*EPF410 07/15/2004
Countries with Economic Freedom Grow Fastest, Researchers Say
(Report backs up new U.S. approach to aid, Treasury's Taylor adds) (700)

By Kathryn McConnell
Washington File Staff Writer

Washington -- Countries that adopt and maintain institutions and policies that encourage economic freedom attract investment, enhance productivity and grow rapidly, according to a report from a major U.S. research institute.

In contrast, countries stagnate when they stifle trade and erode incentives to engage in productive activities, said the authors of "Economic Freedom of the World 2004," released July 15 by the Cato Institute in Washington.

In the report, authors James Gwartney and Robert Larson said the "cornerstones" of economic freedom are personal choice, voluntary exchange of resources, freedom to compete, and security of privately owned property.

This type of economic research can have a substantial impact on U.S. policy, John Taylor, under secretary of the treasury for international affairs, pointed out during a Cato press event announcing the report.

As an example, Taylor cited the creation of the Millennium Challenge Account (MCA), which is the Bush administration's supplemental aid program for countries that demonstrate a commitment to govern justly, encourage economic freedom, and invest in education and health care for their people.

The study released by the CATO Institute rated countries according to measures in five categories: size of government, legal structure and protection of property rights, access to "sound" money or credible currencies, freedom to trade internationally, and regulation.

Similarly, the MCA measures such performance factors as government effectiveness and control of corruption, rule of law, trade, fiscal and monetary policy, ease of starting a business, and public expenditures on health and education.

"This research is a validation of those [MCA] measures," Taylor said.

By choosing policies that encourage economic freedom, countries are able to attract more investment, which leads to more growth, he said.

The study rated Hong Kong the highest of the 104 countries studied, closely followed by Singapore, New Zealand, Switzerland, the United Kingdom and the United States. The other top 10 countries are Australia, Canada, Ireland and Luxembourg.

Most of the lowest-ranking nations are in Africa or Latin America, or are former communist states, according to the report.

Botswana was rated the best of sub-Saharan countries, and Chile was given the best rating in Latin America.

The authors found that countries with more economic freedom have substantially higher per capita incomes.

They also found that life expectancy in countries with the most economic freedom is more than 20 years longer than those with the least. Adult literacy rates increase and infant mortality drops in countries with more economic freedom, they said.

Increases in economic freedom also are linked to decreases in child labor and increases in clean water.

With fewer regulations, taxes and tariffs, economic freedom reduces the opportunities for corruption of public officials and the size of shadow economies, the authors added.

Gwartney and Larson said political rights, such as free and fair elections, and civil liberties, such as freedom of speech, also are tied to economic freedom.

Overall, in the countries rated between 1980 and 2002, global economic freedom has risen, the authors said. They saw improvements in monetary policy, the lowering of high marginal tax rates, liberalized exchange rates, and reduced tariff rates.

They also noted that trade has increased to 25 percent of the collected gross domestic product (GDP).

The report pointed to several former centrally planned economies that have made "substantial" moves toward economic freedom since 1990: Estonia, Latvia, Lithuania, Hungary, the Czech Republic and the Slovak Republic.

In contrast, it says 10 countries' ratings declined between 1995 and 2002: Zimbabwe, Indonesia, Argentina, Malaysia, Myanmar, Papua New Guinea, the Philippines, Thailand, the Republic of the Congo and, to a lesser extent, Norway.

Taylor noted that since the end of 2002, the last rating period included in the study, some of these countries have made improvements in their economies.

Gwartney is a professor of economics at Florida State University and Lawson a professor of economics at Capital University in Ohio.

The Cato Institute publishes the Economic Freedom of the World Report in conjunction with The Fraser Institute of Canada and more than 50 other public policy research organizations around the world. The report was first published in 1996.

(The Washington File is a product of the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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