"This research suggests that economic freedom, rather than foreign aid, has a powerful positive impact and is a better approach."

—James Gwartney
FSU Professor of Economics

FSU News

Report: Economic freedom key to lifting poor nations out of poverty

by Jill Elish

Economic freedom has a greater impact than foreign aid in helping people in poor nations escape poverty, according to Florida State University Economics Professor James Gwartney, the co-author of the just-released 10th edition of the Economic Freedom of the World: 2006 Annual Report.

This year's report features new research by economist William Easterly of New York University, who compares the impact of economic freedom and foreign aid on economic growth in the poorest nations. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete and security of privately owned property, according to Gwartney, who also serves as the director of the Stavros Center for Economic Education at FSU.

"The demand for foreign aid is typically made in the absence of any empirical evidence that it leads to benefits for recipient nations and without asking whether there are better approaches to poverty reduction for the international community to support," Gwartney said. "This research suggests that economic freedom, rather than foreign aid, has a powerful positive impact and is a better approach."

Easterly demonstrates that foreign aid has no positive impact on economic growth in the poorest nations. His research shows that economic freedom can help lift nations out of poverty. Once economic freedom is taken into account, poor nations, far from being caught in a perpetual state of poverty, grow faster than rich nations.

The report, which measures the degree to which the policies and institutions of countries are supportive of economic freedom, reveals that these freedom levels have been rising around the world over the last quarter century. That's good news particularly for the poorest of the poor, according to Gwartney, who has served as an author of the report since its inception in 1996. Robert Lawson of Capital University in Columbus, Ohio, is co-author.

"The bottom line is that the quality of life is higher for those who reside in economies that are more free," Gwartney said. "Free economies grow faster, have a cleaner environment, a lower infant mortality rate and less political corruption. The per capita gross domestic product is about 10 times the income level of the least free quartile. Further, the life expectancy of the freest group is 77 years, compared to 52 years in the least free group."

In this year's index, Hong Kong retains the highest rating for economic freedom, 8.7 out of 10, closely followed by Singapore at 8.5. New Zealand, Switzerland and the United States tied for third with ratings of 8.2.

The United Kingdom and Ireland are tied for sixth place. Canada ranks eighth, and Iceland and Luxembourg are tied for ninth place. The rankings of other large economies are Germany, 17; Japan, 19; France, 24; Italy, 45; India, 53; Mexico, 60; Brazil, 88; China, 95; and Russia, 102.

Among those nations that have made substantial gains in economic freedom since 1985 are Hungary, Iceland, El Salvador, Zambia, Poland, Bolivia, Israel, Ghana, Uganda, Peru and Nicaragua—though some of these began at very low levels or have experienced ups and downs over the period. Among those nations that have registered significant losses in economic freedom since 1985 are Myanmar, Venezuela and Zimbabwe.

The bottom nations were the Central African Republic, Rwanda, Burundi, Algeria, Guinea-Bissau, Venezuela, Democratic Republic of Congo, Republic of Congo, Myanmar, and Zimbabwe. However, a number of other nations for which data are not available, such as North Korea and Cuba, may have even less economic freedom, he said.

Gwartney and Lawson used 38 components to measure the degree of economic freedom in five areas: size of government; legal structure and protection of property rights; access to sound money; international exchange; and regulation. The rankings are based on 2004 data, the latest available.

The annual report is widely used by scholars and policy makers and is published in conjunction with the Economic Freedom Network, a group of independent research and educational institutes in more than 70 nations. The Cato Institute in Washington, D.C., is the lead institute in the United States.

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