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Economic Freedom of the World: 2000 Annual Report 19

COUNTRY REPORTS

This chapter presents an overview of the level ofeconomic freedom in some of the countries in-cluded in this study. Included for each country is abackground description of the levels and changesin economic freedom and, in some cases, the fu-ture outlook for economic freedom. These reportswere produced with the help of the members ofthe Economic Freedom Network, who contributedspecific knowledge of their own country’s circum-stances. More countries are not included becauseit is difficult to have a detailed understandingabout the level of economic freedom in every sin-gle country.

For each country, we present two charts (showingdata from 1970, 1975, 1980, 1985, 1990, 1995, and1997, where data are available.) The first, whichappears in the upper left-hand side of the page,shows the summary economic freedom ratingalong with that country’s overall rank. The left axisand the bars correspond to the country’s summaryratings. The right axis and the line correspond tothe country’s overall rank. (The number of coun-tries rated and ranked varies each year.) The chart

to the right of this shows total government expend-iture as a percentage of GDP over the measure-ment period. For years, this ratio was consideredthe most objective measure of the size of the gov-ernment sector as compared to the market sector.While revealing, it neglects other important as-pects of economic freedom that are highlighted inour index, including the structure of the economy,monetary policy, freedom to use alternative cur-rencies, legal structure and property rights, free-dom to trade with foreigners, and the freedom ofexchange in capital and financial markets. Somewould argue that these “other factors” should haveless (or more) weight in the measurement of eco-nomic freedom. Observation of changes in botheconomic freedom and government expenditureswill help us to interpret the trends in, and meaningof, these two different but interrelated indicatorswith greater understanding.

More detailed information on the 23 componentsthat compose the economic freedom index can befound in the next section, Country Data Tables,which includes all the countries in this study.

20 Economic Freedom of the World: 2000 Annual Report

ALBANIA

Economic Freedom Rating (bar) and Rank (line)

Total Government Expenditure as a Percentage of GDP

5.0

4.3

2.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

62.1

30.8

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

This troubled Balkan country saw its already lowrating fall from 5.0 in 1995 to 4.3 in 1997. Thisplaces Albania 113th out of the 123 countries ratedin this edition of Economic Freedom of the World.Widespread use of government enterprises, pricecontrols, and credit and currency-market controlscontribute to the low rating. The monetary regimehas all but collapsed as Albania’s rating in Area IIIhas fallen to 2.5, reflecting an inflationary and vol-atile monetary policy. But, the financial crisis of1997 appears to be over and there are signs that thesituation is stabilizing as the inflation rate is falling.

Among the most important areas that threaten theeconomy are corruption, lack of public order, the

political tensions in Albania as well as the recentevents in Kosovo.

The growth rate of GDP in 1998 was 8 percent,which is comparable with growth prior to the fi-nancial crisis of 1997. Unemployment continues atan exceedingly high rate (17.5 percent in 1998).

The privatization of strategic sectors is supposed tostart with the telecommunication companies (Al-banian Mobile Communication, Albtelecom).Other companies that are supposed to enter theprocess of strategic-sector privatization includethose active in mines, energy, petrol, and banking.


ALGERIA



4.74.2

3.64.1

2.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

24.932.1 32.9 30.5 28.0

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Since the 1990s, Algeria has been near the bottomof the rated countries. In 1997, Algeria was 117th of123 countries. This poor performance can be at-tributed to the prevailing unstable political situa-tion, the aftermath of bloody independence and asocialistic approach to policy.

The relatively high share of government con-sumption (22 percent) and government enter-prises (rating 0.0), the remaining price controls(rating 4.0), limited freedom in financial markets,and military conscription drag this country’s rat-ing downward.

Monetary policy seems to be improving. The an-nual money growth has been slightly curbed, theinflation variability has been reduced, and the re-cent inflation rate declined from 28.5 percent in1995 to 6.3 percent in 1997, which correspond toratings of 4.3 (1995) and 8.7 (1997).

Due to restrictions on the ownership of foreigncurrencies and a soaring black-market exchange-rate differential, Area IV, Freedom to Use Alterna-tive Currencies, got a rating of 0.0. As well, AreaVII, Freedom of Exchange in Capital and Finan-cial Markets, received a rating of 0.7.


ARGENTINA



6.6

4.8

3.8

8.47.9

3.2

4.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

27.1 28.024.8

30.6

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Argentina is one of the real success stories in eco-nomic freedom. As recently as 1985, Argentinawas ranked 93rd in the world with an abysmal 3.8rating. Its current rating of 8.4 places Argentina in12th place.

Rapid and widespread privatization, de-control ofprices, a shift to a volunteer military and, most im-portantly, a radically improved monetary regimeare all responsible for the improvement. Argen-tina’s currency-board arrangement has turned oneof the world’s most notorious inflation records into

one of the best. Having the Argentine peso tied tothe American dollar has brought inflation fromover 2000 percent as recently as 1990 to under1 percent. There is even serious talk about dollar-ization; i.e., using American dollars instead of adomestic currency.

Argentina’s most significant weak spot is in the areaof international trade, where it records some fairlyhigh tariffs and a smaller trade sector than onewould expect. Privatization of the remaining gov-ernment-owned banks also remains on the agenda.


AUSTRALIA



8.1

6.97.4

7.8

8.6 8.6

8.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

25.531.5 34.0

38.5 37.7 39.035.8

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Australia’s 8.6 rating placed it 7th among the 123countries rated.

Two core elements of Australia’s high rating are:an established legal structure guaranteeing secureproperty rights and stable monetary policy, whichmaintains low inflation rates (1 percent for 1997).

Institutional arrangements provide for substantialcapital mobility. Citizens are free to own foreigncurrency accounts, although some limitations inengaging in capital transactions with foreigners are

imposed. In financial markets, the trend of replac-ing credit extended to the government with pri-vate investments is proceeding, with just 5.5percent of the credit allocated to the non-privatesector. Australia possesses a free and liberalized in-ternational trade sector; the few existing taxes andtariffs are almost negligible.

Although the share of government consumption isshrinking, transfers and subsidies have been in-creasing since the mid-1970s.


AUSTRIA



7.2

6.26.8 6.9

7.8 8.07.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

39.2

48.9 51.7 49.453.1 52.7

46.1

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Austria’s rating of 8.0 in 1997 placed it 25th amongthe 123 countries of this study. Its ranking duringthe past three decades has been relatively con-stant. Its strengths are a trustworthy established le-gal structure, a credible monetary policy, and thefreedom to maintain foreign currency accountsdomestically and abroad.

In preparation for European single-market inte-gration, the trade sector has been liberalized andtariffs almost abolished.

But, as in most European nations, the size of gov-ernment is relatively high. This is especially thecase in the area of transfers and subsidies. A top

marginal tax rate of 50 percent is needed to financethis income redistribution.

Privatization is moving along smoothly. Since1990, over i2.5 billion worth of assets have beenprivatized. The government telecom monopolyhas been eliminated and prices have plummetedwhile service has increased. A choice among sev-eral sources of electricity is now available for largeindustrial users. About 50 private radio broadcast-ers now compete with the state-owned enterprisethough television remains a state monopoly. De-regulation and privatization of banking and fi-nance is still needed.


BAHAMAS



6.46.0

6.4 6.26.7

6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

22.117.2

24.4 23.020.421.921.2

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

The Bahamas is a very small island country that hasa highly regulated, centrally managed economy. Allbusiness ventures face a complex set of often-con-tradictory entry restraints, tax breaks, and subsidies.For instance, a licensing system restrains and con-trols business entry so that a business venture mayget a construction permit, construct its facilities andthen not receive the necessary operating license.Foreigners are excluded from the wholesale and re-tail business sector but qualify for tax breaks inother areas. Expatriate employees must have workpermits that are increasingly costly. The Govern-ment has invested heavily in the tourist industryand still owns the utilities.

Consequently, the Bahamas has a rating of 6.7,which places it 60th in the world. Most disturbing,though, is the Bahamas’ relative decline: it ranked43rd in the world as late as 1990 and 21st in 1975. Itslowest rated areas are Area II, Use of Markets, AreaIV, Use of Alternative Currencies, and, oddly for aisland nation, Area VI, International Exchange.

However, a new administration in 1992 promisedand subsequently produced a more honest gov-ernment, sought foreign investment, and sold itslargest hotels. This has produced four years of realper-capita growth in the range of 1 ½ to 2 ½ per-cent per year, reduced unemployment, and in-creased wage rates.

Despite the new-found prosperity, the govern-ment has problems. It created a fast track throughthe maze of bureaucratic controls for selected in-vestments but it has not changed the maze. Its ef-forts to privatize the utilities have been slow. Thefirst project, Bahamas Telecommunications, hasnot been concluded. A 62 percent reduction instaff, an apparent prerequisite to a sale, has pro-duced exceedingly high separation costs and sig-nificant labour unrest. This case illustrates howpolitical factors can sometimes undermine move-ment toward a more efficient and competitiveeconomy.


BARBADOS



5.5 5.76.2 6.4 6.3

6.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

28.6 30.0 32.3 32.7 31.7

21.4

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

The economic freedom rating of Barbados has re-mained fairly constant during recent years; its rat-ing was 6.2 in 1990 and 6.3 in 1997. This hasresulted in a drop in its relative position from 41st

in 1990 to 70th currently.

The main weaknesses of this country are price con-trols, economic intervention through state-ownedcompanies, lack of trade openness to the rest of theworld and capital-mobility controls. All these as-pects create market distortions and reduce resourceallocation efficiency in the economy. Governmentconsumption as a percentage of the total is over 20percent. This has not changed in the last ten years.

Among the capital controls that are worth men-tioning are the prohibitions on holding foreignbank accounts and the use of foreign currency foreconomic transactions. These restrictions holdback many commercial activities. In addition,high and selective tariffs contribute to an unusu-ally small amount of trade (especially for an is-land nation).

However, Barbados has made modest advances interms of lowering top marginal tax rates. Therehas also been some improvement concerningproperty rights and contract enforcement.


BELGIUM



7.8 8.0 8.1 8.1

9.3 8.3

8.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

36.5

50.7

62.355.3 55.4 54.5

44.6

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Belgium’s summary rating of 8.3 for 1997 does notdiffer significantly from its historical norm. Itsoverall ranking for 1997 was 14th of 123, downsomewhat from earlier years.

