We have proof: this is the land of the free

We top the `Index of economic freedom'. But the price of liberty can be neglect
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The Independent Online
In one respect at least, the United Kingdom, along with the United States, Switzerland and Hong Kong, features at the top of a league table ranking countries in order of merit. The Heritage Foundation, a right- wing and influential Washington think-tank, has just published its ranking of nations according to 10 criteria designed to measure economic freedom. By these tests only eight countries in the world, including the UK, are said to be "free". In order, they are: Hong Kong, Singapore, Bahrain, New Zealand, Switzerland, the US, the UK and Taiwan. At the bottom of the table are Cuba, Laos and North Korea.

If we accept the economic theory driving this exercise, then we should be encouraged. The publishers of the "Index of economic freedom" argue that it is a powerful tool to explain why some countries prosper, while others lag behind. The Heritage Foundation claims that there is a significant correlation between economic freedom and the rate of economic growth. It believes that this new theory is a better explanation of economic success, or its absence, than, say, cost advantages, population growth, access to natural resources or the pace of technological change.

This leads the authors to claim that any country in the world can become rich if it wants to. If Bangladesh, for instance, immediately started to remove restrictions on its economy, then rather than languishing at No 118 in the table as it does, it could reach the standard of living currently enjoyed by Americans within 40 years.

By the same token, however, the Heritage Foundation sees foreign aid in the form of money and nothing else as useless or even harmful. Haiti and Peru have received millions of dollars from the US for 52 years yet they are poorer now than they were in the mid-1960s. Poverty is largely a condition imposed on people, the authors argue, by ill-conceived and repressive economic policies.

But formulae for economic success are like recommendations for healthy living, mostly common sense plus advice about a special diet - and ideas about the latter are always changing. Thus when the Japanese economic miracle was under way in the Sixties, Seventies and Eighties, the mystery ingredient was supposed to be the way the Japanese government guided investment to where it was most needed and got new industries going. At the time, Japan, with its high tariff walls, restrictions on foreign ownership, and licensing systems would have come out badly on the index of economic freedom. Now that Japan's arrangements are more liberal in the Anglo-Saxon sense, the country finds itself stuck in a long period of low growth.

The list of the free has some unexpected aspects. The UK is the only country of the European Union to feature. The next one down, the Netherlands, comes in at No 9 under the heading "mostly free". Germany has slipped for the second year running, and now lies joint 20th with Ireland. France is well down.

This is the European league: 7) United Kingdom, 9) the Netherlands, 11) Denmark, 12) Luxembourg, 15) Belgium, 18) Austria, 20) Ireland and Germany, 23) Finland, 27) Sweden, 31) France, 36) Italy, Portugal and Spain, 59) Greece.

More surprising is to find that there is no necessary correlation between economic freedom and political freedom. Hong Kong, at the very top of the list, has been a traditional colony. Singapore is a one-party state. In Taiwan, about a third of all local politicians have criminal records.

In fact the higher a country's position on the index of economic freedom, the less there is for government to do. Britain, for instance, scores badly on tax rates, which are assessed as moderate to very high. To achieve "low taxes" the top rate of income tax would have to be 25 per cent or below, and low taxes are almost bound to equal low welfare.

Then so far as regulation is concerned, two of the questions asked by the Heritage Foundation are: does the government force business to subscribe to limits on the working week, paid vacations, maternity leave? Does the government force business to subscribe to strict environmental, consumer safety and worker health regulations? Such hard-nosed questions characterise American right-wing thinkers. Their notion of freedom becomes at this point what I would call neglect. You cannot ascribe merit to an economy in which, say, industrial accidents are unchecked.

Many of the criteria in this exercise are, however, interesting. Is there corruption in the customs service? To what extent does the government own businesses and industries? Can foreigners own land? Does the government provide subsidies to businesses to hold down prices? Is there corruption within the judiciary? Is a licence required to operate a business and is it easy to obtain one? How extensive is the black market? On the other hand, there seem to be no questions directed towards establishing that governments effectively police markets to remove the constant dangers of monopoly power and collusive trading.

The Wall Street Journal, which has co-published the report with the Heritage Foundation, noted that countries "after they have become economically liberated ... tend to fall back down the scale of economic freedom". I believe that this is inevitable - and appropriate. You could rephrase the Heritage Foundation's conclusion to say that to achieve fast economic growth you pay a price in terms of absence of welfare, social cohesion and respect for the environment.

Democratic societies are unlikely to tolerate this for long stretches of time. Economic freedom and political freedom are generally complementary, but at the extremes they compete. And when pushed, I would rather be free than rich.