The Real Key to Development
By MARY ANASTASIA O'GRADY
January 15, 2008; Page A13
Are the world's impoverished masses destined to live lives of permanent misery unless rich countries transfer wealth for spending on education and infrastructure?
You might think so if your gurus on development economics earn their bread and butter "lending" at the World Bank. Education and infrastructure "investment" are two of the Bank's favorite development themes.
Yet the evidence is piling up that neither government nor multilateral spending on education and infrastructure are key to development. To move out of poverty, countries instead need fast growth; and to get that they need to unleash the animal spirits of entrepreneurs.
Empirical support for this view is presented again this year in The Heritage Foundation/ The Wall Street Journal Index of Economic Freedom, released today. In its 14th edition, the annual survey grades countries on a combination of factors including property rights protection, tax rates, government intervention in the economy, monetary, fiscal and trade policy, and business freedom.
The nearby table shows the 2008 rankings but doesn't tell the whole story. The Index also reports that the freest 20% of the world's economies have twice the per capita income of those in the second quintile and five times that of the least-free 20%. In other words, freedom and prosperity are highly correlated.
The 2008 Index finds that while global economic liberty did not expand this year, it also did not contract. The average freedom score for the 157 countries ranked is nearly the same as last year, which was the second highest since the Index's inception.
This is somewhat of an achievement considering the rising protectionist and anti-immigration sentiment in the U.S., the uncertainty created by spiking global energy prices, Al Gore's highly effective fear mongering about global warming, and the continuing threat of the Islamic jihad.
Former British colonies in Asia took three of the top five places this year. But half of the top 20 freest economies in the world are in Europe. Of the five regions surveyed, Europe is the most free, continuing to advance this year with tax cuts and other business-friendly reforms. The only other region to score above the world average this year is the Americas, which is helped by strong performers like the U.S., Canada, Chile and El Salvador. At the other end of the scale Argentina, Bolivia, Haiti, Venezuela and Cuba dragged down the regional average.
Although overall global economic liberty did not expand, there were a few stars. Egypt was the most improved economy in the world, implementing major changes to its tax policies and business regulation environment and jumping to number 85 from 127th place last year. Mauritius was the second-best performer, moving into the top 20 from No. 34 last year. Trade liberalization and improved fiscal policies, including a flat tax, made Mongolia the third-best performer, and put it in the category of "moderately free" economies.
Three essays in the 2008 Index help illustrate why economic liberty matters to human progress. In "Economic Fluidity: A Crucial Dimension of Economic Freedom," Carl Schramm, president of the Kaufmann Foundation, explains that growth-driving innovation results not only from sound macroeconomic policy, but also from dynamism at the micro level.
Most important is the interaction between "institutional, organizational and individual elements of an economy," which gives rise to "the entrepreneurial energy and the speed of economic evolution." Such "fluidity," he writes, "facilitates the exchange and networking of knowledge across boundaries. This fosters both innovation and its propagation through entrepreneurship."
Mr. Schramm's essay illuminates why successful economies cannot be centrally planned. Fluidity, he writes, resembles "the idea of the 'the edge of chaos,' the estuary region where rigid order and random chaos meet and generate high levels of adaptation, complexity and creativity." It is "ideas on the margins, challenging the status quo, that lift the trajectory of an economy's performance." Try that in Cuba.
In "Narrowing the Economic Gap in the 21st Century," Stephen Parente, associate professor of economics at the University of Illinois at Urbana-Champaign, debunks several World Bank myths by showing that it is not the resources -- land, workforce and capital -- of an economy that play the most important role in explaining higher income countries. Instead it is "the efficiency at which a society uses its resources to produce goods and services."
Mr. Parente cites the microeconomic research of McKinsey Global Institute, which estimates that modern industry in India could take a huge bite out of its productivity gap with U.S. competitors by simply upgrading production techniques. India doesn't need another multilateral education project. It needs to tap into knowledge already available in successful economies -- the information and technology is out there. The trouble is that it is unavailable in many countries like India, because government barriers and constraints to limit competition make access difficult or impossible.
French journalist Guy Sorman's "Globalization is Making the World a Better Place" is a treatise on "one of the most powerful and positive forces ever to have arisen in the history of mankind." It fosters economic development, moves countries from tyranny to democracy, sends information and knowledge to the most remote corners of the globe, reinforces the rule of law, and enriches culture. International commerce in post-World War II Europe, he reminds us, wasn't invented by diplomats, but by entrepreneurs who wanted to end centuries of strife on their continent and build a peaceful union based on commerce.
Today's entrepreneurs, across the globe, have similar aspirations and abilities. If only the politicians would let them be free.
Ms. O'Grady is a member of the Journal's editorial board. She is co-editor, with Edwin J. Feulner and Kim R. Holmes, of the 2008 Index of Economic Freedom (410 pages, $24.95), available at 1-800-975-8625.