Belgium’s strengths are in the areas of legal struc-ture, monetary policy, freedom to use alternativecurrencies and international trade. By conductinga tight and strict anti-inflationary policy, Belgiumhas kept its inflation rate at a low level (1.5 percentin 1997). The Belgium Franc is fully convertibleand citizens are free to engage in capital transac-tions with foreigners and to own foreign-currencybank accounts. The international trade sector iswell developed and existing barriers will be re-duced soon. Also a well-established legal struc-

ture is provided but there exists a highlybureaucratic system and space for an erosion ofthe rule of law (rating 7.0).

Looking to the banking sector, while savings areheld by the private financial institutions, only45.3 percent of total credit is extended to the pri-vate sector.

Like the western welfare economies, Belgium’sgovernment consumption is relatively high at 18.7percent. The unemployment rate of almost 10 per-cent is in part financed by excessive top marginaltax rates (58 percent to 64 percent). Therefore, aslimming of the government, tax cuts, and liftingof existing price controls are recommended.


BELIZE



5.1 5.35.5

6.36.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

29.032.2

37.9 36.3

28.7 29.1

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Like other Caribbean countries, Belize’s rating hasnot changed too much recently. Its rating in 1990was 5.3 and in 1997 it was 6.3. Despite this slightimprovement, its ranking relative to other coun-tries was set back several positions. Belize wasranked 58th in 1990 and 70th in 1997.

This country has shown important improvementsin several areas. Belize’s strength is in monetarypolicy. The growth of the money supply hasslowed and price instability has been reduced. Inaddition, currency exchange restrictions havebeen reduced to the point where only minimalblack-market activity remains.

However, there are also several factors that havenot improved, holding back economic freedom.Belize still has high trade barriers that reduce thesize of the trade sector. The size of imports plusexports as a percentage of GDP is very low com-pared with its expected size. Also, the financialsystem and capital market are highly regulated,which reduces Belize’s access to internationalfunds.

Another liability is the number of state-owned en-terprises that participate in the economy, inhibit-ing the private sector.


BENIN



5.1 4.9 4.8

5.7

4.94.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

28.5 26.819.3

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Benin’s rating fell from 5.7 to 4.9 and its rank from52nd in 1990 to 101st in 1997. Its economy remainsunderdeveloped and dependent upon agriculture,cotton production, and regional trade. The agricul-tural sector makes up 38.4 percent of GDP whilethe industrial sector makes up only 13.9 percent.

Although the size of government consumption isrelatively low, a large number of government en-terprises exist within the economy. Price controlsare still prevalent.

Despite some problems in the mid-1990s (the in-flation rate in 1995 was 15.4 percent), positive de-

velopments can be seen more recently as inflationhas fallen to single digits. The banking sector iscompletely private with all deposits held in pri-vate banks.

There are still strong restrictions on capital trans-actions with foreigners and the ability to own for-eign currencies remains unchanged receiving arating of 0. Problems also remain in generating atrustworthy established legal structure. Beninneeds to contend with corruption, encourage com-petition and adopt market-based policies if itsprospects for growth are to improve.


BOLIVIA



4.0 4.0

6.5

8.07.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

23.3 22.627.4 27.2

19.218.518.9

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Bolivia’s economic freedom rating was flat duringthe 1980s but it has rebounded during the last dec-ade. Bolivia’s rating improved from 4.0 in 1985 to8.0 most recently. It now ranks 25th in the world.Historically, the potential of this country has beenstifled by monetary instability and hyperinflation.In 1985, Bolivia’s inflation rate soared to nearly13,000 percent. Inflation rates of this magnitudeundermine economic progress, regardless of thepolicies in other areas.

Seeking to rebound from this catastrophic situa-tion, Bolivia has taken a number of constructivesteps. The freedom to maintain foreign currencybank accounts, which was denied during the infla-tion of the mid-1980s, has been restored. The topmarginal tax rate was reduced from 48 percent in

1980 to 10 percent in 1990 and 13 percent in 1995.Tariff rates were reduced sharply and most of thediscriminatory treatment among product catego-ries eliminated. Relaxation of exchange rate con-trols has virtually eliminated the black market.There has also been some liberalization of the re-strictions on the movement of capital.

The privatization program has transferred themanagement of almost all state-owned companiesto the private sector. In order to modernize man-datory social security for the Bolivian employeesand workers, the Pensions Law has been passedwith the objective that everyone saves with an in-dividual account by means of obligatory savings inprivate institutions.


BRAZIL



5.6

4.1

3.2

4.4

5.45.9

4.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

27.2 24.5 23.5 25.3

32.936.5 36.8

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Throughout the last two decades, Brazil's rankinghas been low. In 1997, Brazil ranked 85th among123 countries. Its relative position in the worldhas been more or less unchanged throughout theperiod.

The large share of government enterprises is asign of the government’s control over importantsectors of the economy. Furthermore, monetarypolicy remains poor, even following a sharp de-crease in annual money growth and the accompa-nying decrease of the inflation rate from 2,506.5percent in 1990 to 77.6 percent in 1995 to 7.9 per-cent in 1997. The high level of inflation variabilityimplies danger.

Remarkable improvement has been made inavoiding negative interest rates: in 1995 the rating

was still 0.0 and by 1997, 8.0. The field of govern-ment consumption shows a slight improvement, asign of further reforms under Mr. Cardoso. Theshare of transfers remains high despite recent ef-forts to cut the budget. One positive note has beenthe relaxation of price controls during the 1990s.Brazil’s rating in this area rose from 0.0 in 1990 to8.0 in 1997.

While protectionism remains at a high level, Brazilhas moved toward trade liberalization during the1990s. The mean tariff rate was reduced from 30percent in 1990 to 11.9 percent in 1997. The stand-ard deviation of tariff rates followed a similar pat-tern. As the world’s 9th largest economy and themain player within the MERCOSUR, reforms ofthe trade sector would be advantageous for all par-ties involved.


BULGARIA



3.8

5.35.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

55.1

41.5

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

The transition to a market economy in Bulgaria isnow ten years old. The reform has been painful,output has declined, and the population has suf-fered high social costs. However, real GDP growthreached 3.2 percent in 1998. The improvement ineconomic performance is due to the introductionof a currency-board regime in July of 1997. Eventhough significant progress has been made in theareas of trade and price liberalization, the prices ofenergy products, tobacco, and telecom servicesare still controlled by the government.

Bulgaria’s economic freedom rating has grownslowly during the decade, reaching 5.3 in 1997, up

from 3.8 in 1990. The former communist countryranks 94th out of 123 in the world. In fact, if Bul-garia’s new currency board works as expected, itsextremely low monetary area rating (0.0) shouldbe on the rise in the next few years.

1998 also saw the privatization of small and me-dium enterprises. The privatization of big unprof-itable enterprises, however, has gone slowly. Ifprivatization takes hold, Bulgaria’s other weakspot (Area II) should improve. If these improve-ments come to pass, then Bulgaria’s overall ratingcould improve significantly.


CANADA



8.17.7

8.0 8.28.5 8.68.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

35.740.1 40.5

47.1 47.8 48.2 46.4

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Canada currently ranks 7th overall in economicfreedom with a score of 8.6, its highest rating ever.While its ranking of 7th is an improvement over1995, when it placed 9th, it is still below its rankingof 5th in 1980. The fact that its rating has risensteadily during that time but its ranking has alsofallen reflects the faster growth of economic free-dom in the rest of the world.

Canada rates well in most of the areas of the in-dex. Its highest scores are earned in Area IV,Freedom to Use Alternative Currencies (a score of10) and Area V, Legal Structure and PropertyRights (a score of 9.4). Canada also does well inmonetary policy and freedom of exchange in fi-nancial markets. However, the substantial size ofgovernment in the Canadian economy along withmediocre scores in Area II, Structure of the Econ-omy and Use of the Markets, drag down Canada’soverall rating.

Areas of improvement since the 1970s includeArea II, Structure of the Economy and the Use ofMarkets and Area VII, Freedom of Exchange inFinancial Markets. The improvement in Area IIstems from declines in the importance of govern-ment enterprises, less reliance on price controls,and reductions in the top marginal tax rate. Can-ada has followed the general worldwide trend inlowering top marginal rates since the 1970s, when

the top marginal rate was over 90 percent in someprovinces! Despite its improvement, Canada stillscores fairly low in this component, receiving a 4.Nevertheless, some of this nation’s provinces havemade progress in lowering their marginal tax ratesand other provinces and the federal governmentmight be expected to follow. The improvements inArea VII derive from an increase in the percent ofcredit extended to the private sector. This corre-sponds with a decrease in the importance of gov-ernment-operated enterprises in the economy.

In other areas of the index, Canada’s performancehas remained fairly steady, with notable excep-tions in Area III, Monetary Policy and Price Sta-bility, and Area V, Legal Structure and PropertyRights. After falling during the 1970s, Canada’sscore in both areas has increased in recent years.In the case of Area III, its initial score has beensurpassed while Area V’s rating, although increas-ing, is lower today than it was in 1970.

Much of the current debate in Canada about eco-nomic freedom concerns marginal tax rates. Littleof this debate has been on the appropriate size ofgovernment (where Canada ranks quite poorly) orits functions. The lack of attention to the currentsubstantial size of government, unfortunately, im-plies a low likelihood of great improvements inCanada’s overall score.


CHILE



3.7

6.0

7.4

5.9

3.7

8.28.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

38.0 40.4

31.5 33.427.0 24.7 26.7

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Chile’s rating of 3.7 (54th rank) in 1970 was almostthe worst rating in the world for that year. Its cur-rent rating of 8.2 is good for 18th place. There hasbeen significant privatization of state-owned enter-prises, liberalization of trade (note the reduction inthe mean tariff rate from 105 percent in 1970 to 9.4percent in 1997), private ownership of banks, andmuch improved legal framework. Chile’s muchcelebrated privatized pension plan, though not di-

rectly measured in this index, is reflected in the re-ductions in the transfer sector: 15.3 percent in1985 and 10.8 percent in 1997.

The recent re-establishment of democracy coupledwith this degree of economic freedom surely makesChile one of the most free Latin nations. It is not asurprise, then, that Chile has grown at a 5.7 percentannual rate in real per-capita income in the 1990s.


CHINA



NO R

ELIA

BLE D

ATA A

VAILABL

E

3.5

4.4 4.2

6.25.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

The most populous country in the world continuesa slow march toward economic liberalism. China’srating in the 1990s has improved 2 points to 6.2while per-capita GDP growth remained very highat 8.65 percent per year. However, despite the pos-itive press about China’s economic reforms, it stillranks only 75th in the world.

