela and Zimbabwe.  One wonders if Brazil can sustain growth with such a tightly regulated economy. 

Conclusion

The big picture is that for much of the world economies have been subject to more government regulation in recent years, as the automatic response to a financial crisis caused by central bank fueled credit bubbles and exacerbated by fiscal incontinence has been to regulate more, engage in more central bank incontinence and to do little to substantially shrink state spending.

So let's stop talking about austerity.  In Greece, the only dimension that has ranked well as of late has been monetary policy - the rest have been the measures of a state dominated and regulated economy.  The broad indicators of a sound economy come down to a robust legal system that protects property rights and reasonably sound monetary policy.  Beyond that, the more regulation and more trade restricted the economy, the less likely it is to grow or to deliver better results for the poor. 

There is a lot of further analysis that could be done of these figures, particularly trends in GDP growth, GDP per capita and changes in rankings over time.  Of course this is all based on scoring which is not particularly transparent.  Herein lies the difficulty in making more than broad based interpretations of the report.

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