Transcript Economic Freedom of the World The Role of Government in the Modern Growth Economy       Presentation to Institute X LOCATION DATE PRESENTER PRESENTING Institute.

Economic Freedom of the World The Role of Government in the
Modern Growth Economy






Presentation to
Institute X
LOCATION
DATE
PRESENTER
PRESENTING Institute
2
3
The crucial questions for economic
management




What causes Economic Success?
What are the practices of economically
successful countries and regions?
How can countries and provinces achieve
success and avoid failure
What are the implications of successful
strategies?
Why do some countries succeed
and others fail?
5
A Tale of Two Countries



Hong Kong and Venezuela
From poor to rich
From rich to poor
6
Hong Kong and Venezuela…1950
5000
4000
3000
2000
Hong Kong
Venezuela
1000
0
U.S.
Dollars
per
person
7
Hong Kong and Venezuela today
25000
20000
15000
10000
Hong Kong
Venezuela
5000
0
U.S.
Dollars
per
person
8
Hong Kong and Venezuela
compared
Hong Kong Today
Hong Kong 1950
Venezuela Today
Venezuela 1950
0
5000 10000 15000 20000 25000 30000
Income per person
9
Hong Kong and Venezuela
population growth 1950 - present
Hong Kong
Venezuela
0
1
2
3
4
Population Multiple relative to 1950
5
What differences caused Hong
Kong to become Rich and
Venezuela to become Poor?




Population - evidently not
Natural Resources - not likely
Ability to afford infrastructure - certainly not
Policy differences - a possible source of the
difference
10
The Attitude of Success…economic
freedom in Hong Kong and
Venezuela
10
8
6
Venezuela
Hong Kong
4
2
0
1970
1999
11
12
Hong Kong’s Freedom Advantage
over Venezuela
Percentage advantage
60
50
40
30
20
10
0
1970
1999
The story of Hong Kong and
Venezuela is repeated around the
globe

Motivated the creation of the Economic
Freedom of the World Project to examine
whether there were empirical regularities that
could be found between economic freedom
and other characteristics of societies
including economic growth and development
13
14
Economic Freedom of the World
Project




15 year project examining policies of
successful and unsuccessful regions
Led by Professor Milton Friedman, Rose
Friedman and Michael Walker
Involved 60 of the worlds top economists, four
of whom received the Nobel Prize
Objective: find a way to measure economic
freedom and explore the connection
between it and other attributes
15
What does Economic Freedom
Mean?
The right to pursue voluntary acts of trade
and exchange without interference by
government or others via force or fraud
 The ability to access an impartial judiciary for
the enforcement of property rights
 The right of citizens to keep the majority of
the income they earn

16
What is the Index of Economic
Freedom?
An attempt to identify the factors which make
a country economically free
 A compendium of 21 freedom factors based
on objective data or independent surveys
 A ranking of 123 countries according to the
extent to which they are free
 Now a collaboration of 55 Institutes in 55
different countries

17
The Index measures 21 factors
which are practical indicators
of the extent to which consenting
adults can engage in
Capitalist Acts.
It is the broadest, most objective
measure of economic freedom
ever constructed.
18
19
The components of The Economic
Freedom Index