Most of the positive changes have taken place inthe area of economic structure and use of markets,one of China’s weakest areas in the economic free-dom index. Likewise, the financial market and thecountry’s legal structure have seen a number ofpositive changes. The rating in Area VII, Freedomof Exchange in Capital and Financial Markets, has

risen from 0.0 in 1980 to 3.0 in 1997, still very lowbut a nice improvement nevertheless. The ratingfor Area V, Legal Structure and Property Rights,has improved from 6.5 in 1990 to its current 8.5and rating for Area IV, Freedom to Use Alterna-tive Currencies, improved from 2.5 to 6.8 duringthe 1990s.

The greatest fear for the Chinese is a possiblebackward move in the international trade areawhere additional restrictions on foreign exchangehave been imposed as a result of the Asian finan-cial crisis. Also, tariff reductions as a part of the ne-gotiations for entering into the WTO may beslowing under domestic pressures.


COSTA RICA



8.3

7.0

5.6

7.3

5.6

8.1

7.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

27.3

35.331.5 30.6 32.4

19.2

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Costa Rica has improved its economic freedomrating in the last few years. Its rating of 8.1 placesit 22nd in the world. During the period from 1990to 1998, the average growth of real GDP was 4.1percent. With an annual rate of population in-crease of 2.3 percent (1985–1996), the average realper-capita growth in the last eight years averaged1.8 percent, similar to that of the United Statesover the same period.

Government consumption expenditures as a per-cent of total consumption have fallen from 22.9percent in 1995 to 17.2 percent in 1997. Althoughlow with respect to public expenditures in manydeveloped countries, this rate is still high whencontrasted with developing nations and with theservices provided.

The data of the Central Bank of Costa Rica indi-cate that the average annual inflation rate (CPI) forthe 13-year period from 1986 to 1998 was 17.3 per-cent and the average growth of the money supply(M1), 18.2 percent. The growth of the money sup-ply slowed in the 1990s, as did inflation.

Although residents may freely hold bank accountsin foreign currency, domestically and abroad, for-eign banks face many restrictions and regulationsthat prevent them from operating freely in thecountry. This severely limits the number of partic-ipants in the banking system, a fact that is reflectedin a very high spread between the deposit rate andthe lending rate and high real interest rates.


CZECH REPUBLIC



3.9

7.16.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

61.5

44.144.3

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

The Czech Republic has made significant movestoward economic freedom since the fall of com-munism and the Velvet Revolution of 1989. Itssummary rating increased from 3.9 in 1990 to 7.1in 1997 (note that the 1990 figure is for the formerCzechoslovakia). This increased the country’sranking from 96th (out of 115) to its current 51st

(out of 123). But, after 1995 political deadlock en-sued. There has been very little increase in eco-nomic freedom since 1995. Virtually no additionalmoves in the areas of privatization and deregula-tion have been made.

The Czech Republic made the transition to a mar-ket economy more smoothly than most former so-cialist countries. This country was spared thehyperinflation that beset most other transitionaleconomies. Price controls have been eliminatedfrom most products and the size and scope of state-

operated enterprises has been reduced by voucherprivatization. Exchange-rate controls have beeneliminated and the Czech koruna is now a fullyconvertible currency. As trade barriers havefallen, the size of the trade sector has grown. Gov-ernment expenditures for both consumption andincome transfers have been curtailed.

However, it is expected that transfers and subsi-dies as a percent of GDP, already high at 27.2 per-cent, will increase. Many other problems remain.The economy is still fighting the consequences ofa halfway privatization of the banking sector,which is still heavily subsidized. Fiscal policy ishighly expansionary; the fiscal deficit is expectedto move to an all-time high. The inflation rate isrelatively stable and in the single digits. However,high fiscal deficits often invite inflationary mone-tary policies. This may lead to future problems.


DENMARK



7.6

6.7 6.8 6.9

7.78.4

8.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

40.2

48.2

56.259.3 58.6 60.9 60.8

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Denmark’s ranking has improved from 21st in1985 to 12th in 1997. The strengths of its economyare the freedom to use alternative currencies aswell as its legal structure and guarantee of propertyrights. Further, the achievements of a consistentmonetary policy should be mentioned. The areaof capital transactions with foreigners has been im-proved and got a perfect rating of 10; the previousrating in 1995 was 8.0.

However, the share of government consumption—governmental expenditure and transfers—is partic-ularly high. This consumption is financed to the

detriment of the taxpayer and is reflected in anenormous top marginal tax rate (55 percent to 60percent). For that reason, in this category Den-mark receives a rating of 2.0. The Extension ofCredit also deserves note. Only 58.7 percent ofavailable credit is given to the private sector, re-markably low in international comparison. As anEU nation, Denmark’s revenues on Taxes on In-ternational Trade are almost negligible (0.3 per-cent of trade value) but there is still potential forimproving the Mean Tariff Rate (rating 8.6) andStandard Deviation of Tariff rates (rating 7.6) in allthe EU nations.


DOMINICAN REPUBLIC



4.1

6.3

7.0

5.25.3

3.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

17.6 16.9 16.4 15.6 16.3 17.018.8

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

The Dominican Republic rated a 7.0 in 1997,placing it 53rd out of 123 countries. This repre-sents a large increase from the 4.1 rating (93rd

ranking) of 1990.

This country has made important improvementsin monetary, exchange, and credit policies. Thetop marginal tax rate has been reduced and man-datory military service has been eliminated.

There was a significant advance over previousyears with respect to the enforcement of contracts(Area V-B). In improving its legal structure, the

system has more credibility, which would grantconfidence to investors.

However, the Dominican Republic could improveother aspects to drive the country towards a higherdegree of economic freedom. In particular, lowertariffs and reduction of other trade restrictions areneeded. Concerning financial and capital markets,it is still necessary to break barriers that impedethe mobility of capital. Dominican Republic needsto eliminate remaining restrictions on currencyconvertibility.


ECUADOR



3.9

5.86.0

4.5

5.3

6.77.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

27.030.0

23.628.6 28.1 27.4

21.8

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

In 1990, Ecuador ranked 58th among the 115 coun-tries in the study. In 1997, Ecuador ranked 53rd

among the 123 countries studied. With few excep-tions, such as in the area of freedom of exchangein capital and financial markets (Area VII), littleimprovement in economic freedom can be found.Monetary expansion during the 1990s has led toan annual inflation rate of 26 percent in 1997. Thecountry is in a state of stagnation; per-capita eco-nomic growth in the 1990s has been an abysmal0.90 percent.

Unlike other countries in the region, Ecuador hasdone almost nothing to privatize government en-

terprises and little to reduce price controls on gas,electricity, and telephone service. The property-rights structure and legal system is weak and sen-sitive to political manipulation.

Monetary reform to reduce the discretionarypower of the central bank to print money and bailout banks, a cut in tax rates, a reduction in govern-ment expenditures, and privatization of govern-ment enterprises would help to enhance the healthof this economy.


EL SALVADOR



3.74.3

5.0

8.08.3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

15.1

24.3

14.7 16.222.122.0

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

El Salvador is one of the Latin American countriesthat showed a dramatic improvement in its eco-nomic freedom. Its rating of 5.0 in 1990 increasedto 8.3 in 1997. El Salvador jumped from the 67th po-sition to the 14th in the world ranking. A more mar-ket-oriented program is the main reason for thisimprovement. Price controls in many markets havebeen eliminated and government participation inthe economy has been reduced through an ambi-tious privatization process, especially in strategicsectors such as communications and electricity.Moreover, policies promoting trade liberalizationand more freedom in financial and capital-markettransactions have been adopted.

Monetary policy has been less expansionary. Theannual rate of monetary growth has been curtailedfrom 11.5 percent in 1990 to 5.0 percent in 1997.This allowed the country to reduce its inflationrate from 23 percent in 1990 to 4.6 percent in1997, one of the lowest rates in the Central Amer-ica region. In addition, legalization of foreign-currency bank accounts, a reduction in govern-ment consumption expenditure, relaxation of ex-change-rate controls, a stronger legal system and alower exchange-rate premium in the black markethave contributed to the improvement in El Salva-dor’s economic freedom rating.


ESTONIA



6.16.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

33.7

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

In 1997, Estonia ranks 57th in terms of economicfreedom among 123 countries. Estonia’s strengthis its liberalized trade sector; taxes on internationaltrade are negligible. Its efforts to regain monetarystability have also borne some fruit. The annualmoney growth for the past five years (relative toeconomic growth) shrank from 74.6 percent in1995 to 38.4 percent, and the inflation rate hasgone from 29.0 percent to 11.4 percent. Broadgoals to reach firm monetary stability and credibil-ity still remain.

The share of government consumption and trans-fers, though modest by European standards, isrelatively high compared to the rest of the world.Reforms leading to privatization are under wayto reduce the government enterprises. For exam-ple, in 1997, a partial privatization of Estonian

Telecom was conducted to reduce the govern-ment’s stake to 27 percent.Visible restructuring ofthe banking sector was also undertaken. How-ever, restrictions on ownership of foreign curren-cies still remain.

One point for consideration is the lack of a fullyguaranteed rule of law and viability of contracts, acharacteristic of all three Baltic States.

A threat for Estonia’s economic prosperity is theeconomic situation in Russia, although the bilat-eral trade dependencies are declining since Esto-nia has gained independence. Estonia ambitiouslycontinues structural reforms to match EU acces-sion requirements for membership as a long-termtarget. The growth of real GDP moved forwardfrom 4.3 percent in 1995 to 10.6 percent in 1997.


FINLAND



8.1

6.77.1 7.4

7.7 8.28.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

31.336.1 36.6

59.6 59.4

46.845.0

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Finland’s 8.2 rating places it at 18th position among123 countries in 1997, about the same as its 8.1 rat-ing and 8th place finish (out of 57) in 1970.

Despite the recent economic revival the govern-ment shows no significant structural realignmentin terms of the size and share of government con-sumption. Further, transfers and subsidies remainhigh—21.9 percent of GDP—and are financed bytop marginal tax rates of 53 percent to 60 percent.

A receding governmental share of the economywould increase the potential for economic growth.

Finland’s economic strengths are an establishedand reliable legal structure, the freedom of citizensto maintain foreign currency accounts domesti-cally and abroad, and an almost fully liberalizedforeign-trade sector. Also, attempts to control theannual money supply were effective as the infla-tion rate shrank to 1.5 percent.


FRANCE



7.3

6.3 6.3 6.4

7.88.0

8.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

38.9

52.2 49.954.3 54.7

46.143.5

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

In 1995, France ranked 16th and slipped to 25th in1997. The most obvious reduction was in the ruleof law component—from 10.0 in 1995 to 7.0. Nev-ertheless, the credibility of its legal structure is farfrom seriously damaged and remains reliable.

