Economic Freedom in 2010

Free markets are in retreat.

As the global recession took hold of the world last year, free-market capitalism increasingly came under persecution. Much of the industrialized world accepted an expansion of government power over the economy in the form of greater oversight, tightening financial regulation and sharper labor laws. Taxes went on the rise consequently, targeting especially the supposed perpetrators of the meltdown: bankers and big business, although they were hardly to blame for the situation.

The 2010 Index of Economic Freedom published by the Washington-based Heritage Foundation and The Wall Street Journal reflects these changes as countries formerly steeped in the free-market tradition have fallen on the scale, the Netherlands, the United Kingdom and the United States foremost among them.

The Netherlands, fifteenth on the list, dropped two points from its rating of last year as business, financial, labor and monetary freedom all declined. Particularly burdensome is the Dutch tax regimes. The country’s overall economic freedom “is restricted,” notes the Index, “by a high level of government spending and the lack of fiscal competitiveness.”

“As a participant in the EU’s Common Agricultural Policy,” agriculture is heavily subsidized in the Netherlands, “distorting the prices of agricultural products.” The costs of energy and pharmaceuticals as well as housing rents are also regulated while policies introduced last years that distort domestic prices amounted to a deduction of so much as ten points from the country’s monetary freedom ranking.

In the wake of action taken in Britain and the United States, the Dutch government too nationalized banks in October 2008 and invested heavily in several other financial institutions. The country’s labor market is “relatively rigid” and subject to increased government measures to fight unemployment. “The non-salary cost of employing a worker is high, and dismissing an employee is relatively costly and difficult.” A situation made all the worse by the current government. In terms of labor freedom, the Netherlands scores similar to countries as Algeria, Ethiopia, Russia and the Ukraine.

Japan, nineteenth on the list, actually improved its standing in terms of economic freedom last year, if only slightly. “The export-oriented Japanese economy has long benefited from global trade,” according to the Index, “although non-tariff barriers linger, hurting overall trade freedom.” The country scores above average in many regards, including business freedom, the protection of property rights and lack of corruption. “The regulatory environment,” moreover, “is efficient and facilitates overall entrepreneurial activity.”

Nevertheless, the Japanese economy is stagnant. Deflationary pressure and a mounting public debt are hurting the country’s chances of recovery while the financial sector, although “modern and well developed”, remains subject to government interference and “a host of restrictions.”

A “high-income tax rate and a moderate corporate tax rate” have decreased Japan’s fiscal freedom while government expenditure, “including consumption and transfer payments,” is high, equaling 36 percent of GDP. “Efforts to reinvigorate the economy and the rising cost of social welfare for an aging population have put government spending on an upward trend.” Foreign investment is hampered by “overregulation” and discouraged by Japan’s growing public debt.

France receives a ranking that a Western country ought to be ashamed of, between Saudi Arabia and Romania at place #64, leaving the country just “moderately free”. It actually improved its score last year, but “France’s economic freedom remains curtailed by the pervasive presence of the state in economic activity.” Government is responsible for spending more than half of GDP, owning or controlling major industries as postal services, electricity and railways. Taxes are high while the state’s expenditure ranks among the highest in the world with only Eritrea, the Seychelles and Sweden performing worse.

The country’s investment climate also ranks poorly. While regulation is transparent, “officials have wide discretion to impose ‘unwritten’ performance requirements.” Investments in “sensitive sectors” as agriculture, aircraft, defense, insurance and maritime transport all require government approval.

Lastly, “burdensome regulations hamper productivity and job growth” on the French labor market. “The non-salary cost of employing a worker is very high, and dismissing an employee can be difficult.” Worth mentioning is that an unusually large segment of the French population is employed by the state: about one in every five workers draws a government salary.

The United Kingdom took quite a fall in this year’s listing, dropping to the rank of eleventh economically free country in the world. Monetary and financial freedoms decreased while “a dramatic expansion of state ownership has taken place since late 2008” with the government nationalizing or seizing considerable ownership in several major banks.

“Deterioration in public finances is worse than in other leading economies,” notes the Index. “Welfare benefits, the biggest component of government spending, have been rising. The government deficit is widening rapidly,” while the country’s public debt has climbed to about 60 percent of GDP.

Business freedom in the United Kingdom is still among the highest in the world. One is able to start a business within two weeks in the country whereas the world average stands at 35 days. “Bankruptcy is easy and straightforward.” Moreover, investment remains free and flexible with few restrictions against foreign capital. “The investment code and bureaucracy are generally transparent and efficient.”

The British financial system, although “efficient and competitive” with prudent supervision and transparent regulation, has been subject to unusual government interference throughout the past year. Banks were nationalized with calls for greater oversight producing additional regulation. Corruption increased slightly.

Eighth on the list is the United States which witnessed “notable decreases” in financial and monetary freedom as well as the protection of property rights. “Government interventions in financial markets and the automotive sector have raised concerns about expropriation and violation of the contractual rights of shareholders and bondholders,” warns the Index.

In fact, the country’s scores lowered on almost all fronts with only freedom of trade improving last year. The government’s “interventionist responses to the financial and economic crisis” are to blame. “Uncertainties caused by ongoing regulatory changes and politically influenced stimulus spending have discouraged entrepreneurship and job creation, slowing recovery.”

“Tax rates are increasingly uncompetitive,” and have become “burdensome” to the American economy. Government expenditure is on the rise with “massive stimulus spending […] creating unprecedented deficits.”

Financial freedom, unsurprisingly, has dropped as “the government has intruded on firms’ management in unprecedented ways.” The financial market is still dynamic and developed although the absence of transparency and accountability in the operation of the Troubled Asset Relief Program (TARP) and similar injections of capital have “increased concerns about the potential for government corruption.”

Topping the list are Hong Kong, Singapore, Australia and New Zealand, with Canada coming in seventh. The global turndown did affect these countries and sometimes, regulation did increase but on the whole, their open markets coupled with competitive tax regimes, a solid protection of property rights and flexible labor laws have proved sufficient to bring about a quick and steady recovery.

In Hong Kong, government spending is among the lowest in the world, equaling 14.5 percent of GDP. “Disciplined fiscal management” has helped the city weather the recession as “government has made efforts to maintain a balanced budget.”

Singapore spends even less, with low tax rates and high business activity as a result. “Commercial operations are handled with transparency and speed, and corruption is perceived to be almost nonexistent.”

In Australia, the financial sector, as much of business in general, is subject to a minimum of regulation. “Relatively low leverage and a high ratio of capital adequacy, coupled with banks’ limited exposure to securitized assets, helped to avert a sharp credit contraction during the global financial crisis.” No banks were nationalized. No corporations had to be bailed out with billions of dollars of taxpayers’ money.

New Zealand has even gone against the current, recently cutting corporate tax rates. Setting up a business takes no more than a single day there. The country can boast “an impressive record of market reforms and benefits from its openness to global trade and investment.”

Time and again, as this year’s Index of Economic Freedom also shows, we are reminded that in countries where regulation low and government is far from pervasive in the economic sphere, growth is the norm. Freedom breeds prosperity whereas forced attempts to model society according to political notions of justice and progress are doomed to fail. Rather they will produce the very opposite of their intentions for free-market capitalism refuses to function under restriction.