Claims for economic freedom index simply don't stand up

Hong Kong again tops the list of freest markets in world, but if freedom leads to greater prosperity, then why isn’t the city also the richest?

PUBLISHED : Wednesday, 15 January, 2014, 1:30am
UPDATED : Wednesday, 15 January, 2014, 3:04pm

Once again, Hong Kong has been pronounced the world's freest economy.

Yesterday, US free market lobby group Heritage Foundation published its 20th annual index of economic freedom. And for the 20th year in a row, there was Hong Kong sitting at the top of the ranking.

Naturally, the Hong Kong government was overjoyed, with Financial Secretary John Tsang Chun-wah declaring that he is determined to uphold economic freedom.

The Heritage Foundation was pretty pleased with itself too. Its 20th anniversary report on the index included a chapter entitled "The moral case for economic liberty", extolling the merits of free markets and lambasting 19th century British philosopher John Stuart Mill, author of the seminal work On Liberty, for daring to suggest that because trade is a social rather than personal act, it should be subject to social control and regulation.

The foundation's researchers have no doubts. Greater economic freedom leads to greater prosperity, which they define as a higher gross domestic product per capita.

Last year … Hong Kong had slipped to a lamentable 25th place in terms of its GDP per capita

"In plain language, the more economically free a country is, the wealthier its people are," the report declares. "The linkage is unmistakable, and the data each year confirm it."

In that case, you might expect that after 20 years as the freest economy in the world, Hong Kong would by now be far and away the richest.

You might think that after 20 years heading Heritage's league table of economic freedom, Hong Kong would have risen up the global rankings of income per capita.

You might, but you would be disappointed.

In 1994, the year Heritage first compiled its index, Hong Kong ranked a respectable 15th on the International Monetary Fund's table of economies by GDP per capita. With an income per head of US$22,482 in US dollars of the day, the city was placed a whisker behind the Netherlands and just ahead of Singapore.

By last year, however, despite having enjoyed such an unbroken spell of unmatched economic freedom, Hong Kong had slipped to a lamentable 25th place in terms of its GDP per capita.

To be fair, some of the countries whose incomes leaped ahead of the city in the intervening years - Qatar, Australia, Canada - benefited from the long resource boom of the 2000s.

But not all the countries that overtook Hong Kong can claim commodity wealth - or even of particularly free economies. Britain, for example, has consistently ranked poorly on Heritage's index, thanks to its government's heavyweight role in the economy and its politicians' propensity to tax and spend.

Yet despite that handicap, Britain has managed to overhaul Hong Kong in terms of income per capita. Meanwhile, the social democracies of Scandinavia, which also get a lowly freedom rank from Heritage, continue to be among the world's most prosperous economies.

You could object that simple GDP per capita is the wrong indicator of prosperity, and that a measure of income per head adjusted for differences in purchasing power would be a better yardstick.

Yet purchasing power parity is a tricky concept at the best of times. In this case, it does show Hong Kong advancing in the wealth rankings. But the United States, which has consistently come behind the city on the Heritage index remains firmly in front in terms of incomes per head. And Singapore, less free than Hong Kong, has extended its lead in terms of prosperity.

Clearly something is wrong. That doesn't mean economic freedom isn't desirable. But it does rather call into question the validity of the Heritage Foundation index that the Hong Kong government sets such store by.