France’s monetary administration pursues strictpolicies of price stability. Its achievements culmi-nated in an inflation rate of 1 percent in 1997 withan inflation variability of 0.5 for the recent fiveyears. Citizens are free to own foreign currenciesand the banking sector is fully deregulated. But, inthe area of capital transactions with foreigners,constraints still exist. As one of the countries push-ing European integration energetically, its foreign-trade sector receives good scores.

France’s problem areas are the large share of gov-ernment consumption, huge transfers and busi-ness subsidies, and a stalled deregulation andprivatization program. Government consumption,24.2 percent (1997) of total consumption, resem-bles the shares of leading western industrial coun-tries. A significant portion of the economy, 28.8percent of GDP, was redistributed as transfers andsubsidies, financing double-digit unemployment(12.3 percent) and distorting market competition.

The real GDP growth rate for 1997 was 2.3 per-cent but going forward with structural reformswithin the government apparatus and more liber-alization efforts would enable higher potentialgrowth rates.


GERMANY



8.27.7 7.8 7.9

8.3 8.18.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

38.6

48.9 48.3 47.650.6

56.0

45.7

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

In the immediate post-war years, Germany hadbeen one of the most free economies in the world.This was the basic reason for the “economic mira-cle” at the time, when the country had one of thefastest growing economies in the world. Since the1970s, stagnation has been the characteristic fea-ture of Germany’s economic policy. The eco-nomic-freedom rating has fallen slightly duringthe last two decades (from 8.2 in 1970 to 8.1 mostrecently). The relative decline is even more worri-some than the absolute one: because most othercountries have liberalized their economies sincethe 1980s, Germany’s relative decline, if com-pared to the development of the rest of the world,is fairly dramatic. In 1970, Germany’s 8.2 ratingmade it the 7th most free economy in the world; itscurrent 8.1 rating places it at only 22nd place.

There are, of course, positive aspects to be noted.Stability in monetary policy and prices was boldlymaintained by the independent Deutsche Bundes-bank (German Federal Bank, i.e. the central bank).Trade policies have been oriented toward freetrade and the trade sector has consistently regis-tered a strong performance.

There are three major weaknesses, however, whichhave not been dealt with by government for dec-

ades despite growing pressure. One of them is highgovernment consumption, which hovers around25 percent of total consumption. Another is thehighly developed welfare state of Germany, whichcontributes to a large transfer sector (over 20 per-cent of GDP). The third problem is taxation. Witha 56-percent top marginal tax rate, Germany im-poses one of the highest top tax rates in the world.In 1997, the government tried to implement a rad-ical tax reform to reduce this tax rate but it was de-feated by the opposition in the Bundesrat (SecondChamber). The new government, elected in 1998,is also planning a tax reform, the outcome of whichremains unclear.

Germany also still has a highly regulated econ-omy. There have been major successful reformsin some areas, such as telecommunications andelectricity. However, the German labour marketremains as highly regulated as ever and, there-fore, the main problem of the German economywill also remain unsolved. While, on the whole,the German economy may still perform fairlywell in the future under the given circumstances,unemployment will continue to stay at an intoler-ably high level.


GREECE



6.35.8 5.7

6.87.4

6.15.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

22.426.7

30.5

49.6 52.349.4

43.7

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Greece has improved its rating somewhat since1970 but has been on an erratic path towardsgreater economic freedom. In 1997, Greececlimbed up to 42nd position from a previous rankof 49th in 1995.

One area of improvement is the freedom to holdforeign currencies, still limited as late as 1995. Fur-ther positive aspects are the provision of a func-tional legal structure and the guarantee ofproperty rights, although deficiencies still exist inthis area. Greece scores quite low in the Structureof the Economy and Use of Markets, in part due toits reliance on conscription for military recruitsand a large government enterprise sector. The 45

percent top marginal tax rate also lowers Greece’sscore in Area II.

There is a push toward further liberalization of fi-nancial markets. Around 50 percent of availablecredit is channelled to the private sector, up from39 percent in 1990, and capital transactions withforeigners are less restricted. Since 1995 the gov-ernment has moved to dam the abundant flow oftransfers and subsidies. Compared to 1990, where20.5 percent of GDP was redistributed as transfersand subsidies, in 1995 19 percent and, in 1997,17 percent of GDP was used. This is still high butit is a move in the right direction.


GUATEMALA



6.4

7.3

6.5

7.7 7.4

6.5

5.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

11.7 11.616.2

11.5 12.0 11.4

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Guatemala ranks 42nd among the countries in thisstudy. This represents little change: in 1990, itranked in 36th place. Except for a decline duringthe 1980s that was primarily the result of high gov-ernment consumption, monetary instability, re-strictive exchange rate controls, higher tradetariffs, and many price controls, Guatemala’s sum-mary rating has been fairly steady throughout thelast two decades.

Inflation has declined to 8.4 percent in 1997. Pricecontrols were relaxed. Several previously regulatedmarkets were opened. A number of state-ownedcompanies have been privatized. Government con-sumption as a percentage of GDP has declined andtransfers and subsidies have been reduced. Moreo-ver, the top marginal tax was reduced from 34 per-cent in 1995 to 25 percent in 1997.

Modest steps towards more economic freedomhave been taken in the commercial area. Withinthe Northern Triangle (Guatemala, Honduras andEl Salvador), duties on international trade havedeclined slightly during recent years and someother steps have been taken to reduce non-tariffrestrictions.

Although positive steps toward more economicfreedom have been adopted in recent years, Gua-temala still needs to make progress in other key ar-eas where freedom could be improved: it stillneeds to liberalize currency convertibility and ad-vance on reforms that allow its legal structure tomove closer to a true rule-of-law. In addition, Gua-temala’s use of military conscription hurts its eco-nomic freedom rating.


HONDURAS



8.1

5.5

6.9 7.0

6.25.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

24.2 25.7 24.8 27.121.8 20.5

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Although Honduras has increased its summaryrating from 6.2 in 1990 to 7.0 in 1997, it hasdropped from 41st to 53rd place. This relativemovement away from more economic freedom isexplained by uncertainty in monetary policy, anincrease in the top marginal tax rate, and the exist-ence of price and exchange controls.

Although Honduras has made efforts to have a lessexpansionary monetary policy, to reduce the topmarginal tax rate, and to increase the size of itscommercial sector (as a percentage of GDP), re-sults are still very poor. The inflation rate still re-

mains high. In 1990, the inflation rate was 23.3percent and, in 1997, 20.2 percent. Some effortshave been made to reduce the size of governmentthrough privatization of state-owned companiesbut results are very poor and no significant im-provement has been achieved in this area.

Actions were taken to remove financial and capi-tal-market controls and to fortify the legal struc-ture. This explained the improvements shown forthis country in its effort to approach to a rule-of-law. Nonetheless, the current ranking of Hondurasis well below that achieved during the mid-1970s.


HONG KONG



9.49.89.39.39.69.39.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

13.116.0 16.0 17.6 18.0

20.919.0

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

The resumption of sovereignty over Hong Kongby China on July 1, 1997 has not materially hurt theeconomic freedom long enjoyed by the people ofthe territory. The latest economic freedom indexstands at a level of 9.4, maintaining Hong Kong’sprimacy as the most economically free place onearth. This year, though, they will share that titlewith Singapore whose rating was also 9.4. The con-cept of “One Country, Two Systems” seems to beworking. On the whole, the government of theHong Kong Special Administration Region hasbeen given considerable autonomy by the centralgovernment in Beijing in conducting its affairs.

The Asian financial turmoil has taken its toll onHong Kong. After decades of high growth, realGDP shrank by 3 percent in 1998. The unemploy-ment rate shot up from 3 percent to 6 percent,property values decreased by one-third, and thestock market took a beating. Given the severity ofthe economic downturn, many suggested that theold policy of “positive non-intervention” could notbe maintained.

The government did respond to this crisis. Thetwo most controversial moves were the suspensionof public land sales for a year and the purchase ofmore than HK$100 billion worth of shares ofHong Kong blue chip companies in August 1998.Such overt intervention in the market was

prompted by the desire to avoid a collapse in theproperty market, the concern over bank failures,and the support for the Hong Kong dollar. Thegovernment intervention, though condemned insome quarters, had the support of the public.

Concerned by the heavy dependence of the econ-omy on the property and financial sectors, thegovernment has taken steps to diversify the econ-omy. A cyberport on multimedia and internetservices will be developed; Disneyland is beingcourted to build a theme park; there are talks ofscience parks, a silicon harbour, and a ChineseMedicine Centre.

The government has adopted a policy to sell pub-lic rental housing units to their incumbent tenants.This policy, championed by the Hong Kong Cen-tre for Economic Research for close to a decade,will enhance the efficiency of the housing market,and make the distribution of public housing subsi-dies more equitable. The telecommunication mar-ket is being further liberalized. More competitionwas introduced into the transportation sector.There are more franchised bus companies andmore routes. The interest rate agreement as main-tained by the banking cartel is scheduled to becompletely abolished next year.

(Continued on page 82)


HUNGARY



4.8 4.8 4.9

6.87.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

63.257.1

49.3

42.5

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

In transforming itself from an economy that wascentrally (or, semi-centrally) planned toward onethat is market-driven, Hungary made significantprogress towards economic freedom, the results ofwhich are captured by its economic freedom rat-ing. In this decade, Hungary showed solid im-provement in the rating, which jumped from 4.9 in1990 to 6.8 in 1995 and further to 7.4 in 1997. Thisranked it 42nd in 1997, up from 71st in 1990.

The comprehensive stabilization package intro-duced in 1995 had some temporary negative ef-fects on the assessment of economic freedom: (1)the Consumer Price Index jumped abruptly, in-creasing temporarily the uncertainty among theeconomic actors and the variability of the prices;(2) the levied temporary import surcharge de-creased the free international exchange of goods(by 1997 the import surcharge had been graduallyabandoned).

Nevertheless, some good resulted: (1) the tightmonetary and restrictive fiscal policy reduced therate of inflation; (2) the new exchange-rate regimebecame credible; (3) the internal and externalequilibrium was restored; (4) the size of the gov-ernment sector decreased; (5) the competitivenessof the private sector strengthened; (6) Hungary re-mained attractive to foreign capital.

Institutional measures were also taken to liberalizethe economy and to cut back the government sec-tor. Privatization went ahead rapidly. Restrictionson foreigners entering the Hungarian money mar-ket were eased. The pay-as-you-go pension systemwas replaced by a 3-pillar system, including a newfully-funded pillar as well.

