Still the world's freest

PUBLISHED : Monday, 19 July, 2004, 12:00am
UPDATED : Monday, 19 July, 2004, 12:00am

Since 1970, Hong Kong has ranked as the world's freest economy. In the latest Economic Freedom of the World annual report, Hong Kong remains at the top.

The report, published by the Fraser Institute in conjunction with the Cato Institute and other think-tanks around the world, ranks countries on their adherence to a set of policies that measure the degree of economic freedom. Those that safeguard property rights, enforce contracts, allow free trade, maintain low marginal tax rates, ensure sound money, and limit the size and scope of government will score well on the Economic Freedom of the World (EFW) index.

Out of a possible score of 10, Hong Kong achieved 8.7; Singapore came a close second at 8.6; while New Zealand, Switzerland, Britain, and the United States tied for third with 8.2. (There is a two-year lag in the data, so those scores are for 2002, not this year).

Japan, one of the world's richest economies from past growth, ranked only 36th of 123, with a score of 7; Taiwan placed 22nd, with 7.3; China, the fastest-growing economy in the world, ranked 90th with a score of 5.7; while India, another high-growth country, placed 68th, with a score of 6.3; Russia came 114th, with a score of 5. The lowest-scoring countries were the Central African Republic (4.5), the Democratic Republic of Congo (4.4), Zimbabwe (3.4), and Myanmar (2.5). North Korea and Cuba were not ranked because of a lack of data.

The authors of the report, economists James Gwartney and Robert Lawson, construct a 'chain-linked' index to allow comparisons over time in a country's economic freedom rating. In doing so, they found that China has made substantial gains in economic liberalisation since 1980, when its economic freedom rating was only 3.8. The rise would be even more impressive, however, if one focused on the coastal provinces, such as Fujian, Guangdong and Zhejiang, which are highly market-oriented. Moreover, the current index score of 5.7 does not recognise the liberalisation that has occurred in China since 2002, including the recent amendment to the constitution that gives greater protection to private property rights. Although the mainland has made considerable progress, it still has a long way to go before it reaches the level of Hong Kong. But at least it is moving in the right direction, unlike Argentina whose rating has gone from 7.2 in 2000 to 5.8 in 2002.

Unfortunately, Argentina, which was one of the world's top industrialised countries prior to the second world war, failed to maintain its commitment to free markets and free people. Could the same happen to Hong Kong?

In 1995, Hong Kong's 'chain-linked' EFW rating was 9.1. Since becoming a special administrative region, its rating has fallen slightly, to 8.7 in both 2000 and 2002. If one were to take account of more recent policy changes, Hong Kong's rating might actually be lower.

In particular, the government has increased the corporate income tax from 16 per cent to 17.5 per cent, raised the standard tax rate on personal income from 15.5 per cent to 16 per cent, and will introduce a sales tax at some point.

Hong Kong also faces serious political challenges as Beijing delays universal suffrage and more closely monitors activists.

When Hong Kong does achieve democracy, that political watershed could be a curse as well as a blessing. It would be a curse if it allowed voters to use the force of legislation to plunder private property by redistributing it to special interest groups in the name of 'social justice'. The expansion of the welfare-regulatory state would endanger both economic and personal freedom in Hong Kong.

James Dorn is vice-president for academic affairs at the Cato Institute in Washington