(Reprinted from HKCER Letters, Vol.48, January 1998)
Hong Kong: Still the Freest Economy
Hong Kong is still rated as the freest economy in the world, according to a research report released recently. The report, entitled Economic Freedom of the World: 1997 Annual Report, is sponsored by the Fraser Institute in conjunction with research organizations, including the Hong Kong Centre for Economic Research, in forty-seven countries. It is the continuation of a decade-long effort to develop a comprehensive and accurate measure of differences in the level of economic freedom across countries. It updates and expands the findings presented in Economic Freedom of the World: 1975-1995.
Nobel Laureate Gary Becker said of the report: "We presume that economic freedom contributes to economic prosperity and growth by encouraging creative entrepreneurship and a more productive work force. Yet research on this subject has been hampered by incomplete and inadequate measures of freedom in economic life. This Report helps fills the void with detailed measures for over one hundred nations. It will be an invaluable source for studies of the determinants of economic growth, and for understanding the relation between economic, political and civil freedom."
The central elements of economic freedom are personal choice, freedom of exchange, and protection of private property. Thus, a good measure of economic freedom will identify the extent to which rightly acquired property is protected and to which individuals are free to choose for themselves and engage in voluntary transactions. The seventeen components included in the Index of Economic Freedom reflect these criteria.
Data for the seventeen components of the index were compiled for 115 countries, and statistical procedures were used to assign each country a component rating between zero and ten. Ten represents the highest possible rating, and zero represents the lowest. The components were grouped into four major areas: money and inflation, government operations and economic structure, government takings and discrimination taxation, and international trade. The component ratings were then used to derive a summary rating for each country. The summary rating provides an indication of the degree to which a nation's institutional arrangements and policies are consistent with sound money, reliance on markets, avoidance of plunder and discriminatory taxes, and freedom of international exchange.
Country ratings were also derived for the years 1975, 1980, 1985, and 1990. These ratings make it possible to track the economic freedom of a country over a two-decade period. An increase in a country's summary rating indicates that it is moving toward liberalization and that the economic freedom of the citizenry is expanding. In contrast, a reduction in the summary rating suggests a decline in economic freedom.
By a significant margin, Hong Kong was the highest-rated country in the world in 1995, as it had been in each of the four prior rating years. Singapore, New Zealand, the United States, and, surprisingly, Mauritius round out the top five countries.
During the last two decades, the level of economic freedom has been generally increasing throughout the world. New Zealand has enjoyed the largest increase in economic freedom since 1985, while Venezuela has suffered the greatest loss. Since the collapse of communism, the economies of Eastern Europe and the former Soviet Union have gone through a dramatic period of transition. The Fraser index indicates that during the 1990s these economies have been taking significant strides in the direction of economic liberalism.
The 1997 report rates China and Russia for the first time. Among the 115 countries in the study, China ranks 81st and Russia 105th. Their ratings, thought low, have risen. China's rating rose from 2.3 in 1980 to 3.9 in 1990 and 4.3 in 1995. Russia's rating rose from 0.9 in 1990 to 3.5 in 1995.
Economic freedom and prosperity are strongly related. According to the index, the average per capita GDP of the freest economies was US$14,829, while the corresponding average for the least free economies was a paltry US$2,541. Between 1985 and 1996 the freest economies registered a 2.9 percent average growth rate of per capita GDP. For the least free countries, the per capita GDP fell at an annual rate of 1.9 percent during the same period. Thus, both per capita GDP and its growth rate are positively linked with economic freedom. This positive correlation suggests that countries that follow policies more consistent with economic freedom reap a payoff in the form of more rapid economic growth that leads to higher living standards.
Will Hong Kong remain the freest economy in the world now that the handover has taken place? The answer to this question depends in a large part on the future of China and on the actual implementation of the "one country, two systems" concept. The SAR government will be under pressure to show its mettle and will be tempted to take a more proactive role in the economy. The Fraser report provides a timely reminder that Hong Kong's prosperity is critically dependant on its economic freedom, which is rooted in personal choice, freedom of exchange, and the protection of property rights. The policy of "positive non-intervention" has served Hong Kong well over the years. Any deviation from this policy will be costly.