How Economic Freedom can Create Economic Growth

When citing the economic growth of China and India as an example of how freeing up trade brings prosperity, a common counter-argument is that the vast size and populations of those countries skews the comparison with other (developing) countries. There are plenty of examples, though, of small countries prospering for the same reason. Arguably the two best examples are Hong Kong and Singapore; the two most economically free nations in the world today.

Despite (or because?) its small size and population of only 7 million, Hong Kong is the world’s 10th largest trading economy and is ranked the world’s most competitive country. Moreover, its unemployment rate of about 3 percent in recent years and extremely low tax rates by OECD standards would make many a European or North-American jealous.

Another economic powerhouse in East Asia, Singapore is less than one third the size of Luxembourg or about half the size of the city of Los Angeles and has a population of approximately 5.5 million. The Singapore economy grew by an average of 8.6 percent between 2004 and 2007. After contracting by 0.8 percent in 2009 as a result of the global financial crisis, it rebounded 14.8 percent a year later. Singapore is consistently in the top-3 most competitive countries in the world and its unemployment rate is far lower than that of most developed countries, at 2 percent or less. Tax rates are far lower than those of many other developed nations, GDP per capita is among the highest in the world and the country is known to have a remarkably corruption-free environment.

Though to say that economic freedom paves the way for prosperity may sound like stating the obvious to Economic Freedom Economic Growthsome, it is certainly not always put into practice. In fact, the words “economic freedom” are hardly ever uttered by those who seem to constantly be talking about “creating jobs”. When is the last time you heard a politician, economist or media outlet advocate for more economic freedom as a means to achieve prosperity? All too often low unemployment is imagined to be just one brilliant government program away. The pundits then proceed to debate which program would secure the most “new jobs”. No mention of economic freedom there.

Moreover, very few people seem to ask the question of what the goal is: to create new jobs or to boost economic growth? Do the two necessarily go hand in hand? An upcoming blog post will deal with that debate. For now, let’s get back to how economic freedom might relate to prosperity.

First off, we should ask ourselves: what is economic freedom? The index above referred to and published in Economic Freedom of the World names personal choice, voluntary exchange, freedom to compete and security of privately owned property as the cornerstones of economic freedom. It then uses 42 variables to construct a summary index which, in the interest of time, we will not go over here. Still, it is worth going over the cornerstones of economic freedom as determined by the authors of the report.

In an economic context, personal choice could refer to my freedom to buy a 32 ounce soda if (God forbid) I felt the need to do so, without mayor Bloomberg threatening to fine me or the person offering it to me. The principle of voluntary exchange holds that buyers and sellers should be free to engage in transactions on a voluntary basis, i.e. if people are forced to buy a product or service – Obamacare, anyone? – they are less economically free.

Freedom to compete is another essential part of economic freedom. For instance, if Apple obtains a patent for a particular product, its competitors are effectively barred from competing in that particular market unless it finds ways to produce a similar product. This, by the way, not only reduces economic freedom but also tends to keep prices artificially high by reducing the supply of the product in question.

Perhaps most important to economic freedom and consequently economic growth, is the security of private property. After all, it would be quite a stretch to claim that someone is free if his or her private property can be stolen at any time by criminals without any repercussion. Besides, this would pose a major disincentive for anyone to accumulate wealth. The same can of course be said about taxation, which is why it should not be surprising that the economically freest countries generally have low tax rates.

If only those elected “representatives” and heads of state pulling the levers of power understood that!

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