Marginal tax rates were decreased slightly afterthe temporary rise in the 1995 stabilization pack-age. The top rate jumped from 44 percent in 1995to 48 percent in 1996, then fell to 42 percent in1997 and remained the same in 1998. After thegeneral elections in 1998, the new government de-clared a new tax and contribution policy to reducethe private sector’s burden. Accordingly, the toprate for 1999 fell to 40 percent. Social insurancecontributions paid by companies have also fallen.A special sort of tax is conscription. It remained inforce but the duration was shortened significantly.Early in the 1990s, it lasted 18 months; this was cutback to 12 months and then to 9 months in 1994,giving more room for individual freedom.

(Continued on page 82)


ICELAND



6.4

8.08.1

7.5

5.75.5

4.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

29.6

38.532.2

36.339.9 39.4 37.3

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Iceland’s rating of 8.0 placed it 25th among the 123countries in our study. In 1995, it placed 16th witha rating of 8.1. This decline in rank is due to themore vigorous efforts of other countries towardsgreater economic freedom. But all told, Icelandhas rebounded nicely from the doldrums of the1970s and 1980s when its rating fell to very lowlevels largely as a result of unstable money andprice policies.

The share of government consumption is, as in allwestern European economies, relatively high and,during the last decades, there has been a tendencyfor it to increase. Since 1985, the sector of transfers

and subsidies has shrunk. The cut in the top mar-ginal tax rate (42 percent) and deregulation of thebanking sector in the field of saving deposits ingovernment-owned financial institutions are otherpositive signs.

The citizens of Iceland are free to own foreign cur-rency accounts and the country has a functionaland well-established legal structure that provides asound base for stable economic activities. Its mon-etary policies are showing promise in maintainingthe inflation rate at a level that will fulfill the Maas-tricht-criteria—for 1997 the inflation rate was only1.6 percent.


INDIA



4.04.3 4.1 4.1

5.0

5.8

3.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

22.5 22.025.3

30.8 31.2 31.9 31.1

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

A shift in India’s economic policy took place in1991 when central planning appeared to give wayto market forces. The large increase in the eco-nomic freedom rating of 1.7 points during the1990s in the Summary Rating marks that shift.But, in relative terms this improvement has barelykept pace with the liberalization of the rest of theworld. India’s rank only improved from 93rd (outof 115) to 86th (out of 123) in the 1990s.

The score of 4.1 on Component VI: InternationalExchange clearly indicates the long path India stillhas to travel, even though this is the area where In-dia has seen the most improvement. The ratings forArea II: Structure of the Economy and Use of Mar-

kets and Area VII: Freedom of Exchange in Capitaland Financial Markets suggest that the state controlof the domestic economy through price controls,nationalized banking and insurance industry, andpublic sector enterprises has seen little change.

The improvement in Area V: Legal Structure andProperty Rights indicates the increasing independ-ence of the judiciary and of the agencies that su-pervise the government, like Central VigilanceCommission, Comptroller and Auditor General,and especially the Election Commission, whichhas curtailed sops given by ruling parties just be-fore elections. The changes in the components ofthe Index provide reason for guarded optimism.


IRELAND



6.86.2

6.6 6.7 7.3

8.78.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

39.6

50.854.8

41.4 41.237.7

46.5

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Ireland has been one of the few real success storiesof Europe. Beginning in the early 1990s, Irelandembarked on an impressive liberalization pro-gram and has now achieved a rating of 8.7 to gain6th position.

Ireland’s economy is one of the most explosiveeconomies in Western Europe. Its growth rate ofreal GDP for 1997 was a formidable 10.5 percentand, on average, from 1990 to 1997 it grew annu-ally by 6.6 percent.

Ireland’s government spending has fallen mostlyby reducing the size of the national debt and the ac-companying interest payments (a factor that is notfully captured by the government consumptionand transfer data). Between 1986 and 1989, gov-

ernment employment fell by 10 percent. Marginaltax rates for high-income individuals have been re-duced from the brutal 1975 rate of 80 percent to 58percent in 1986 and 48 percent in the period from1992 to 1997. In 1998, the top rate was reduced to46 percent. Even so, the 3 rating in the marginaltax component is the only really significant blighton Ireland’s economic freedom rating.

Supporting these developments was the contribu-tion of monetary policy and legal structure. Thelatter got a perfect 10 rating. Since the 1990s, theinflation rate has fallen to 1.8 percent in 1997.There are no restrictions upon citizens who wishto maintain foreign currency accounts domesti-cally and abroad.


ISRAEL

4.8

4.04.4

4.8

6.3 6.5

4.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

58.1

67.172.8

58.1

48.6 47.4

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997



Israel’s rating has improved only slightly over thelast three decades from 4.8 to 6.5. At times it hasbeen ranked near to the bottom of the list (86th in1980, for instance) but now holds 66th place.

Israel’s government consumes a large portion ofthe nation’s resources; it also has a huge regulatorypresence. State-owned enterprises abound, pricecontrols are quite extensive, marginal tax rates arehigh and apply at low levels of income, and mili-

tary conscription is used. Banks are all but nation-alized, ownership of foreign currency is partiallyrestricted, capital transactions are restricted, andtrade is reduced by non-tariff barriers.

The only bright spot for Israel is that it has man-aged to get its monetary regime under control.The recent single digit inflation rates represent ahuge improvement over the three digit rates in the1980s.


ITALY



6.8

5.5 5.56.0

7.57.9

7.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

34.2

41.9

51.3 53.6 52.9 52.7

43.2

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Italy ranked 31st in 1997, down from its rank of24th in 1990. Among the major industrial coun-tries, Italy lags behind in terms of economic free-dom, doing better than only a handful of itsEuropean neighbours.

The bright spots are freedom of exchange in capi-tal and financial markets, use of alternative curren-cies, legal structure, security of property rights andinternational trade. These results have beenachieved through the effort to join the EuropeanMonetary Union (EMU). As a co-founder ofEMU, Italy has been stimulated to deregulate thefinancial market and other important areas of theeconomy. Moreover, in order to fulfill the Maas-tricht’s criteria, Italy reduced its historically highinflation rate and cut the public deficit below thelevel of 3 percent of GDP.

The size of the government in terms of consump-tion, transfers, and subsidies has been slightly re-duced but remains huge: in 1997, governmentconsumption was over 20 percent of total con-

sumption and transfers and subsidies accountedfor more than 20 percent of GDP.

The structure of the economy represents the mostcritical issue. Although the privatization plan isproceeding, it seems to gain ground too slowly. In1997, state-owned enterprises still representedmore than a quarter of the national economy. Thenational power-generating utility (ENEL) is stateowned and the state directly owns the nationalrailway system. The national Mail Service is state-owned. Some privatization is expected to be real-ized during the next year but, as in the past, someof it will undoubtedly be deferred.

Most of the prices are determined by the marketforces; a few controls are levied on energy and ag-riculture in accordance with the framework set bythe European Union. The Italian top personalmarginal tax rate ranks near the top level world-wide though there is some prospect for tax reformin the future.


JAPAN



7.3 7.07.4 7.7

8.3 8.38.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

27.332.6 32.3 32.3

36.7 36.9

19.3

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Japan’s ranking moved modestly higher between1970 and 1990. Faced with consequences of theAsian flu at the beginning of the 1990s, the govern-ment’s trend toward greater economic freedomlost momentum. This allowed other countries tomove past Japan in terms of ranking even as itssummary rating remained relatively the same. Ja-pan fell from 7th position in 1990 to 14th in 1997.

Japan’s strength remains in the field of money andinflation but the incomplete reformation of thebanking sector (bad loans), the outflow of privatesavings from government-owned Post-Banks, andthe endangered independence of the Bank of Ja-pan could cast doubt on future positive develop-ments. The figures for ownership of banks remain

constant (rating 5.0) because of the size and pre-sumed importance of the government-ownedbanks for Japan’s economy. Successful deregula-tion policies are, however, being finalized.

Japan also needs to improve in Area II (EconomicStructure and Use of Markets) since it had poorratings in IIA (Government Enterprises) and IIB(Price Controls). The marginal tax rate (65 per-cent) that applies to its most productive citizens isout of line with the rest of the world and warrantsa rating of 2 in that component. Japan’s use of non-tariff (and even non-quota) trade barriers is re-flected in the unusually small size of its trade sectorwhen compared to expectations.


LATVIA



5.7

6.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

32.8

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Latvia improved its relative position from 77th in1995 to 60th in 1997.

Latvia shares some of the characteristics of theother Baltic states. Latvia reduced its annualmoney growth (relative to economic growth) forthe past five years from 49.5 percent in 1995 to18.5 percent in 1997. At the same time, its inflationrate fell from 16.0 percent to 6.6 percent.

There are also problems with the rule of law andrecognition of property rights. Ownership of for-

eign currencies is not fully allowed—a measure toavert outflow of foreign capital resources—andthe relatively high share of government con-sumption, though modest by European Stand-ards, is significant.

The reduction of government enterprises is wor-thy of mention. Latvia has improved its ratingfrom 0.0 in 1995 to 4.0 in 1997. Although Latvia’sprivatization reforms lagged behind other re-forms, privatization got a refreshing impetus in1997 when a new competition law was approved.


LITHUANIA



5.7

6.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

33.0

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Consistent market reforms have allowed Lithua-nia to improve its rating to 6.6 from 5.7 in 1995.It now ranks 62nd out of the 123 countries in thisstudy.

Lithuania’s tax system is based on an income taxthat is almost flat (the regular rate is 33 percent,compared to a top rate of only 35 percent). TheVAT (which is the basic source of budget income)is now applied universally at the rate of 18 percent, with very few items still exempt. It is in theofficial program of the government to abolish cor-porate income tax and all companies are alreadyallowed to deduct their investments fully from tax-able profits.

The private sector, which employs two-thirds ofthe country’s work force, contributes up to 75 percent of GDP. Privatization has reached areas of theinfrastructure that earlier were “non-touchable.”Even the government’s 60 percent stake of theTelecommunication Company was privatized in

1998. Of course, given the low rating in this area,there is more to be done.

The currency is protected from political and otherinterventions by the Currency Board, introducedin 1994. Since that time, the national currency, Li-tas, is fully backed by foreign reserves and is freelychanged into foreign currency at the rate of 4 Litasfor US$1. Thanks to the Currency Board, interestrates went down significantly and private invest-ment, both domestic and foreign, boomed. Peo-ple’s savings and other assets are protected fromdevaluation and income is consistently rising.Since this component is calculated for a period offive years, Lithuania’s rating is still affected by theproblems of post-Soviet times and will see im-provement in the coming years.

Lithuania can also expect further increases in eco-nomic freedom if it proceeds further with privatiza-tion (including privatization of financial services)and eliminates conscription and price controls.


