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ENABLING FACTORS

Excerpts from the “2008 Index of Economic Freedom”

Published by The Heritage Foundation and the Wall Street Journal
Analysis by RÉHAB EL-BAKRY

In a world where economic competitiveness plays out on the global arena, the degree of economic freedom in countries has a direct impact on the prosperity of each country’s population, as well as its ability to compete on an international level. In an effort to benchmark the degree of freedom and competitiveness of the various economies around the world, The Heritage Foundation and the Wall Street Journal have issued the “2008 Index of Economic Freedom,” their 14th in a row.

“The goal [of the report is] to develop a systemic, empirical measurement of economic freedom in countries throughout the world. […] Economic freedom is the key to creating an environment that allows a virtuous cycle of entrepreneurship, innovation, and sustained economic growth and development to flourish. Economies with higher levels of economic freedom enjoy higher living standards.”

The index ranks the performance of 157 countries based on 10 different variables. These variables highlight the level of government intervention in the economy – the less government intervention in the economy, the higher the ranking of the country on the index. The variables included in the report are: business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption, and labor freedom. The report divides the countries ranked into five regions: Europe, Asia and the Pacific, the Americas, the Middle East and North Africa, and sub-Saharan-Africa.

“A majority of the freest economies are in Europe […], five are in the Asia-Pacific region and three are from the Americas. […] Europe has continued to advance its economic freedom because of policy improvements, such as tax cuts and other business climate reforms. […] The Americas [… have] experienced some regional determination in economic freedom in recent years. […] Asia-Pacific countries have the highest variance within their region, which means that there is a much wider gap between the heights of freedom in some economies and the lows in others that is nearly twice as variable as the norm. […] Economic freedom in sub-Saharan Africa and the Middle East/North Africa region has somewhat stagnated over the life of the index, but those regions have been moving slowly toward higher economic freedom in recent years.”

As far as the Middle East and North Africa region is concerned, none of the 17 countries included in the ranking made it to the list of the 20 freest economies. The highest ranking countries in the region are Israel (37th), Bahrain (39th) and Jordan (53rd). The three lowest ranking countries are Syria (142nd), Iran (150th) and Libya (155th). The majority of economies in the region do not rank well. Many suffer from what is known as “Dutch disease,” where oil-exporting countries generate economic growth through the export of oil and thus have little incentive to adopt open economic policies and invest very little in their human capital or in the spirit of entrepreneurship.

“[…] Most of the economies in the region are not free. Cursed in some way by enormous natural oil resources, the local population experience extreme concentration of wealth and poverty. The Middle East has a comparatively high GPD per capita. At $7,002 per person, the region GPD is dead center: lower than Europe and the Americas but higher than Asia and sub-Saharan Africa. […] Structural problems clearly abound, as the regional unemployment rate, which averages 13.6 percent, is the highest in the world.”

However, it is the countries of this region that have made the clearest jump in terms of their rank on this year’s Freedom Index. Yemen and Morocco have experienced immense improvements, jumping by 3 percent and 4.4 percent. Although they have not experienced growth that is as tremendous as that of the aforementioned countries, Kuwait (57th), Tunisia (69th), Qatar (72nd), the UAE (74th), Lebanon (77th) and Egypt (127th) have all improved their rankings.

“The Middle East is the absolute world leader in only one category: fiscal freedom. Fiscally, its 90.4-percent average score is well above the world average of 82.8 percent, a level reached because of the extremely low income tax common to oil kingdoms. The region does score above the world average in other areas, however, such as monetary freedom and freedom from corruption – a result that may reflect the measures regional leaders are taking to cut back on bribery and government malfeasance.”

However, the 17 countries in the region rank well below the world average on several other indicators. Among the indicators where the region’s countries rank poorly are the investment freedom indicator, which ranks the degree of government imposition on the investment in the country or in specific sectors of the economy. While the majority of countries score a low 10 to 50 percent, only Israel and Morocco score higher, both at 70 percent. Rankings on the financial freedom indicator are just as low, with all countries in the region scoring between 25 and 59 percent. Only Israel breaks the 60-percent mark, and only by 3 percent. n

This report is available on the website of The Heritage Foundation at www.heritage.org

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