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Economic Freedom: The Key to ProsperityBy Ambassador Terry Miller

Ambassador Terry Miller is director

of the Center for International Trade

and Economics and the Mark A.

Kolokotrones Fellow in Economic

Freedom at The Heritage Foundation.

Prior to joining Heritage, Miller had

a distinguished career as a diplomat

and public servant. In 2006, Miller

was appointed Ambassador to the

United Nations Economic and Social

Council. Before that, he served as

Deputy Assistant Secretary of State

for Economic and Global Issues.

Miller served overseas in Italy,

France, Barbados and New Zealand.

He headed the U.S. delegation to

the U.N. Conference on Trade and

Development in 2004 and was the

lead negotiator for the Monterrey

Consensus on Financing for

Development.

Miller did his undergraduate studies

in government and his graduate

studies in economics at the University

of Texas in Austin.

FREEDOMTeachingTeachinga series of speeches and lectures honoring the virtues of a free and democratic society

ower to the people!

I have wanted to say that for 40 years. The last time I did, I was on a college campus. It wasn’t quite a setting like this. It was in Austin, Texas, and I actually wasn’t inside a building. I was in the middle of the street.

Back then my goal in life was to challenge entrenched special interests, to diffuse power throughout society, to give everybody an equal chance to get ahead in life. And those are still my goals today.

Power to the people.

What on earth am I up here talking to you about? I work for the most conservative think tank in Washington, D.C. I work for The Heritage Foundation. How can a conservative be a radical in terms of wanting to spread power throughout society today?

Well, I’m going to just spend about three minutes before I start my talk to tell you how that happens.

I’m going to ask you to think about the principles of the American Revolution. We hold these truths to be self-evident – that all men and women – they were kind of retrograde in those days – are created equal with God-given powers.

Well, what are we talking about when we talk about being a conservative today? We’re talking about conserving the principles of the American Revolution, about helping to continue to create that government of the people, by the people and for the people.

So, what are the principles of economic freedom I’m talking about? They’re just what I was talking about 40 years ago when I raised my fist and called for power

This is the first lecture delivered to students of The Fund for American Studies’ 2011

summer institutes. This annual lecture is named in honor of Dr. Lev Dobriansky, who

was the founding director of the first TFAS program, the Engalitcheff Institute on

Comparative Political and Economic Systems, otherwise known as ICPES.

Ambassador Terry Miller is the director of the Center for International Trade and

Economics at The Heritage Foundation. Miller directs the Center’s ongoing research

into the role of free markets and international trade and fostering economic growth

around the world.

The Center’s signature publication in this area is the Annual Index of Economic

Freedom, a country-by-country guide co-published by The Wall Street Journal.

to the people. Empowerment of the individual – that’s the number-one thing we’re talking about when we talk about economic freedom.

The second thing – nondiscrimination. Everybody should have an equal chance in life. We’ve done a pretty good job in the United States in eradicating discrimination. It wasn’t always the case.

But you go around the world and if you can think of a way that we can pigeonhole people into groups – whether it’s by religion, race, gender, ethnic background, color, anything you can think of, language – I will find an example for you where people are discriminated against because of that. One of the things that economic freedom does is help break down those walls.

And the last thing is open competition. I talked about everybody having an equal chance. We want everybody to be able to compete on a level playing field, to have the opportunity.

What happens in this life all too often is that special interests get control of

the levers of power and they use those levers to eliminate competition or to make sure that they get a special break in society. That’s not consistent with the ideas of economic freedom.

Is this all just talk, or do we try to actually do something about it? Well, with the Index of Economic Freedom, we actually try to put some numbers behind this. We look at countries around the world. We have a fairly elaborate scheme in place for measuring economic freedom.

Why do we want to measure it? Because only by giving people an accurate measurement of where they are do they gain the incentive to change where they – and ultimately we, their fellow citizens – are. And we do find that people in countries around the world want to change. They want to improve their scores.

We look at four basic areas, and we have 10 indicators of economic freedom. We collect an awful lot of data.

We look at the business environment – how easy is it to start a business or

to go bankrupt? Because in a market economy, it’s absolutely essential that you have the ability not only for new businesses to grow, but for old businesses that are no longer efficient, that no longer have the highest standards of productivity, to fail. It’s absolutely essential that they be allowed to go out of business and that we take those resources – that capital, that physical infrastructure and those employees – and put them to work elsewhere in the economy, where they can be more productive.