LUXEMBOURG



8.88.3 8.58.4

9.49.09.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

33.1

48.654.8

51.7 49.345.545.5

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Luxembourg’s 8.5 rating places it at 9th positionamong the 123 countries in our study. Luxem-bourg lost the high ranking that it held through the1980s because of rapid development in othercountries and, to a certain extent, problems inLuxembourg itself.

There has been a tendency towards governmentgrowth during the recent decades. Government’sshare of total consumption has grown from 13.6 per-cent in 1970 to 19.8 percent in 1997. Transfers andsubsidies absorbed 26 percent of the GDP in 1997and were financed by very high marginal tax rates.

However, in other fields of examination Luxem-bourg’s performance is one of the best. Citizensare fully free to maintain foreign currency ac-counts domestically and abroad and suffer no con-straints in capital transactions with foreigners.There is a reliable, well-established legal structureproviding for the protection of property rights. Itsinternational trade sector has been almost com-pletely liberalized as a precondition for integrationinto the EU. Since the middle 1980s, the monetaryauthorities have kept control over inflation. An-other important quality of Luxembourg is its func-tional and liberal banking sector.


MAURITIUS



4.7

6.4

7.6

7.9

6.0

4.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

31.035.0

27.0 25.5 25.128.6

21.6

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

This small African country of approximately 1.2million people has seen impressive increases in itslevel of economic freedom, rising from an overallscore of 4.6 in 1975 (70th in rank) to a peak of 7.9 in1995 (23rd in rank). In 1997, Mauritius had anoverall score of 7.6 (36th in rank).

Improvements in their overall score can be attrib-uted to improvements in three areas: (I) Structureof the Economy and Use of Markets, (IV) Free-dom to Use Alternative Currencies and (VII) Free-dom of Exchange in Financial Markets. Inparticular, Mauritius has made significant im-provements in its top marginal tax rate, goingfrom a score of 3 in 1980 to 8 by 1995. Mauritiushas also increased the reliance on the private sec-

tor by moving toward more private banks and al-locating credit more to the private sector ratherthan the public.

The mean tariff rate remains high but was showingsome signs of improvement until it increased be-tween 1995 and 1997. The standard deviation oftariff rates is also unacceptably high, garneringthem the lowest score possible of 0.

The overall effect of the increase in economic free-dom has been tremendous. The average annualgrowth rate in GNP per capita between 1977 and1987 was 1.8 percent per year. From 1988 to 1998,this rate jumped to 4.1 percent per year. In 1997, itwas 5 percent and in 1998 it was 4 percent.


MEXICO



7.0

5.7

4.5

7.4 7.7

6.4

4.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

24.2 23.627.0

30.624.3 24.0 23.3

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

During the past 15 years, Mexico has steadily im-proved its rating. Its 7.7 rating in 1997 places it 35th

among 123 countries in our study; this is up fromits 4.5 rating and 76th ranking in 1985.

Mexico has been a fast-growing economy; its realGDP grew by 6.8 percent in 1997. Positive aspectsare its small share of government consumption(only 11.3 percent in 1997), low transfers and sub-sidies (7.5 percent in 1997), and the relatively lib-eral foreign-trade sector. Although it still suffersfrom corruption and bureaucratic ineffectiveness,the legal structure has improved significantly since1985. Compared with 1995, some price controlshave been relaxed.

Mexico has problems with its monetary policy.The authorities are struggling to curb annualmoney growth and an inflation rate of 19 percentcannot be a basis for sustainable growth. While cit-izens are free to own and maintain foreign cur-rency accounts, there are constraints on capitaltransactions with foreigners. The recent decline incredit extended to the private sector represents astep backwards. In 1997, just 60.5 percent of totalcredit was extended to the private sector, downfrom 83 percent in 1995.


THE NETHERLANDS



8.6

7.47.8 7.8 8.1

8.4 8.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank 52.8

57.560.7

57.5 55.258.1

46.0

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

The Netherlands’ 8.5 rating in 1997 places it 9th

among the 123 countries in our study. The Nether-lands has one of the most agile economies amongwestern European countries. It has a moderate un-employment rate and a healthy rate of growth inreal GDP. The Netherlands gets high ratings in theareas of monetary policy, international trade, fi-nancial markets, and alternative currencies. Itsreputation is as a successful anti-inflationary re-gime. Since the change from full monetary sover-eignty to reliance on German Bundesbank policiesin the 1980s, the inflation rate has been main-tained at a low level by its authorities. Citizens arefree to hold foreign currency accounts domesti-cally and abroad and are not bound by restrictionsto engage in capital transactions with foreigners.

The trade sector is liberalized; remaining tariffsand taxes are negligible.

Even in the area of government operations im-provements are visible. Even though governmentconsumption, at 19 percent of total consumption,is relatively high, it has declined slightly during thepast 20 years. Also, the transfers and subsidies sec-tor fell modestly from 29.7 percent of GDP in1995 to 27 percent in 1997, though it remains at avery high level and is financed by a very high topmarginal tax rate of 60 percent. The governmentrelaxed some price controls and abandoned con-scription. The government provides a well-estab-lished legal structure supportive of soundeconomic development.


NEW ZEALAND



7.0

6.06.4 6.2

8.19.19.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

34.440.8

47.0 47.9 50.0

42.342.9

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

In recent years, New Zealand has moved to the topranks of this index more rapidly than any othercountry. In 1997, as in 1995, it ranked in 3rd place.As recently as 1985, though, New Zealand ratedjust 6.2 and ranked 32nd of 111 nations.

The key components of New Zealand’s prosper-ous economy are a well-established legal structure(note the perfect 10 rating) and a consistent anti-inflationary monetary policy—the inflation rate for1997 was –0.5 percent.

The reductions in government expenditures inthe early 1990s were remarkable. The share of

government consumption remains relativelyhigh but has fallen. The reduction in the transfersand subsidies area has been even more impres-sive—from 27.5 percent in 1990 to 12.4 percent in1997, financed by a comparatively low top mar-ginal tax rate of 33 percent. Government enter-prises are more completely privatized and pricecontrols abolished.

New Zealand’s international trade sector is almostcompletely liberalized and only some minor taxesand tariffs still exist. Even so, the size of the tradesector (in percent of GDP) has declined slightly.


NICARAGUA



3.7

2.0

2.9

5.7

6.97.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

30.4

59.8

29.3

45.4

19.4 21.0

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

The policies of the 1980s caused Nicaragua’s eco-nomic freedom rating to plunge from 7.6 in 1975 to2.0 in 1985. Through reforms in the 1990s, Nica-ragua has dramatically changed its policy makingand this has improved its rating for economic free-dom substantially. It has now recovered to thelevel it had before the Sandinista Revolution andhas moved from 109th position (out of 111 coun-tries) in 1985 to 56th in 1997.

What has produced the increase in Nicaragua’sranking? Price stability and freedom to have for-eign currency accounts have played a role. Price

controls were also relaxed. Another substantialachievement was met when controls on interestrates and capital markets were eliminated. Nicara-gua has also made efforts to reduce its govern-ment’s consumption and to respect contracts andproperty rights.

The risk of expropriation and the lack of attentionto the principles of a rule-of-law are still weak-nesses of Nicaragua’s economy. The country stillhas a lot to do if it wants to regain the confidenceof citizens and foreigners.


NORWAY



7.0

6.1 6.26.8

7.78.18.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

41.0

48.4 48.354.9 52.0

46.445.6

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Although Norway received the same rating of 8.1in 1997 and in 1995, its ranking fell from 16th posi-tion to 22nd in 1997.

Norway’s share of government consumption ishigh, as it is in other European welfare states.However, since 1990 there has been a slimming ofthe transfer and subsidies sector: the share of thissector fell from 27.3 percent of GDP in 1990 to19.5 percent in 1997. Furthermore, in some areas,price controls were abandoned. There is still an

opportunity to reduce the number of governmententerprises and its investments.

Norway provides a progressive and functional legalstructure supporting economic development.While tariffs are low, their standard deviation in-creased during the 1990s. Citizens are free to ownforeign currencies and to maintain those accountsdomestically and abroad. A characteristic feature ofNorway’s macroeconomic indicators is its success-ful monetary policy pursuing monetary stability.


PANAMA



7.7

6.77.0

8.38.1

6.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

28.732.6

35.8 36.6

29.1 27.6

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

In 1997, Panama’s rating was 8.3, up from 6.9 in1990. Its ranking rose from 30th in 1990 to 14th in1997. Panama has made substantial moves towardeconomic freedom during the last decade: tariffshave been reduced and financial and capital mar-kets have been liberalized. The strengths of the Pan-amanian economy are price stability and its highlyconvertible currency. Beginning in 1904, Panamaadopted the American dollar as its official currency.This provides Panama with a highly credible cur-rency that is readily accepted throughout the world.

There are still weaknesses to be overcome. The le-gal structure (respect of contracts and the securityof private property) would benefit from the re-moval of barriers that reduce the trust of inves-tors, both foreign and domestic. The statecontinues to operate a number of government en-terprises. Moreover, the size of government isquite large, particularly for a country with a lowper-capita income. In spite of these negative fac-tors, Panama has the best economic freedom rat-ing in Central America.


PHILIPPINES



5.1 4.9 4.95.6

7.7 7.9

5.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

16.2 17.514.1

22.5 22.621.319.6

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

The Philippines’ rating has moved up to 7.9 from4.9 in 1985 and has secured a 31st place ranking.One weak area is Area II, Structure of the Econ-omy and Use of Markets, with a fairly low rating(5 out of 10) for the Price Control Component. Theratings in Area V, Legal Structure and Propertyrights, were quite low with a very poor 4.1 ratingfor the Rule of Law component. Relatively hightariffs and restrictions on capital-account transac-tions are also problem areas.

On the positive side, money and prices are rela-tively stable and the citizens have access to alter-native currencies. Government consumption anddirect transfers are fairly small as well.

The Philippines, like so many of the emergingAsian economies, needs a healthy dose of trans-parency and reduced corruption if it is to continueits trek toward the industrialized world.


POLAND



3.54.0

6.46.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

59.5

42.6

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Since 1989, Poland has been on a steady path to-ward a market economy. Its economic freedomscore increased from 3.5 in 1985 to 4.0 in 1990 and6.4 in 1995, while its rank rose from 96th (out of111) in 1985 to 95th (out of 115) in 1990, and 57th

(out of 122) in 1995. However, in 1996/1997 it re-corded a slight decline to 6.0, which gave it a rank-ing of 82nd place.