Size of Government
Structure of the Economy
Monetary and Price Stability
Freedom to Use Alternative Currencies
Legal Structure and Property Rights
International Exchange
Freedom of Exchange in Capital Markets
20
The Top Eleven
Hong Kong
Singapore
New Zealand
United Kingdom
United States
Australia
Ireland
Switzerland
Luxembourg
Netherlands
Argentina
7.6
7.8
8.0
8.2
8.4
8.6
8.8
9.0
9.2
9.4
9.6
The Next Ten
21
Bolivia
Canada
Finland
Austria
Chile
Denmark
Germany
Iceland
Belgium
El Salvador
7.7
7.8
7.9
8.0
8.1
8.2
8.3
8.4
22
How does Canada’s level of
Economic Freedom compare with
the ten most free countries and
with NAFTA trading partners?
23
Canada and the Top Ten
Average
Total
Capital and Financial Markets
International Exchange
Legal Structure/Property Rights
Alternative Currencies
Monetary Policy
Structure of the Economy
Size of Government
3
4
5
6
7
8
Score (out of 10)
Canada
Average of Top Ten
9
10
24
The United States, Canada and
Mexico
Total
Capital and Financial Markets
International Exchange
Legal Structure/Property Rights
Alternative Currencies
Monetary Policy
Structure of the Economy
Size of Government
3
4
5
6
7
8
Score (out of 10)
Canada
United States
Mexico
9
10
Ne
wZ
ea
Un
ited land
3
Sta
tes
5
Ire
l
Lu
xem and
6
bo
urg
Ca
9
na
da
13
Jap
an
Fra
20
nc
e
Ta
iwa 34
n
Hu
38
ng
a
r
Bo
y
ts w
43
an
a
Th
50
aila
nd
52
Ma
l
t
a
Lith
Slo
5
ua
vak
nia 6
Re
6
pu
blic 2
68
Tu
rke
y
72
Po
lan
d
Cr
85
oa
tia
95
Ma
Ira
n
d
Pa
ag
10
p.
as
2
Ne
ca
r
wG
11
uin
0
e
a
R
o
Gu
11
4
ine m ani
a
a-B
11
is s
8
au
12
Alg
0
eri
a
12
2
Economic Freedom Spectrum
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
25
26
World Average: Economic
Freedom
6.4
6.5
6.2
6.2
6.0
5.5
5.5
5.3
5.2
5.3
5.0
1970
1975
1980
1985
1990
1995
1999
27
World Average: Economic
Freedom, adjusted for population
Countries with ranks in 1970
7.3
6.87
6.57
6.8
6.3
6.05
5.98
5.8
5.7
5.69
1980
1985
5.31
5.3
4.8
4.3
3.8
1970
1975
1990
1995
1999
World Average: Government
Consumption as a Percentage of
GDP
20
19.5
19
18.5
18
17.5
17
16.5
16
1970
1975
1980
1985
1990
1995
1999
28
29
World Average: Transfers as a
percentage of GDP
12
10
8
6
4
2
0
1970
1975
1980
1985
1990
1995
1999
30
World Average: Publicly owned
assets as a percentage of GDP
50
40
30
20
10
0
1970
1975
1980
1985
1990
1995
1999
31
World Average: Existence of Price
Controls
8
7
6
5
4
3
2
1
0
1970
1975
1980
1985
1990
1995
1997
1999
32
World Average: Right to own
Foreign Currency
10
8
6
4
2
0
1970
1975
1980
1985
1990
1995
1997
1999
33
World Average: Right to Own
Private Property
10
8
6
4
2
0
1970
1975
1980
1985
1990
1995
1999
34
World Average: Tariff Rate
120
100
80
60
40
20
0
1970
1975
1980
1985
1990
1995
1999
35
World Average: Private Ownership
of Banks
100
80
60
40
20
0
1970
1975
1980
1985
1990
1995
1999
World Average: Right to have
Capital Transactions with
Foreigners
10
8
6
4
2
0
1970
1975
1980
1985
1990
1995
1999
36
37
Population of the world, by
economic freedom rating
Rating (1999)
9.0-10.0
8.0-8.99
7.0-7.99
6.0-6.99
5.0-5.99
4.0-4.99
3.0-3.99
2.0-2.99
1.0-1.99
0.0-0.99
Unrated countries
Population
9,850,700
458,362,700
651,094,287
716,439,060
2,619,445,230
605,938,700
175,429,000
78,138,000
44,464,000
490,646,634
(%)
0.18%
8.18%
11.62%
12.79%
46.76%
10.82%
3.13%
1.39%
0.79%
0.0%
8.76%
1
6
Rank
11
16
21
26
31
99
19
95
19
90
19
85
19
80
19
75
19
19
70
The top ten and how they got there
38
Hong Kong
Singapore
New Zealand
United Kingdom
United States
Australia
Ireland
Switzerland
Luxembourg
Netherlands
39
Some Asian Countries
1970 1975 1980 1985 1990 1995 1999
1
21
Rank
41
61
81
101
121
Japan
Malaysia
Indonesia
Taiwan
China
40
Countries which have increased or
decreased the level of Economic
Freedom
Countries having significant
improvement since 1970
1970 1975 1980 1985 1990 1995 1999
1
21
Rank
41
61
81
101
121
Chile
Peru
Argentina
Philippines
Portugal
United Kingdom
New Zealand
Ireland
Mauritius
41
19
70
19
75
19
80
19
85
19
90
19
95
19
99
Countries with significant
deterioration since 1970
1
RANK
21
41
61
81
101
121
42
Venezuela, Rep.
Madagascar
Syria
Congo, Dem. R.
Nigeria
Pakistan
South Africa
Brazil
Colombia
Iran
43
The Race Toward Capitalism in the Eastern
and Former Soviet Transitional Economies
Eastern and Former Soviet Transition Economies
44
Hungary
Latvia
Czech Rep
Lithuania
Slovakia
Slovenia
1999
1990
Bulgaria
China
Poland
Albania
Ukraine
Russia
Romania
0
1
2
3
4
5
Economic Fredom Index
6
7
8
45
Why is Economic Freedom
Important?



