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Economic freedom or foreign aid?

By Doug Bandow

Thursday, Feb 24, 2000, Page 9

Illustration: Yusha

In a world of plenty, want abounds. To blame are big corporations, international trade, and open markets, according to demonstrators who have been attacking the World Trade Organiza-tion (WTO), most recently in Davos, Switzerland. In fact, they couldn't get it more wrong.

Economic liberty offers the world's poor the best hope for a better future. For decades Third World nations shared the protesters' aversion to free markets. Countries routinely chose state-run development strategies in an attempt to accelerate economic growth. The result was disaster. Economies collapsed. Societies dissolved. Countries imploded. Small, wealthy elites prospered at the expense of the impoverished masses.

So foreign aid became the mantra. The US alone contributed more than US$1 trillion (in current dollars) to a variety of assistance programs. But that turned out to be another dead end. In 1996 the UN declared that 70 countries were poorer than they were in 1980; an astounding 43 were worse off than they had been in 1970. All were on the international dole.

The biggest recipients of assistance -- India, Sudan, Tanzania -- were among the worst performers. Indeed, the US Agency for International Development admitted: "much of the investment financed by US AID and other donors between 1960 and 1980 has disappeared without a trace." So, too, has money more recently provided to Bosnia, the Palestinian Authority and Russia. Nor do resource endowments or population densities correlate with overall growth levels. But economic freedom does.

Freedom = Growth

According to the latest volume of Economic Freedom of the World, written by James Gwartney, Robert Lawson and Dexter Samida, the average income of people in the top fifth of economically free countries is nine times as high as that of those in the bottom fifth.

The nations with greater economic liberty grew an average 2.27 percent annually during last decade; those with the least economic freedom shrunk by 1.32 percent a year. People in the most free countries live 20 years longer than those in the least free states.

The importance of economic liberty is particularly evident in the Asia-Pacific, which hosts the top three nations. Hong Kong and Singapore tie as the most liberal economic systems. Both are particularly impressive. Neither possesses natural resources. Both are crowded urban areas. Neither collected foreign aid. Instead, both opened their economies.

Hong Kong has consistently topped the economic freedom list. Its government is small, its economy is relatively unregu-lated, and its currency and financial markets are free. Where Hong Kong lags -- and has fallen significantly since 1995 -- is in the rule of law and enforcement of contracts. Nevertheless, despite China's takeover, the economy remains the envy of the world. Singapore bests Hong Kong in the rule of law and matches it in open currency and financial markets. However, Singapore's government is bigger and its regulations are more intrusive.

Number two to Hong Kong throughout the 1990s, Singapore gained a share of the number one spot by holding its rating steady while Hong Kong slipped. New Zealand, ranked number 32 in 1985, zoomed to number 3 a decade later and continues to maintain that position. It has reduced government spending, deregulated its economy, and freed its currency and financial markets. Wellington demonstrates how economic reform can transform a nation. The US comes in at number four. It does well with its free currency and financial markets. US performance on economic regulation is anemic, however, and the government is a fiscal wastrel.

Poor scorecards

Obviously, such market imperfections have not prevented the US from growing dramatically. But the US would solidify past gains -- and generate an extra future spurt -- if it learned from its Asian competitors and addressed its policy shortcomings.

The reason why many European countries are suffering economically is evident from their rankings. Germany falls among spots 22-24. Austria, France, and Sweden follow at 25-30. Italy and Greece lag even further behind.

As for the rest of Asia, although Australia scores 7-8 and Japan and Thailand earn passable scores, landing in the top 21, others did not do so well. South Korea ranks 47-48, Taiwan runs 51, China comes in at 75-77, and the three leading powers in South Asia, Bangladesh, India and Pakistan are abysmal, ranging between 86 and 96. Obviously there is much room for improvement in Asia despite its domination at the top.

Finally, there are the bottom performers. Myanmar is the worst, with several African states, Alba-nia, Algeria, Syria,and Ukraine close behind (a number of disastrously repressive countries, like North Korea, are not rated).

Economic Freedom of the World offers an important lesson for poor nations: they hold their destinies in their hands. The path to prosperity is simple -- liberty. Free their people to be productive and entrepreneurial, and their societies will grow prosperous and healthy.

Doug Bandow is a senior fellow at the Cato Institute in Washington and a former special assistant to then US President Ronald Reagan.
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