Between 1995 and 1997, economic freedom ofother eastern European countries went up whilePoland experienced a slow-down from its earlierfast pace of transformation toward a freer econ-omy. This, however, was not reflected by any sub-stantial decline in economic growth or in theworsening of other major macroeconomic indica-tors. A decline in rating for Area VI, InternationalExchange: Freedom to Trade with Foreigners,from 6.2 in 1995 to 5.0 and another in Area II,Structure of the Economy and Use of Markets,from 4.1 to 3.4 should be noted. There would havebeen no fall in the overall score if not for the dete-rioration in these two categories. It may be ex-pected that the scores in Area VI will improveshortly, as Polish trade and competition policieswill have to be harmonized with those of the Euro-pean Union. Scores in Area II will be positively in-fluenced by recent reductions in marginal tax ratesand the shortening of compulsory military service.

The Central Bank continued to be a guardian ofsound national money. In February 1998, a newbody—the Monetary Policy Council—was estab-lished to monitor and, to a degree, control decisionsof the President of the Central Bank. Nevertheless,the Council itself proved to be largely independentof any direct political influence. In short, the Cen-tral Bank maintained a stable money supply and in-terest rates, retained its traditionally liberal stance inthe area of citizens’ access to foreign currencies, im-plemented progressive though not hasty liberaliza-tion of the financing of capital transactions andexchange-rate determination (moving toward float-ing regime). The pace of privatization of commer-cial banking was rather slow although there aregood prospects for a more visible change in this re-spect in the immediate future.

Problems were exacerbated by the fact that crucialsystemic reforms had not been undertaken beforethe end of 1997 (social security, health care, territo-rial administration, and education). They were fi-nally prepared and introduced in 1998 and 1999and may substantially improve the country’s eco-nomic-freedom score in the years to come. Thesepositive tendencies may, however, be offset by ris-ing demands for redistribution by social groups likethe coal miners and peasant farmers influenced bypopulist ideology and trade-union leaders.


PORTUGAL



5.6

7.8 8.0

6.45.75.6

3.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

25.9

35.3

21.6

46.045.542.943.4

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

In 1997, Portugal ranked 25th among the 123 coun-tries in our study. This is the best ranking Portugalhas ever received. Its rating has improved steadilysince 1975’s low rating of 3.4 (73rd out of 83 na-tions) to its current rating of 8.0.

Portugal’s monetary policy has shown strong im-provement toward monetary stability in order toqualify for membership in the EMU. After morethan 20 years of high inflation, the inflation ratedeclined to a narrow range between 2 percent and3 percent. The citizens are free to maintain foreigncurrency accounts domestically and abroad. Therecent economic achievements are backed by a

well-established legal structure providing a nearlyperfect score in Area V. Portugal’s internationaltrade sector is very liberalized as it is part of theEU. Progress is also found in the deregulation ofthe banking sector, where an increasing share ofdeposits are held in private banks.

The share of government consumption remainsrelatively high (though moderate by Europeanstandards) and transfers and subsidies appear to becoming down. Price controls exist in some sectorsand there is ample opportunity for additional pri-vatization of government enterprises.


SLOVAKIA



3.9

6.2 6.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

61.555.0

50.1

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Slovakia’s 1997 rating of 6.1 placed it 78th among123 countries. This rating was a marked improve-ment over the 3.9 rating (and 96th ranking) of theformer Czechoslovakia in 1990 but leaves a lot ofroom for improvement.

Slovakia has one of the most open economies andsome of the lowest tariff barriers in the region.Even though it has made significant progress in thelegal protection of private-property rights, it hasstill a long way to go in the enforcement and viabil-ity of contracts. Restrictive monetary policy con-tributed to one of the lowest inflation rates in theregion (around 6 percent in 1996/1997). On theother hand, there have been delays in deregulating

prices, especially those for electricity, gas, andrents. Slovakia is gradually liberalizing its capitalflows and foreign-currency regime, where furtherlifting of controls are expected. High marginal taxrates are used to support the still significant share ofgeneral government expenditures (50.1 percent ofGDP in 1997). The largest banks are still in thehands of the state, as are public utilities.

Slovakia will be able to improve its ranking sig-nificantly only if restructuring and privatizationare accelerated both in banking and in corporatesectors and if there is a far-reaching reform ofpublic finances aimed at reductions in income re-distribution.


SLOVENIA



5.6

6.3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k 45.747.245.7

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Slovenia’s 1997 rating of 6.3 placed it 70th among123 countries. Slovenia’s low rating stems from itsweaknesses in Area II: Structure of the Economyand Use of Markets. In particular, it received lowratings because of the large number of govern-ment enterprises, the size of its government, andrestrictions on the mobility of capital.

There is some good news that will be reflected inup-coming indexes. The privatization of trade andindustry has been completed. However, a few en-terprises (2 percent of equity) showing losses arestill state-owned. Several steps forward in the ex-pected privatization of insurance companies,banks and public utilities have been undertakenrecently. A draft version of Proposal of Law ofState Property Privatization has been prepared.

The new Foreign Exchange Operations Act, whichregulates operations between residents and non-residents, went into force in April 1999. It repre-sents a major step towards full liberalization in theflow of capital. A number of restrictions on foreigninvestment in Slovenia have been phased out; atthe same time, there are almost no restrictions lefton residents’ investments abroad. Nevertheless,foreign-currency bank accounts abroad for resi-dents are still not permitted.

Further steps must also be taken to lower generalgovernment expenditures, especially transfers andsubsidies, which constitute an astounding 33 per-cent of GDP. Since Slovenia is a candidate for fullEU membership, it is reasonable to expect thatstructural reforms towards more economic free-dom will be coming.


SOUTH AFRICA



7.6

6.2 6.06.6

7.3

5.95.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

27.333.1 31.2

36.0 35.0 34.931.6

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Despite slow improvement during the 1990s,South Africa’s economic-freedom rating continuesto fall midway among rated countries: its rankingremained steady, 48th (out of 115) in 1990 and 47th

(out of 123) in 1997. Government expenditure(31.6 percent of GDP in 1997) remains extremelyhigh for a low-income country ($4,513 per-capitaGDP in 1996) but fiscal discipline has been im-proved and the level of expenditure as well as thesize of the budget deficit is declining.

With the disappearance of apartheid, the first gov-ernment of the new democracy and the 1996 Con-stitution greatly improved the overall legalstructure. Conscription has been abolished andother pro-market changes have been made. How-ever, while controls on the movement of capitalhave been substantially reduced, exchange con-trols remain in place and the inflation rate, whiledeclining, has been consistently higher than therates of South Africa’s major trading partners. Thecurrency exchange rate has consequently beenfalling continuously.

Trade tariffs have been reduced and the powers ofthe former agricultural marketing boards re-

moved. Farmers and long-protected industrieshave had to adjust to the changed circumstancesand formal unemployment has consequently in-creased to around one-third of the potential work-force. New labour laws have exacerbated theproblem by imposing increased costs on employ-ers. The high unemployment level and restrictivelabour laws also make it difficult for the govern-ment to implement its planned reduction in thenumber of civil servants and employees at state-owned industries. The government has re-statedits commitment to privatization but the process isproceeding very slowly.

South Africa can improve its economic freedomrating and prospects of higher growth by contin-uing to reduce the growth rate of the money sup-ply, replacing the existing limited rights to ownforeign currency with total freedom to maintainforeign currency accounts in local banks, abolish-ing the remaining limitations on the ownership ofbank accounts abroad, substantially reducinggovernment expenditure as a percentage ofGDP, privatizing rapidly, and reducing marginaltax rates.


SOUTH KOREA



6.35.6 5.7

6.0

7.77.3

6.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

17.522.5 22.8 23.820.019.719.3

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Although South Korea’s rating declined onlyslightly from 7.7 in 1995 to 7.3 in 1997, its rankingfell from 34th in 1995 to 47th in 1997. Reasons forthis decline are the successful efforts of other coun-tries pushing forward economic development andfreedom.

Korea is well known for its economic growth.However, for a sustainable future development,the Korean government must deregulate the den-sity and supremacy of affiliated trusts (Chaebol) inorder to foster flexibility, competition, and effi-cient allocation of investments.

For the last several decades, governmental con-sumption and spending on transfers and subsi-

dies have been increasing but remain within amodest range. Particular strengths are the mone-tary policy, freedom to use alternative currenciesand a well-established legal structure. The credi-bility of its monetary policies has been improvedthrough curbing annual money growth and re-ducing inflation.

Korea has a large functional foreign-trade sectorbut there is a relatively high Mean Tariff Rate. Thestandard deviation of tariff rates indicates a pre-vailing protectionism toward domestic industries.In the recent decades there have been no signifi-cant efforts to liberalize the banking sector. LikeJapan, private savings held as deposits in govern-ment-owned financial institutions are very large.


SPAIN



6.55.9

6.2 6.3

8.27.9

7.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

22.2 24.7

32.9

42.245.445.8

43.0

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Spain improved its performance steadily during thelast decades and the 8.2 rating places it at 18th place,the best that it has yet attained. This is a fairly soundimprovement over its 29th ranking in 1990 .

Spain’s strengths are international exchange, afully convertible currency, its legal structure andits monetary policy. Since 1985, the monetary au-thorities have successfully moved the inflation ratedown to 2.1 percent. Obviously, the Maastricht-criteria for accession to the EMU were partly thereason for this. The citizens are not subject to re-strictions infringing their right to own foreign cur-

rencies domestically and abroad. There is a well-established, trustworthy legal structure providingsupport for economic development. Spain’s for-eign-trade sector could be expanded and is almostcompletely liberalized.

Transfers and subsidies, as well as governmentconsumption, still remain high. Moreover, duringthe recent decades there has been a tendency to-wards the expansion of total government con-sumption. Signs of liberalization of governmententerprises and price controls are hard to find andpoint to an obvious area for improvement.


SWEDEN



6.2 6.2 6.37.0 8.07.97.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k 48.9

61.664.9

60.866.168.7

43.7

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

The Swedish figures have been fairly stable overtime, varying from a summary rating of 6.2 in 1970to a rating of 8.0 most recently. Sweden’s rankingconsequently has not changed much either: 34th in1970 and 25th in 1997. Two trends are discernable:the variables associated with Area I, Size of Gov-ernment, and Area II, Structure of the Economyand Use of Markets, have received lower scores,while the variables in Area VI, International Ex-change, and Area VII, Freedom of Exchange inCapital and Financial Markets, have improved.

It is in the two first areas that the main problemscan be found. The Swedish government has con-tinued to expand and to increase the level of taxa-tion, especially since 1970, which has caused long-term economic growth to slow down and eco-nomic freedom to be curtailed. The Swedish wel-fare state consumes over one third of the totalconsumption of the nation and redistributes an-other third.