Economic rights are fundamental rights in the
sense that without them there can be no
political freedom or civil freedoms
They are a prerequisite for growth and
development
They are a prerequisite for broader human
development
Per Capita Income, $ US
Per Capita Income and Economic
Freedom Quintile
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Bottom
20%
2nd
Quintile
3rd
Quintile
4th
Top 20%
Quintile
Least Free…………...Most Free
46
47
Economic Freedom and Affluence
Real GDP Per Person (PPP$) 1998 .
40,000
35,000
30,000
R2 = 0.5849
25,000
20,000
15,000
10,000
5,000
0
0
2
4
6
Economic Freedom Rating
8
10
Growth in Real per Capita GDP and
Economic Freedom Quintile
2.5
Growth Rate
2
1.5
1
0.5
0
-0.5
-1
-1.5
Bottom
20%
2nd
Quintile
3rd
Quintile
4th
Top 20%
Quintile
Least Free…………...Most Free
48
49
Growth of Real Per Capita Output in the 1990s of
Countries That Improved the Most Since 1980.
Real GDP Growth Rate, 1990s
8
6
4.5
3.6
4
3.1
2.6
2
1.8
1.7
1.2
1.0
0.4
0
Argentina
(+55)
Bolivia
(+73)
El
Mauritius
Salvador
(+35)
(+70)
New
Zealand
(+20)
Peru (+70) Philippines Costa Rica
(+31)
(+20)
Countries in the Top 40 That Improved
by 20 or More Places Since 1980
(Ranking improvement in parentheses.)
Iceland
(+34)
50
Income (per person) of the Top Ten
Luxembourg
United States
Switzerland
Singapore
Australia
Netherlands
Ireland
Hong Kong
United Kingdom
New Zealand
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
51
Income (per person) of the Bottom Ten
Russia
Gabon
Romania
Algeria
Syria
Pap. New Guinea
Congo, Dem. R.
Guinea-Bissau
Malawi
Sierra Leone
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
52
Of course capitalism works to
boost economic outcomes ...…But
What about Human Development?
Do countries have to choose
between economic development
and community values and social
development?
Human Development
Index (out of 1)
UN Human Development Index
Rating by Economic Freedom Quintile
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Bottom
20%
2nd
Quintile
3rd
Quintile
4th
Quintile
Top 20%
Least Free…………...Most Free
53
54
Economic Freedom and Human Development
1.000
United Nations Human
Development Index
0.900
0.800
0.700
0.600
0.500
R2 = 0.3316
0.400
0.300
0.200
0.100
0.000
0
1
2
3
4
5
6
Economic Freedom Rating
7
8
9
10
Life Expectancy at Birth, 1998, and
Economic Freedom Quintile
80
Years
75
70
65
60
55
50
Bottom
20%
2nd
3rd
4th
Top 20%
Quintile Quintile Quintile
Least Free…………...Most Free
55
1998 Adult Illiteracy Rate, % of population by
Economic Freedom Quintile
35
30
25
20
15
10
5
0
Bottom
20%
2nd
Quintile
3rd
Quintile
4th
Top 20%
Quintile
Least Free…………...Most Free
56
Human Poverty Index
Human Poverty Index and Economic
Freedom Quintile
45
40
35
30
25
20
15
10
5
0
Bottom
20%
2nd
Quintile
3rd
Quintile
4th
Top 20%
Quintile
Least Free…………...Most Free
57
Infant Mortality and Economic
Freedom Quintile
per 1,000 live births
(1998)
80
70
60
50
40
30
20
10
0
Bottom
20%
2nd
Quintile
3rd
Quintile
4th
Top 20%
Quintile
Least Free…………...Most Free
58
% underweight (90-96)
Child Malnutrition and Economic
Freedom Quintile
30
25
20
15
10
5
0
Bottom
20%
2nd
Quintile
3rd
Quintile
4th
Top 20%
Quintile
Least Free…………...Most Free
59
% of population with
access
Access to Health Care and Economic
Freedom Quintile
