The Unfair Distribution of Economic Freedom
When the World Economic Forum opened in Davos, Switzerland, Wednesday—bringing together 2,500 top corporate CEOs, 40 government leaders, NGO campaigners for many causes, and leading economists and political pundits—the statistic echoing off the Alps was: “The top 1% will have more wealth than the remaining 99% of the people” in the world by 2016. The source of that statistic is Oxfam, the British anti-poverty charity, which timed its report on world wealth equality for this year’s Davos meeting.
So are some populations very good at building wealth, and many others lousy at it?
Does it sound better to say that about 73 million individuals (1% of the 7.3 billion world population) control about half of the world’s wealth? Or that to be in the top 1.0% you need $798,000 in total assets, including your home and retirement savings? Not really, although I just discovered that I am not a struggling retired guy, looking for a new job at 70, but one of the world’s elite 1%.
Nor is it very reassuring to point out that our species, since the year 2000, has doubled its wealth from $117 trillion to $263 trillion in 2014. At least, we—some of us—still know how to make money! A great deal of that new wealth has been created in China, which, though the Communist one-party dictatorship retains a tight grip on politics, has opted for a market economy, freeing up hundreds of millions of Chinese to become richer. Much the same is true of India.
But that leaves us with about 20% of the world’s population controlling 90% of its wealth, with the other 10% of wealth left to the remaining 80% of the world’s population. So are some populations very good at building wealth, and many others lousy at it?
The big decision-makers landing at Davos in their private jets (big traffic jams are expected at small airports) ought to take a look at another study—not quite as up-to-the-moment as Oxfam’s, but more suggestive of solutions.
The 2014 “Index of Economic Freedom,” the 20th in a series jointly published by The Wall Street Journal and the Heritage Foundation, rigorously rates the degree of economic freedom of 186 nations. The survey is probing, and the rankings merciless (for example, the United States no longer is rated “free” economically; that distinction goes to Hong Kong, Singapore, Australia, Switzerland, and Canada).
But what the Davos participants should ponder, even as they take the world’s income inequality seriously, is what the “Index of Economic Freedom” calls the “correlates” of economic freedom:
“Economies rated ‘free’ or ‘mostly free’ in the 2014 Index enjoy average incomes that are more than three times higher than average incomes in all other countries and more than 10 times higher than the average incomes of ‘repressed’ economies. Economic freedom is key to enhancing overall well-being, taking into account other factors such as health, education, security, and political governance.”
So perhaps there are not populations “good” at creating wealth: There are only populations free to create wealth. As the Davos decision-makers ponder wealth inequality, some may be tempted to reach for the usual levers of government: regulation and taxation to redistribute wealth. Certainly, given the themes of this year’s meeting, they will be bombarded with arguments to increase climate pollution targets and energy regulations (Al Gore will take center stage).
They should weigh the cost of reducing economic freedom even as they tout the supposed benefits of environmental regulations, energy regulations, tax policy, banking regulations, and other buttons governments like to press.
When economic freedom, even in a political dictatorship like the People’s Republic of China, brings wealth to hundreds of millions, it also brings to them access to education, health care, and security. And in the end, it brings aspiration to political freedom and the power to fight for it.
In an era when economic growth is driven as never before by innovation, when knowledge and invention are the great “natural resource,” the freedom to create, invest, produce, and trade no longer is merely an “advantage”—it is the life or death of the wealth of nations. If the movers and shakers at Davos care about the opportunity for wealth of untold billions around the globe, they will talk about only one government policy: laissez faire.
That is the message that should be echoing from the Alps this week.
Adjunct: Rich and Free
The International Monetary Fund “World Economic Outlook Database” of April. 2013 (http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx), ranks countries according to their wealth per capita (Gross Domestic Product based on purchasing-power parity divided by population). Here are the 15 countries that top that list in order of their wealth. Next to each country, however, is a very different ranking (shown in parenthesis).
It comes from the 2014 Index of Economic Freedom prepared annually by the Wall Street Journal and Heritage Foundation and now in its 20th year. The index ranks countries according to their degree of economic freedom based on such factors as respect for property rights, degree of economic regulation, and labor freedom. The number in parenthesis is that country’s economic freedom, with #1 the most free.
Qatar (#30)
Luxembourg (#16)
Singapore (#2)
Norway (#32)
Brunei (#40)
Hong Kong (#1)
United States (#12)
United Arab Emirates (#28)
Switzerland (#4)
Australia (#3)
Canada (#6)
Austria (#24)
Ireland (#9)
Netherlands (#15)
Sweden (#20)
The list will surprise most readers and in some evoke skepticism—such lists always do. Both national wealth and economic freedom are complex, in practice if not in theory, and I don’t intend to try to explain (rationalize?) every ranking on the list.
The oil-rich nations with exceedingly small populations (Qatar, Brunei, United Arab Emirates, and Norway) are distinct outliers. They are the only nations among the 15 wealthiest nations with economic freedom rankings above 25—and as high (low in economic freedom) as 40 in the case of Brunei. Their only product is oil. They did not create it, nor did they figure out how to drill for it and ship it: Western companies did that. Economic freedom is not the dominant factor in their wealth. Nevertheless, the Index creates categories, and, for example, in the elite category “free” there are only six nations. But in the next category, “mostly free,” there are 28. Three out of the four oil-producing nations in the top 15 in wealth make it into that “mostly free” category.
Another thing to notice is that five of the nations in the elite “free” category are also in the top 15 in wealth. The exception is New Zealand, rated “free” but not among the 15 most wealthy. I said I would not try to “rationalize” the list; but I will mention that after 10 years of labor-dominated government, New Zealand voters brought back the center-right National Party, led by Prime Minister John Keys with an explicit commitment to economic liberalization. Economic freedom is relatively new to New Zealand.
Well, what about Sweden, ranking 15th in wealth but 20th in economic freedom? Again, Sweden is ranked “mostly free” in its economy. Sweden also is famous for its ‘socialism,’ but that takes the form of an extensive welfare state. Certainly, taxation and borrowing to support a welfare state weaken an economy, but the “production” side of Sweden is left relatively free. One other factor also is relevant: up until 1950, when Sweden began its experiment with the welfare state (not really “socialism”), it was for a century among the most economically liberal and fastest growing nations in Europe. You do not squander that heritage overnight.
To me, the mystery on the list is Austria, ranked #12 in wealth per capita but ranked #24 in economic freedom. Again, Austria’s economy is ranked “mostly free,” and it has a small, very homogeneous population, and a long tradition of higher education. It also leaves most economic decisions to negotiations between workers and employers (for example, Austria has no minimum wage), with government an umpire.
Finally, what about the great United States, a world economic engine, home of the laissez faire capitalist tradition? In 2014, the Index ranked it only “mostly free,” along with a sundry 28 other “mostly free” nations. Why? This must be the most disturbing anomaly on the list and I will let the Index describe it:
“Since [2006]…, it has suffered a dramatic decline of almost 6 points, with particularly large losses in property rights, freedom from corruption, and control of government spending. The U.S. is the only country to have recorded a loss of economic freedom each of the past seven years. The overall U.S. score decline from 1995 to 2014 is 1.2 points, the fourth worst drop among advanced economies.” (http://www.heritage.org/index/ranking)
Sic transit gloria mundi.
About the Author: Walter Donway
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