We look at labor freedom. How easy is it to hire? How easy is it to fire? Because again, you have to have both in a market economy. It’s important that businesses be allowed to get rid of employees that aren’t functioning productively in their enterprise. That’s part of the market system. By the same token, those employees should be able to freely sell their labor anywhere they want to and go out and put themselves to the best use to earn a profit for themselves and for their families.

We look at monetary freedom. Does the government provide a stable

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“After a two-year hiatus,

economic freedom

is rising again in the

world. It’s been very

interesting to watch

what happened during

the financial crisis

and recession because

some countries actually

turned away from

economic freedom.”

environment, a currency that is a stable stock of wealth in society?

We look at government intrusiveness in the economy, government size. How big is the government as a percentage of the gross domestic product or that country’s economy overall?

In the United States, historically our federal government has taken about 20% of our gross domestic product. That’s been the average since the end of the Second World War – 19.6% is the actual number, the average level of government spending as a percentage of GDP in the United States economy.

But last year, that number rose to 24% of our economy. This year it’s running over 25% of our economy through the federal government. That’s more than one dollar out of every four, and that ought to at least raise some questions in our minds.

Fiscal freedom, taxation – the United States has the second highest corporate tax rate in the world right now. We have a highly progressive tax rate – much more progressive than most other countries. It’s very typical even in countries of Eastern Europe or the former Soviet Union now to find flat tax rates at a level of 25% or 15% or even 10% in some cases.

So, when you’re taking tax revenue out of society, you have to think about not only what use will that money be put to, but where’s that money coming from? What’s the opportunity cost? That’s what economists would say. What are the alternative uses that money could be put to? Is its use through the government the best use of those resources?

We look at trade freedom. Is society open to the outside world? Do we allow competition, not only from the people across the street or the people in the next state, but how about the next country? Is there any difference between

competition from those various levels – or should we think about them all in the same way? Is competition a good thing? Well, I think it is because it promotes productivity, it promotes efficiency and it gives Americans access to high quality goods and services at the lowest possible price.

How about investment freedom? Can capital flow wherever it wants? Well, we measure that in societies around the world. A lot of societies put restrictions on the investments that can come in. They require national ownership of some industries. We do that even here in the United States in some instances.

How about financial freedom? This is a big one because many countries control access to credit. They direct through political processes the allocation of credit in society. If you’re already in business or are a potential entrepreneur, you may want to invest in something, go out and borrow money to build a business, or hire employees. You may have to go to a government office and get permission from someone to do that.

That leads me to the next area, but it’s not property rights. I’m going to skip that one for a second and focus instead on corruption. Every time an individual has to go into a government office and ask for a signature or a favor or permission, that creates an opportunity for a corrupt interaction. There may be a request for a favor in exchange or a request for a bribe in exchange.

So, we look at freedom from corruption as one of the important aspects of economic freedom in society. This is an interesting area because it’s the only part of our index where we use survey data. By survey data, I mean someone goes out and actually asks people questions about what they think about the level of corruption in their society.

It’s not done by The Heritage Foundation or the Wall Street Journal.

It’s done by a nongovernmental organization called Transparency International. They ask questions of people in societies. So, when we get a corruption rating for a country, it’s the opinion of their own citizens about the level of corruption in their country.

And finally property rights: This is one of the most basic foundational elements of economic freedom. Hernando De Soto, a prominent economist from Latin America, has estimated that over $9 trillion of assets are tied up in land, in housing and in property that is owned by individuals in a developing country, but they can’t access that capital because they don’t have clear, legally defensible titles to it. So, they can’t take their title down to the bank and get a mortgage. They can’t take their title down to the bank and borrow on that to create a productive enterprise. So, in the index we look at the extent to which property rights exist in society.

Every country we measure gets a grade in each of these 10 areas. We average those grades together and that gives every country an economic freedom score for evaluation purposes.

Now, the 2011 index has about 400 pages. This is the seventeenth year we’ve been doing this, so we have a very elaborate and comprehensive database. That database is online at the Heritage website. It’s available to any researcher that wants to go into it. They can duplicate our results, or they can use the data to create their own research projects – and many researchers do just that.

We, The Heritage Foundation, do this in partnership with the Wall Street Journal. We are up to 183 economies that we are looking at around the world. That’s practically every country in the world. We’re able to grade 179 of those. The other four we can’t fully grade because we can’t get the data.

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And that leads me to the last point – data-driven analysis. It’s very important to us that this not just represent our opinion about what’s going on in countries. It’s very important that we try to the best of our ability to provide actual, factual, neutral data about what’s going on in countries around the world.