100
95
90
85
80
75
70
65
60
55
50
Bottom
20%
2nd
Quintile
3rd
Quintile
4th
Top 20%
Quintile
Least Free…………...Most Free
60
61
Income Inequality
Percent of income accruing to the
Poorest 20%
2nd 20%
3rd 20%
4th 20%
Richest 20%
50
45
40
35
30
25
20
15
10
5
0
Bottom 20% 2nd Quintile 3rd Quintile 4th Quintile
Least Free…………...Most Free
Top 20%
62
Underground Economy % of GDP
Bigger Underground Economy
70
Outlier Countries :
60
50
Bolivia
40
Guatemala
30
Honduras
20
Panama
10
Peru
0
0
2
4
6
8
Least Free…………...Most Free
10
63
More Intellectual Property Rights
Intellectual Property Rights
3.6
3.4
3.2
3
2.8
2.6
2.4
2.2
2
Bottom 20% 2nd Quintile 3rd Quintile 4th Quintile
Least Free…………...Most Free
Top 20%
64
Economic Freedom and Cereal Yield
5,000
Kg per hectare
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Bottom 20% 2nd Quintile 3rd Quintile 4th Quintile
Top 20%
Least Free…………...Most Free
65
Economic Freedom and the
Corruption Perception Index
9
8
Score out of 10
7
6
5
4
3
2
1
0
Bottom 20% 2nd Quintile 3rd Quintile 4th Quintile
Top 20%
66
Economic Freedom Versus Corruption
0
1
Corruption Rating
2
3
4
5
6
R2 = 0.4579
7
8
9
10
0
1
2
3
4
5
6
Economic Freedom Rating
7
8
9
% of Population with Access to Safe
Water
90
80
70
60
50
40
30
20
10
0
Bottom 20% 2nd Quintile 3rd Quintile 4th Quintile
Least Free…………...Most Free
Top 20%
67
68
Political Stability
8.5
8
7.5
7
6.5
6
5.5
5
Bottom 20% 2nd Quintile 3rd Quintile 4th Quintile
Top 20%
Least Free…………...Most Free
69
Labour Productivity
(Non-Residential Capital Per Worker, 1990)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Bottom 20% 2nd Quintile 3rd Quintile 4th Quintile
Top 20%
Least Free…………...Most Free
Research & Development as a % of
GDP (Average 1985-1998)
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Bottom 20% 2nd Quintile 3rd Quintile 4th Quintile
Top 20%
Least Free…………...Most Free
70
Political Rights & Civil Liberties
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Bottom 20% 2nd Quintile 3rd Quintile 4th Quintile
Political Rights
Civil liberties
Top 20%
71
72
Ingredients in the growth recipe:
evidence from 123 Countries
2
1.5
1
0.5
0
Growth
Can
-0.5
1st Quintile
3rd
Quintile
4th
Quintile
US
2nd
Quintile
5th
Quintile
Spain
Mexico
Larger Government..............Smaller Government
Hong Kong
Size of Government and Growth
73
74
Private Ownership and Growth
2.5
China
2
Can US
Hong Kong
1.5
Growth
1
0.5
0
1st
Quintile
2nd
Quintile
3rd
4th
5th
Quintile Quartile Quintile
Less Private...…….........More Private
75
Government Transfers and
Subsidies and Growth
2.5
Hong Kong
Mexico
2
US
1.5
Growth
1
Can
0.5
0
1st
Quintile
2nd
Quintile
3rd
Quintile
4th
Quintile
5th
Quintile
Fewer Subsidies.............More Subsidies
76
Growth and the Friendliness of the
Tax System (tax rates and brackets)
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
China
Mexico
Can
1st Quintile
Hong Kong
US
2nd
Quintile
3rd
Quintile
4th Quintile 5th Quintile
Less Friendly...……………….......More Friendly
77
Growth and Taxes on Trade
China
Hong Kong
1.6
US
Mexico
1.4
1.2
Can
1
0.8
Growth
0.6
0.4
0.2
0
1st Quintile
2nd
Quintile
3rd Quintile 4th Quintile 5th Quintile
Lower Taxes............Higher Taxes
78
Some extensions of the Economic
Freedom of the World Project



