Economic freedom has a greater impact than foreign aid in helping people in poor nations escape poverty, according to the Economic Freedom of the World: 2006 Annual Report, released by the Fraser Institute of Canada in conjunction with the Institute of Economic Affairs in the UK.
In research published in this year’s report economist William Easterly of New York University compares the impact of economic freedom and foreign aid on economic growth in the poorest nations.
"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 which the international community should support instead" said co-author of the report, James Gwartney, Professor of Economics at Florida State University. "The research in this edition of Economic Freedom of the World suggests that economic freedom, rather than foreign aid, has a powerful positive impact on development".
Easterly demonstrates that foreign aid has no positive impact on economic growth in the poorest nations. His research shows that economic freedom has a strong and positive impact on prosperity in general and on helping lift nations out of poverty.
Once economic freedom is taken into account, poor nations, far from being caught in a perpetual cycle of poverty, grow faster than rich nations.
"A key component of the success created by economic freedom is the ability to experiment, find economically successful areas of production, and prune those areas that do not succeed so that resources may be transferred to where they are most productive," said Fred McMahon, The Fraser Institute’s director of trade and globalization studies.
International rankings
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 the 6th place. Canada receives a score of 8.0 and ranks 8th. Iceland and Luxembourg are tied for 9th place.
The rankings of other large economies are Germany, 17; Japan, 19; France, 24; Italy, 45; Mexico, 60; India, 53; China, 95; Brazil, 88; 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.
Most of the lowest-ranking nations are African, Latin American, or former communist states. Botswana’s ranking of 35 is the best among continental sub-Saharan African nations. Chile, ranked at 20, has the best record in Latin America.
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.
Economic freedom on the rise
The report reveals that economic freedom levels have been rising around the world over the last quarter century.
Key findings
- Nations in the top quartile in economic freedom have an average per capita GDP of US$24,402, compared with US$2,998 for those nations in the bottom quartile.
- The top quartile has an average per capita economic growth rate of 2.1 percent, compared with negative 0.2 percent for the bottom quartile.
- In nations of the top quartile, the average income of the poorest 10 percent of the popul
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