So, we use data from places like the World Bank or the World Trade Organization and the International Monetary Fund. In the index, you can see the sources of the data that we use to grade countries in each of these areas.

And a final thing I’ll say about how the index is created is that every graded country in the index has a country page – actually, two pages – in the book. We give a summary of the country’s score, we give some background information about the political situation in that country, we talk about how their score has evolved over time, and then we discuss each of the 10 freedom factors on an individual basis.

Now, what are the results of this analysis? Well, I’m happy to announce that after a two-year hiatus, economic freedom is rising again in the world. It’s been very interesting to watch what happened during the financial crisis and recession because some countries actually turned away from economic freedom during this time.

There’d been quite a trend toward greater economic freedom in the world. That started before we started the index – certainly from the time of the fall of the Berlin Wall, the great liberation of Eastern Europe and the countries of the former Soviet Union. That happened in the late 1980s and the early 1990s. We started measuring economic freedom in 1995, so we actually missed out in the index on that great upsurge in freedom.

But even since then, we’ve seen a positive rise until about three years ago when we had the financial crisis and

then we saw some countries – including some very important countries – turn their backs on economic freedom.

But this year, economic freedom on a worldwide basis is on the rise again. That’s not steady all over the world. There are some pretty important regional differences – and actually, they bring a smile to my face because look at the score for sub-Saharan Africa. They’re leading the world in improving economic freedom, and they need it because the situation there is still quite dire in many of those countries.

North America is the only region that lost economic freedom. Can you imagine which country was dropping and causing that score to go down? Well, one that’s pretty close to home.

What economies do the best? The top four are all from the Asia Pacific region – Hong Kong, Singapore, Australia and New Zealand. It’s a pretty impressive demonstration of economic vitality in the Pacific Rim.

It’s not just on the Asian side. It’s on the North American side too. Mexico’s been improving, as has South America. Chile is one of the top performers in our index, and Colombia is doing very well. Peru is performing nicely, although they just had an election that may turn things around.

Look at the bottom 10 countries there. I don’t think there are any surprises on that list for you. Maybe Venezuela, which used to be one of the richest countries in the world. It has a great endowment of oil and natural resources – and yet a steady drop in economic freedom is starting to show up in social indicators and standard-of-living indicators in Venezuela. And Zimbabwe in Africa – again, formerly one of the most prosperous countries in the world is now an economic basket case because of the loss of economic freedom that has occurred in that country.

I wanted to show you which countries were doing the best in terms of gaining and losing. You can see a lot of African countries on the gaining side. It’s very hard to gain three points in our index, so that’s a big movement and is very significant from a statistical point of view.

But look at the losers again. I don’t think Iceland’s a surprise – a major catastrophe in their economy because of overextension of the banking system. But look at the United Kingdom down there – formerly one of the champions of economic freedom. Now they’ve dropped out of the top 10 of our list. They’re down at number 16 at the moment in terms of economic freedom. That’s not a very good performance.

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And then finally in this segment, I just wanted to show you what’s happened over the lifetime of the index. And here you really clearly can see the improvements in the countries of Eastern Europe and the former Soviet Union that made huge gains in our index over time. They are now the staunchest defenders of economic freedom anywhere in the world.

Why might that be? Well, for me, it’s pretty obvious. They’ve lived under a communist system. They’ve lived under a “command and control” economy. They know what life is like in those systems and they don’t want to go back.

The losers there – I talked already about Zimbabwe and Venezuela. Look at Argentina. Argentina 50 years ago was one of the richest countries in the world – not one of the richest countries in Latin America. It was a middle-income country, one of the wealthiest, best countries in the world – and through a horrible series of government decisions – Peronist decisions, socialist decisions – they have turned their economy into a basket case in Latin America.

Now, why does any of this make a difference? Let’s look. I’ve created this scale. I’ve got winners. I’ve got losers. I’ve got countries with good scores. They can point to the A by their name and other countries get a C- or something. That’s all well and good, and countries care about that sort of thing, but does it really matter in people’s lives?

Well, I’m here to tell you that in fact it does matter, and it matters a lot because economic freedom is the key to prosperity. Our graph shows a correlation between economic freedom scores based on our index and gross domestic product per capita – that is per capita incomes in society. And it’s a very high correlation for data sets of this size. The correlation is about two-thirds. That means about two-thirds of the variation in GDP is accounted for by changes in

economic freedom scores as we measure those scores.