Marketization indices for sub-national
jurisdictions
The Fraser Institute Index for North America
The National Institute for Economic Research
(Beijing) Marketization index for the 31
Chinese Provinces
Economic Freedom of the
Provinces




Learning from international experience with
the Economic Freedom index
Growth and affluence are options and are not
predetermined
Recognize that the provinces have very
different selections from the range of policy
options
Policy settings generally determine the
perimeters for wealth creation activity
Freetheworld.com
Economic Freedom of the
Provinces
Government Operations
 Takings
 Interprovincial sector
 Labour Market Regulation

Freetheworld.com
Government Operations
Freetheworld.com
82
Total Government Consumption as a Percentage
of GDP
NB
NWF
PEI
NS
1996
1995
MB
QUE
SK
BC
ON
AB
0
10
20
30
Total Liabilities and Net Worth of Government Business
Enterprises and Debt Guarentees as a Percentage of GDP
PE
BC
ON
1994
1993
AB
NS
SK
NF
MB
NB
QC
0
10
20
30
40
Percentage of GDP
Freetheworld.com
50
60
84
Provincial Regulatory Spending as a
Percentage of Business Revenue
NWF
NB
SK
1995-96
1993-94
QUE
PEI
NS
BC
MB
ON
AB
0
0.1
0.2
0.3
Percent
0.4
0.5
Takings
Freetheworld.com
Transfers and Subsidies as a Percentage of GDP
NWF
QUE
PEI
BC
SK
1995
1994
NB
MB
ON
NS
AB
0
5
10
Percentage of GDP
Freetheworld.com
15
Direct Corporate Taxes as a Percentage of Corporate Profits
BC
MB
QUE
1997
1996
NS
AB
ON
PEI
NWF
SK
NB
0
0.1
0.2
0.3
Freetheworld.com
0.4
0.5
Top Marginal Tax Rate (Federal and Provincial Combined)
BC
NWF
QUE
SK
ON
1997
1996
NB
MB
PEI
NS
AB
0.42
0.44
0.46
0.48
0.5
Freetheworld.com
0.52
0.54
0.56
Labour Market Regulations
Freetheworld.com
Annual Minimum Wage as a Ratio of Per Capita GDP
AB
SK
MB
ON
BC
1996
1995
NB
PEI
NS
QUE
NWF
0
0.1
0.2
0.3
0.4
Freetheworld.com
0.5
0.6
Economic Freedom of the
Provinces
Overall Provincial Ranking
Provincial Economic Freedom
8.0
81
7.0
85
89
6.0
93
94
5.0
95
98*
4.0
3.0
2.0
1.0
98*
NF
QC
94
BC
NB
NS
89
MB
SK
81
PE
ON
AB
0.0
Freetheworld.com
1998 Estimate of Provincial Economic Freedom Index
AB
ON
PE
SK
MB
NS
NB
BC
QC
NF
0
2
4
Freetheworld.com
6
8
10
The Relationship Between Relative Economic Freedom and
Relative Per Capita GDP
94
Relative Provincial Marketization
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
0
0.5
1
1.5
2
Relative Per Capital GDP (by Province)
2.5
3
95
Conclusions