Two important markets that are not included inthe index at present, the labour and housing mar-kets, represent some of Sweden’s biggest chal-lenges. The former is plagued by a compressedwage structure and rigid laws regulating hiring andfiring decisions, which have resulted in high un-employment. The housing market is likewisehighly regulated, with price ceilings, subsidies,poor competition, building requirements, and soon. Were these to be included in the index, Swe-den’s freedom score would surely drop. Even so,Sweden is near the bottom of the industrializedEuropean nations in terms of economic liberty.

It is hard to say if substantial structural reforms areforthcoming. Many economists advocate them;certain influential interest groups oppose them.Reality, however, may force some liberal reformsto be implemented, which would prove beneficialfor both economic freedom and the functioning ofthe economy.


SWITZERLAND



8.08.4

8.7 8.6 8.58.58.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

28.7 29.3 31.0 30.936.9 36.9

21.3

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Switzerland’s 8.5 rating places it 9th in our 1997 in-dex. Switzerland has sustained its high positionduring the past decades and has never beenranked below 10th position.

The characteristics of the Swiss economy are itscredible and stable monetary regime and well-established legal structure (note the almost perfectrating in that area). Further, a free foreign-tradesector—in the last two years nearly all taxes on in-ternational trade were abandoned—as well as thefreedom of owning foreign currencies and thesmall number of government enterprises are posi-tive attributes.

Like its highly developed neighbouring countries,both government consumption and transfers arehigh. Switzerland’s practice of military conscrip-tion, famous around the world, hurts its rating.Also, despite being a world center for banking, alarge percentage of deposits are held in govern-ment-owned banks.

While the growth rate of real GDP has been mea-gre—an average of 0.4 percent annually between1990 and 1997—the Swiss economy remains one ofthe most free in Europe.


TAIWAN



6.66.1

6.8 7.17.6 7.8

7.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

23.4 23.1 25.822.8

27.130.1 27.7

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Taiwan’s rating has hovered in the low to middle7s since the 1980s. The 1997 rating of 7.1, however,has not kept pace with other countries and, as aconsequence, Taiwan has fallen to 51st place.

Taiwan does a good job in most areas but in twoareas significant problems remain. Heavy use ofgovernment-owned enterprises, price controls,and conscription generate a very low 3.1 rating in

Area II, Structure of the Economy and Use ofMarkets. Widespread government ownership ofbanks and capital-account restrictions contributeto a 5.5 rating in Area VII, Freedom of Exchangein Capital and Financial Markets.

Taiwan could easily move its ranking into the top20 or higher by privatizing public-sector firms andderegulating prices.


THAILAND



6.4

5.6 5.86.1

7.6

8.26.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

17.423.3

26.3

17.420.2 20.3

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Thailand is on the path to improved economicfreedom. In 1975, the economic freedom rating ofThailand was only 5.6 but, in 1997, had improvedto 8.2, pushing Thailand to the 18th rank. The con-tinual improvement in economic freedom from1985 to 1997 can be attributed to the following fac-tors.

(1) Government transfer and subsidies have longbeen relatively low compared with the gross do-mestic product.

(2) The role of state enterprises has been reduced.The rating in this category rose to 7 in 1997, upfrom 4 in 1985. The decreasing role of state enter-prises in the 1990s can be attributed to the gov-ernment’s privatizing plan in the 1980s. Inaddition, the latest financial rescue package fromthe IMF also requires Thailand to privatize keystate enterprises, such as the Transportation Com-pany and the Telephone Organisation of Thai-land, to name a few.

(3) The price level in Thailand, as measured by thestandard deviation of the inflation rate, is rela-

tively stable and Thai residents may now freelyhold foreign-currency bank accounts, which wasnot allowed in 1975.

(4) Thailand’s tariffs are declining although theyremain high.

Although Thailand has improved economic free-dom in certain areas, the country still faces severalchallenges to become an economically free coun-try. The government uses a 24-month conscrip-tion to obtain military personnel. Prices of certainproducts remain under the government’s control:in 1997, the government still formally controlledthe prices of gas and sugar, setting the “maxi-mum” price for gas and the “minimum” price forsugar. For approximately 22 basic consumptionproducts, it oversees the price administration sys-tem, which accounts for the rating of 5 in theprice-control component. Residents of Thailandare not totally free to engage in capital transac-tions with foreigners. If Thailand’s rating is to im-prove, it must remove controls on capitaltransactions, strengthen the rule of law, stream-line its tariff structure and reduce price controls.


TURKEY



3.0 3.3

4.55.1

6.36.6

3.3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

21.928.7

34.029.8 28.7 25.9

30.5

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

Turkey’s most recent rating of 6.6 places it 62nd outof the 123 countries rated. This represents someconsiderable improvement from the 3.0 rating anddead-last placement in 1970.

Turkey’s biggest problem is in the monetary area,for which it received a rating of just 1.6. The situa-tion seems to be getting worse on this front. Theinflation rate was 65 percent in August 1999, andthe interest rate on government bonds has risen tonearly 100 percent. Other problems include state-owned enterprises, price controls, and militaryconscription. Privatization efforts have been sty-mied by trade unions and other interest groups.

Political freedoms are even less protected thaneconomic freedoms. Liberals are either sackedfrom their jobs if they are journalists or harassed ifthey are government officials. Still, freedom ofthought was improved during the recent electionand development of relations with the EU hasbrought about a better climate.

The tax reform in 1998 tried to increase the taxburden but decrease marginal tax rates. But Tur-key ended up with an economic crisis: GDP fell5.8 percent in the last six months of 1999. Thetragic earthquake has only made matters worse.


UNITED KINGDOM



6.65.9

6.8

8.28.6 8.98.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121R

ank

39.242.3

43.745.344.9 46.046.3

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

The United Kingdom is now one of the freesteconomies in the world, following the policychanges brought about by Margaret Thatcher’sgovernment. In 1980, the United Kingdom ranked16th but has now risen to 5th place. The principalreasons for this improvement have been greatermonetary and price stability, removal of exchangecontrols, a substantial privatization program andsharply reduced top marginal personal tax rates(from 83 percent in 1980 to 40 percent at present).

In several respects, trends in the United Kingdomhave been different from those in continental Eu-rope. Government expenditures as a proportion ofGDP have changed little whereas they have in-creased in other major European countries. Gov-ernment transfers and subsidies as a proportion ofGDP have also remained fairly stable instead ofincreasing. The British labour market is less regu-lated than most Continental markets and in recentyears unemployment has been significantly lowerthan in those countries.

The “New Labour” government, elected in 1997,has emphasized monetary stability and a prudentfiscal policy and has given the Bank of Englandoperational independence to pursue an inflationtarget of 2½ percent each year. After six years ofeconomic growth, the economy slowed in 1998but growth now appears to have resumed.

There are still some serious economic problems tobe overcome in the United Kingdom. The govern-ment sector is large and regulation is extensive.The new government has imposed a minimumwage, agreed to the European Union’s workingtime and other “social” regulations that the previ-ous government would not accept. The mobility oflabour is also reduced by the large “public” hous-ing sector and the presence of controls, taxes, andsubsidies in the housing market. The big issues tobe tackled if economic freedom is to increase arefundamental reform of the “welfare state” and aradical attack on regulation to reduce the power ofthe government.


UNITED STATES



8.0 8.18.5 8.6 9.08.8 8.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1970 1975 1980 1985 1990 1995 1997

Sum

mar

y R

atin

g (o

ut o

f 10)

1

11

21

31

41

51

61

71

81

91

101

111

121

Ran

k

32.4 34.6 33.7 36.4 34.8 34.9 34.6

0.0

25.0

50.0

75.0

100.0

1970 1975 1980 1985 1990 1995 1997

The economic freedom rating of the United Stateshas remained remarkably consistent over the lastthree decades. The 8.0 rating of 1970 was good for11th place but the United States has held the 3rd or4th position ever since. Its 1997 rating of 9.0 earnedthe United States 4th place. Whatever improve-ment the index captures reflects a much improvedmonetary regime. The rating for Area III, Mone-tary Policy and Price Stability, went from 3.4 in1970 to 9.8 in 1997. The fiscal size of governmenthas grown only modestly over the years and hasactually fallen slightly in the 1990s. Most of all, theUnited States deserves credit for not increasing thesize of government as so many high-income indus-trial nations have done.

The greatest threats to economic liberty in theUnited States are in areas that the index does notcapture well. For instance, there have been severalminimum-wage increases in the last few years.The regulation of the labour market through anti-discrimination laws (for example, the American’swith Disabilities Act) has become burdensome aswell. Health-care regulations, especially price con-trols in the Medicare and Medicaid programs, arealso a great concern.

Although little gain can been seen in the budgetfigures, welfare reform has been a success. Liter-

ally millions of people have been moved off thesocial welfare rolls into the job market without thedire consequences so many predicted.

Protectionist and other anti-foreign (especiallyanti-immigrant) sentiment appear to be on therise. This has delayed attempts to bring Chile andother Latin American nations into the NorthAmerican Free Trade Agreement. Indeed theUnited States’ rating in Area VI, International Ex-change, has recently fallen to 7.8 from 8.4 in 1980.

Also, despite leading the wave in cutting mar-ginal income taxes that swept the world begin-ning in the 1980s, the top marginal tax rate hascrept up to 39.6 percent at the federal level (andadditional state and local income taxes usuallyapply). Thus the United States’ rating for thatcomponent is just 7.0.

For the United States to maintain its top-five status,it must refrain from adding burdensome labourand environmental regulations and it must moveto privatize social security. Maintaining its leader-ship in the international arena over freer trade andfundamental tax reform are also critical to futureeconomic freedom and prosperity.


(Hong Kong continued from page 49)

The Hong Kong government has indeed taken amore active role in the economy. The widenedscope of policy initiatives may only be a cyclicalphenomenon. When the economy starts to growagain, the government can then afford to have

more faith in the market mechanism and to revertto its “positive non-intervention” principle. Thiswill bode well for long term continuation of HongKong’s economic freedom.

(Hungary continued from page 50)

The transition towards a free economy has notbeen smooth. Although the freedom of choicekeeps increasing, low incomes limit the actual op-tions available to individuals. But GDP in 1998 ex-ceeded the 1989 level, so Hungary is the second

country in the region—after Poland—that exceededthe pre-transformation GDP level in real terms.Now the country is on a sustainable growth pathwith a projected annual rate of growth of 4 percentto 5 percent for the coming years.

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