Global Trend Toward Freer Economies

Ever since the 1980's, following the legacy of Ronald Reagan and Margaret Thatcher, the global trend has been toward freer economies.



That is one of the conclusions of a fascinating report entitled "Economic Freedom of the World: 2004 Annual Report." The report is by James Gwartney and Robert Lawson, in conjunction with the Fraser Institute and the Cato Institute.



According to the report, the country with the most economic freedom is actually part of a nominally communist country -- Hong Kong. The other countries in the top ten are Singapore, followed by a four-way tie between New Zealand, Switzerland, United Kingdom and United States. Rounding out the top ten are Australia, Canada, Ireland and Luxembourg, in that order.



So what is it that makes economies freer? The report measures five criteria:

1. smaller government, including a lower tax burden to support that government;
2. a secure legal structure and protection of property rights, so that businesses can be assured of reaping the benefits of contract rights, patents and innovations;
3. access to sound money, including a reliable banking system and low inflation;
4. freedom to do business internationally, including low tariffs and taxes; and
5. less regulation of businesses.

These factors are important to businesses of all sizes. For small businesses they are crucial, because small businesses tend to have higher sensitivity to negative factors around them. A small business can be hamstrung or even wiped out much faster than a large business if any of these factors gets out of line.



It would be very interesting to see if there is a direct correlation between economic freedom and the current proliferation of small businesses and entrepreneurial enterprises. The report suggests that economic freedom provides greater opportunities for entrepreneurs (Chapter 2, pages 1-2), but does not actually measure or correlate the two with statistics.