So, that makes a real difference. Particularly, it’s pretty clear from our graph that there’s actually a tipping point. If you look at a score of about 60, you can see that there’s not much change in the countries before that area. Changes in economic freedom score don’t tend to make that much difference in per capita income.

Once you get past that point, it starts making a huge difference in your per capita incomes. I think that just emphasizes the importance of those foundational freedoms I talked about – elimination of corruption, property rights, the rule of law in society. If you don’t have those, well then, you don’t really have any economic freedom at all.

This is another way of showing the importance of economic freedom. This shows the data for the various regions. I’ve taken the five highest-scoring countries in each region and compared them with the five lowest-scoring countries in each region. Look at the differences in per capita income. It’s about five times in Europe, but it’s over 10 times in Asia and the Pacific. The freer countries have per capita incomes that greatly exceed per capita incomes in the less free countries.

Life, of course, is not just about income. So, we’ve tried to look at other measurements as well. This shows a correlation between economic freedom and something that’s called overall well-being. It’s based on an index produced by the Legatum Institute. That’s an institute headquartered in Doha, Qatar, but also in London, England. And they produce something called the Prosperity Index. That is a much broader indicator of well-being. It includes things like health care; it includes things like mortality rates, and it includes things like education levels.

And we ran a correlation between our economic freedom scores on the one hand and the prosperity scores on the other. We found, again, a very high correlation. Countries with higher levels of economic freedom have much higher levels of overall well-being, as measured by the Prosperity Index.

The same thing holds true for the UN Development Program’s Human Development Index – the same type of positive correlation. Countries with higher economic freedom scores have higher levels of human development.

How about environmental protection? Are you all environmentalists? I hope so. I certainly am. Well, we wanted to look and see how economic freedom related

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Teaching Freedom is a series of remarks published by The Fund for American Studies, a nonprofit educational organization in Washington, D.C. The speakers featured in each issue of Teaching Freedom delivered their remarks at a TFAS institute or conference or serve as faculty members in an institute.

The speakers who participate in the educational programs contribute greatly to the purpose and mission of TFAS programs. The speeches are published in an effort to share the words and lessons of the speakers with friends, alumni, supporters and others throughout the country and world who are unable to attend the events.

Visit www.TFAS.org/TeachingFreedom to read past issues of Teaching Freedom.

date

2011 LEADERSHIP NETWORKOctober 14 - 15Dallas, Texas

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2012 BALTIC CRUISEJune 09 - 19

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Visit www.TFAS.org for information on all TFAS events.

to the environment. I work for The Heritage Foundation. I had access to a lot of nice conservative databases, but we didn’t think our findings would have a lot of credibility if we did that.

So, we went to the Yale University School of Law and we went to their School of Environmental Law and Policy. They create an index of environmental protection there that looks at countries around the world. We wanted to see how countries that did well in protecting the environment did in terms of economic freedom.

You can see the results on our index graph. The countries that are more free economically do a much better job in protecting the environment. A lot of people think that you need government controls to protect the environment. Really, that turns out not to be the case. If you let the market system operate, if you let individuals make decisions freely, if you let people try to maximize their profits in their business enterprises,

they will do so in a way that minimizes their use of resources. It just makes sense, doesn’t it?

If you use fewer resources in your production processes, you’re going to maximize your profit – and at the same time, it’s good for the environment. Well, that’s what the data shows.

One more correlation I want to talk about? A lot of people think capitalism, the free market system, which is what I’m talking about – they think it’s good for the rich but not good for the poor. But what does the data show?

Well, in the first instance, the data shows that we’re doing a really good job around the world in eliminating poverty. This shows 10-year changes in poverty for all countries around the world. That’s a four-and-a-half percentage point drop in poverty over the last 10 years in countries worldwide.

That’s a pretty good record and one that I think we should all take some satisfaction in. It’s not perfect. There’s a long way to go. As long as one poor person exists on the planet, I think our goal should be to continue to try to minimize or eradicate poverty. We shouldn’t delude ourselves that what we have been doing is hopeless or not working because it has been working.

But the countries that gained economic freedom did an even better job in reducing poverty. Based on our index, we found that the countries that had

gained economic freedom over that 10-year period had knocked almost six percentage points off their poverty rates, compared to about three percentage points for the countries that lost economic freedom.

So, it turns out that economic freedom is, in fact, good for the poor. Remember when I started this – power to the people. That’s the ultimate goal here. That’s what we’re talking about.

“Countries with higher

levels of economic

freedom have much

higher levels of overall

well-being, as measured

by the Prosperity

Index.”

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