Patrick Moyes
Economics for Global Decision Makers
Week 2
Dr. Barbara-Leigh Tonelli
February 12, 2013

Introduction:
Economic freedom is defined as the basic right of all people to act freely in how they work, what they produce, what they consume, and how they invest their time and money. It is “an essential aspect of human liberty, without which a person’s rights to life, liberty, and the pursuit of happiness may be fundamentally compromised” (Miller, Kim, 2013). Economist/philosopher Friedrich A. Hayek stated that economic freedom is the “prerequisite of any other freedom” (Miller, Kim, 2013). Economic freedom, or lack thereof, is experienced in different levels throughout the world, depending on the degree to which governments restrain them in their countries. The Index of Economic Freedom, created 1995 by The Wall Street Journal and The Heritage Foundation, ranks the economic freedom of every country and reports year to year how the levels have changed. This paper will focus on the relationship between economic freedom and variations in wealth among countries, and will describe specifically how one country from the index has changed over the past 5 – 10 years.

The Relationship between Economic Freedom and Variations in Wealth: According to the Index of Economic Freedom, researchers have established that economic freedom is directly associated with economic growth and prosperity (Mitchell, 2013). The wealthiest countries in the world, based on per capita GDP, rank among the highest in economic freedom as well. For example the top five countries average an overall economic freedom score of 78.7 (out of 100). In contrast, the poorest countries have very low economic freedom scores, the bottom five averaging a score of 33.6. When comparing unemployment rates of the same countries, they are much lower in the wealthy countries as opposed to the poor countries. Another interesting fact is that 70 percent of the world’s population is deprived of the basic economic freedoms that the Economic Freedom Index is based on. These people occupy countries that are categorized as “mostly unfree” or “repressed” (Mitchell, 2013). Matthew Mitchell, Ph.D., one of the experts who contributes to the index, explains that one reason for this is that there are certain interest groups who benefit from the absence of economic freedom and they are willing to take extreme measures to ensure the “unfree status quo” (Mitchell, 2013). Furthermore, Mitchell goes on to cite the studies of economist Mancur Olson, who claimed that special-interest groups are responsible for the “rise and decline of nations.” Olson states that “as societies grow wealthy and stable, the seeds of their own destruction are sown. Stable societies are fertile ground for special interests. These interest groups grow in power and influence over time and, once entrenched, rarely disappear….they reduce efficiency and aggregate income in the societies in which they operate and make political life more divisive” (Mitchell, 2013). Based on this research, it rings true when you consider the state of economic freedom in the United States. Currently the U.S. is ranked tenth in the world on the index, but over the last five years (since 2008), they have recorded a steady decline in regard to the components of economic freedom. After the financial crisis in 2008, the firms that were bailed out were the ones who lobbied the hardest (Mitchell, 2013). Special interest groups in the U.S. can greatly influence the outcomes of government policies, despite the opposition of the majority of voters (McConnell, Brue, Flynn, 2012). There are several factors that go beyond the scope of this paper that contribute to the lack of economic freedom in the world. It makes logical sense why those countries with the most freedom are more prosperous than those with not as much freedom. The index concludes that when you have freedom in such areas as limited government and open markets, this creates “more opportunities for people to work, higher levels of productivity, and gains from market opening and trade that elevate prosperity and reduce human poverty” (Miller, Kim, 2013).

China: With an economic freedom score of 51.9, China ranks 136th in the world on the index. This translates into their economy being categorized as “mostly unfree.” This is a prime example of how too much government involvement diminishes the prosperity of a nation. According to the index, the sub-categories of economic freedom in which China scored the lowest were Business Freedom, Financial Freedom, and Investment Freedom. This is no doubt a result of China’s command system. When the government controls the use of resources, production, and business firms, this limits productivity because they must coordinate the “millions of individual decisions by consumers, resource suppliers, and businesses” (McConnell, Brue, Flynn, 2012). China has in recent years made an effort to rely more on free markets to coordinate their economy, but the government control of resources and capital is still very substantial (McConnell, Brue, Flynn, 2012).
The index points out that problems with corruption and cronyism within the government also play a role in China’s lack of economic freedom. Leaders will on occasion attempt to apply free market principles, but their overall efforts to reform the economy have been stagnant. As long as the government relies heavily on communist practices, the economic freedom of China will remain low. The Last 5-10 Years: China has experienced high economic growth over the past several years. Their per capita income has been increasing by 8 percent annually since 1980. This growth is due to the use of more capital, improvements in technology, and labor being used in a higher productive manner (McConnell, Brue, Flynn, 2013). The amount of China’s international trade has greatly increased as well. Between 1978 and 2009, Chinese exports increased from $5 billion to $1.2 trillion. The influx of foreign currency from these exports have allowed China to import higher quality goods from advanced countries, which translates to better factory design, better industrial machinery, and better telecommunications systems (McConnell, Brue, Flynn, 2013). Despite their economic growth, their economic freedom over the last 5 years has remained basically the same. Their overall score on the index has been below 53 since 2008. This is because their financial system as a whole “remains weak and inadequate” (McConnell, Brue, Flynn, 2013). Several struggling state-owned businesses are in massive debt due to loans made by state-owned financial institutions. The number is estimated to be around $100 billion, and a majority of these loans are uncollectable, meaning the government will have to step in and bail out these institutions (McConnell, Brue, Flynn, 2013). Over the past 10 years the GDP per capita in China has steadily increased, from $1,274 in 2003 to $8,382 in 2012, but they are still considered a low-income nation. This correlates with their low economic freedom score, supporting the aforementioned fact that economic freedom is linked to a nation’s prosperity. Unemployment is another problem. Despite a movement from an agricultural-based economy to a more industrial system, there is a great deal of unemployment, which is another indicator of low economic freedom. The future of China’s economy looks positive. A recent report by U.S. intelligence predicts that China’s economy will exceed the United States by the year 2030, and that Asia as a whole will surpass the combined economy of Europe and North America. The article states that they are basing this prediction mainly on technology: “Technology will continue to be the great leveler. The future internet ‘moguls’ – as with today’s Google or Facebook – sit on mountains of data and have more real-time information at their fingertips than most governments” (Zakaria, 2013). This data will make it possible for private firms to “influence behavior on as large a scale as government entities” (Zakaria, 2013). This could make a big impact on China’s command system and result in them implementing more and more free market practices. Conclusion: It is clear that a country’s level of economic freedom and amount of wealth go hand in hand. The ability to work in a free market and produce and consume goods freely, without too much government intervention, contributes to the growth and prosperity of a nation. China is one example of an economic power that has limited freedom due to its communist directives. Over the last few years, they have continued to have economic growth but this has not increased their economic freedom. In the years to come, technology will play a large role in the shift of China’s government to a market system, and perhaps this can help boost their economic freedom as well, along with the billions throughout the world who are deprived of these fundamental rights. References Miller, T., Holmes, K., Roberts, J., Kim, A. (2013) 2013 Index of Economic Freedom. Retrieved from http://www.heritage.org/index/ Mitchell, M. (2013). (2013) 2013 Index of Economic Freedom. Retrieved from http://www.heritage.org/index/ McConnell, C., Brue, S., & Flynn, S. (2012). Economics. (19th ed.). New York, NY: McGraw- Hill Companies, Inc. Zakaria, T. (2013). China’s economy will be No. 1 in less than 20 years, US study says. Retrieved from http://www.nbcnews.com/business/economywatch/