For the past decade, the Heritage Foundation, which considers itself “Washington’s number one think tank,” in partnership with the Wall Street Journal, has published its annual Index of Economic Freedom. The index draws its inspiration from economist Adam Smith and references his book “The Wealth of Nations” to try and measure his theories concerning “liberty, prosperity and economic freedom.” Below are the top five countries from its influential 2012 ranking.
Hong Kong achieved the top ranking in 2012 with a score of 89.9, out of a possible total of 100. The four main categories cover rule of law, how limited government’s role in business is, regulatory efficiency and the extent to which the economy embraces an open market. The study specifically cites Hong Kong’s strong legal framework, especially its property rights and general support for the rule of law. It also commended Hong Kong for its low tolerance for corruption to support its regulatory efficiency. The study noted several steps in the wrong direction since 2010, such as implementing a minimum wage, which counts against being an open market and more toward inefficient regulation, but the dings have not been enough to unseat Hong Kong as the world’s most economically-free country (or to be more precise, Special Administrative Region).br/>Singapore
Singapore attained a total score of 87.5, placing it second, just behind Hong Kong. As will become evident among the top countries and was also noted in Hong Kong, Singapore stands out from the rest of the world for its strong property rights and fighting against corruption. The study also cited Singapore’s efficient government, which keeps costs low as well as low taxes for the companies residing inside its borders. The country encourages open trade and also ranks highly in terms of offering investment and financial freedom. The government is highly involved in “guiding economic development,” which could be considered excessive regulation but appears to only encourage a free market economy at this point in time.
Australia accrued a total 2012 score of 83.1, landing in third place on the esteemed annual ranking. The key strengths of strong property rights, high freedom from corruption, low government spending and high levels of business, labor and monetary freedom all apply to Australia. More specific factors cited include an independent judiciary and low government debt levels. This last factor stands in stark contrast to other developed economies in the world that are currently laboring under heavy debt loads and precarious fiscal positions. Australia has been deregulating since the 1980s and has worked hard to reduce regulations in its economy, as well as encourage free trade with neighbors such as China.
New Zealand wasn’t far behind its neighbor Australia in the 2012 rankings, with a total score of 82.1 Strong property rights, low government spending, high business, labor, monetary and trade freedoms all apply. The study cited a high degree of economic resilience, which showed through in a relatively quick recovery from a major earthquake in 2011 that hit the economy, but did not send it into a sustained recession or severe downturn. In contrast, Japan is still fighting to recover from an equally devastating earthquake.
Switzerland stands out for being located well outside of the Asian region. Its score came in at 81.1, leading Europe as the freest economy in the region. Its strong property rights result in appealing protections for intellectual property, which healthcare and other firms highly appreciate. The study also cited an independent judiciary that “ensures effective and transparent enforcement of commercial contracts.” Finally, support of open trade is key, as is a sound and stable regulatory environment that lets companies be comfortable in Switzerland and stick around to run and grow their operations.
The Bottom LineAccording to the Heritage Foundation’s rankings, the above countries are the only five to truly be considered “free.” The next class of ranking only qualifies as “mostly free,” and though it still represents an esteemed grouping of countries, to be considered free requires a sustained commitment by the underlying governments to fight for keeping their economies open, efficient and as free from corruption as possible.