Growth and development are choices rather
than predetermined
The ingredients of the growth recipe can be
determined by observing the policies of
successful jurisdictions
The key to high economic performance is
providing economic freedom to citizens
The key to progressive social and human
development is economic freedom
96
The End……phew!
www.freetheworld.com
www.fraserinstitute.ca
Other Slides of Interest
98
Aid as a % of GNP
9
8
7
6
5
4
3
2
1
0
Bottom 20% 2nd Quintile 3rd Quintile 4th Quintile
Top 20%
Least Free…………...Most Free
CHILD LABOUR (% of children
aged 10-14 active in the labour force)
25
20
15
10
5
0
Bottom 20% 2nd Quintile 3rd Quintile 4th Quintile
Top 20%
Least Free…………...Most Free
99
Next – Scores in Each Area
Adjusted by Population
101
World Average: Economic
Freedom, adjusted for population
Countries with ranks in 1970
7.3
6.87
6.57
6.8
6.3
6.05
5.98
5.8
5.7
5.69
1980
1985
5.31
5.3
4.8
4.3
3.8
1970
1975
1990
1995
1999
World Average: Government
Consumption as a Percentage of
GDP, adjusted for population
Countries with ranks in 1970
18
16
14
12
10
8
6
4
2
0
1970
1975
1980
1985
1990
1995
1999
102
World Average: Transfers as a
percentage of GDP, adjusted for
population
Countries with ranks in 1970
6
5
4
3
2
1
0
1970
1975
1980
1985
1990
1995
1999
103
World Average: Publicly owned
assets as a percentage of GDP,
adjusted for population
Countries with ranks in 1970
50
40
30
20
10
0
1970
1975
1980
1985
1990
1995
1999
104
105
World Average: Existence of Price
Controls, adjusted for population
5
4
3
2
1
0
1970
1975
1980
1985
1990
1995
1999
World Average: Right to own
Foreign Currency, adjusted for
population
Countries with ranks in 1970
4
3
2
1
0
1970
1975
1980
1985
1990
1995
1999
106
107
World Average: Tariff Rate,
adjusted for population
Countries with ranks in 1980
60
50
40
30
20
10
0
1970
1975
1980
1985
1990
1995
1999
World Average: Right to have
Capital Transactions with
Foreigners, adjusted for population
Countries with ranks in 1980
5
4
3
2
1
0
1970
1975
1980
1985
1990
1995
1999
108
World Average: Government
Consumption as a Percentage of
GDP, adjusted for population
16
14
12
10
8
6
4
2
0
1970
1975
1980
1985
1990
1995
1999
109
World Average: Transfers as a
percentage of GDP, adjusted for
population
8
7
6
5
4
3
2
1
0
1970
1975
1980
1985
1990
1995
1999
110
World Average: Publicly owned
assets as a percentage of GDP,
adjusted for population
50
40
30
20
10
0
1970
1975
1980
1985
1990
1995
1999
111
112
World Average: Existence of Price
Controls, adjusted for population
5
4
3
2
1
0
1970
1975
1980
1985
1990
1995
1999
World Average: Right to own
Foreign Currency, adjusted for
population
4
3
2
1
0
1970
1975
1980
1985
1990
1995
1999
113
114
World Average: Tariff Rate,
adjusted for population
60
50
40
30
20
10
0
1970
1975
1980
1985
1990
1995
1999
World Average: Right to have
Capital Transactions with
Foreigners, adjusted for population
5
4
3
2
1
0
1970
1975
1980
1985
1990
1995
1999
115