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The World Is Getting Freer, Faster

According to the new Fraser Institute report, economic freedom is steadily increasing, and that’s a good thing.

Earlier today, the Fraser Institute published the 21st edition of its annual Economic Freedom of the World (EFW) report. The Canadian think-tank uses 42 data points across five different areas (size of government, legal/property rights, sound money, freedom to trade internationally and regulation) to rank the economic freedom of 159 countries and territories.

The results? As Johan Norberg puts it, “freedom is awesome”. Which is to say that – almost without exception – the freer the country, the more rapid its economic growth, and the higher its citizens’ income.

The full report is available on the Fraser Institute’s website. But here are the key points:

America is not the real Land of the Free

Hong Kong, despite recent political upheavals, takes the top spot – as it has since 1980. For the tenth year in a row, Singapore comes in second. New Zealand, Switzerland, Ireland, the UK, Mauritius, Georgia, Australia, and Estonia make up the rest of the top 10. The United States has moved up from 13th spot to 11th. There it joins Canada, which has fallen six places. Other notable rankings are Germany in 23rd place, France in 52nd, Mexico in 76th, Russia in 100th and China in 112th place.

The freer the country, the better

Why do the positions on the list matter? They matter because, as mentioned above, there is a high correlation between economic freedom and important indicators of human well-being.

The freer the nation, the better off the poorest people in it are.

The Fraser Institute splits the measured countries and territories into quartiles (i.e., each quartile represents a quarter of the samples) based on their level of economic freedom. The freest quartile has an average income that is seven times higher than that of the least free quartile ($42,463 and $6,036 respectively). Between 1990 and 2015, economic growth averaged 3.35 percent a year in the freest quartile, whereas the least free experienced a measly 1.66 percent growth.

It’s not just about money. In the freest nations, life expectancy is 80.7 years. This is 16.3 years more than in the bottom quartile. For many people, that amounts to a difference between knowing one’s grandchildren or dying before their birth.

Finally, the freer the nation, the better off the poorest people in it are. The bottom 10 percent of income earners in the freest quartile earned 11 times more than the bottom 10 percent in the least free quartile ($11,998 per year and $1,124 per year respectively). In the freest countries, the poorest 10 percent make almost twice as much as the average person in the least free countries.

Economic freedom isn’t just about the economy

The inclusion of the index acknowledges that women are not always accorded equal treatment before the law.

For the first time, the 2017 edition of the report has adjusted its methodology to include the Gender Disparity Index (GDI). The inclusion of the index acknowledges that women are not always accorded equal treatment before the law. By using information from the World Bank’s Women, Business and Law and 50 Years of Women’s Rights projects, the Fraser authors have amended the EFW scores retrospectively.

This methodological change has meant that the Arab nations have dropped – a lot. (The report was compiled before the news broke that Saudi women will now be allowed to drive, but I don’t think it would have affected the findings much.)

In the previous report, for example, there were four Middle Eastern nations within the top 30. Now that GDI is included, not a single Arab nation ranks in the top 36. The United Arab Emirates and Qatar, which were previously the highest ranked MENA nations at 5th and 11th places respectively, are now just 37th and 45th. And the 10 countries that experienced the biggest decreases due to the GDI adjustment were all Muslim-majority nations.

The world is getting freer, faster

Economic freedom has increased substantially in the last 25 years – especially in developing nations.

This is the final and most important point to make. Despite our tendency towards pessimism about the state of the world, economic freedom has increased substantially in the last 25 years – especially in developing nations.

In 1990, the average score for a “high-income industrial” country was 7.18, compared to only 5.28 for the average “developing” country. By 2015, the average score in high-income countries was 7.76 and the average in developing countries was 6.61. The gap between the two groupings has fallen from 1.90 to 1.15 – an improvement of 40 percent. This is thanks in large part to trade liberalization and the widespread conquest of inflation and introduction of sound money.

The result is that, if the 1980s world average was a nation, it would place in 154th place today – ranking between war-torn Syria and anarchic Libya. If the 2015 world average was a nation in 1980, it would be the 9th freest – with a score of 6.88, slightly above Canada at the time.

The new EFW shows that despite many anomalies and challenges, economic freedom remains deeply linked to important indicators of human well-being, including wealth, poverty alleviation and life expectancy. As such, it is the poorest members of the human family who get the greatest benefits from it. Long may that continue.

Reprinted from CapX

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Stop Conflating Inequality With Poverty

By  Bryan Cheang

The problem of inequality has often been considered to be one of the biggest social problems of our generation.

Widespread concern about the great disparities of income and wealth have fueled anti-globalization sentiments all around the world, and threaten to undermine the advances in trade, investment, and immigration we have seen.

One key problem is that contemporary discussions of inequality have often conflated it with poverty. Not only are inequality and poverty conceptually distinct, a failure to distinguish between them can lead to problematic policy conclusions. Additionally, when market advocates criticize redistributive policies and government welfare programs, they are seen as anti-poor. Thus, separating these two concepts can help market advocates regain the moral high ground in this debate.

Conflating Inequality and Poverty

It is generally assumed that inequality implies poverty, i.e. the rich people are prospering, so poor people must be suffering. This conflation is very subtle and is best seen through the presentation of inequality in the widely-used high school economics textbook Economics (7th ed) by John Sloman (2009). According to Sloman (2009, p. 276):

Inequality is one of the most contentious issues in the world of economics and politics. Some people have incomes far in excess of what they need to enjoy a luxurious lifestyle, while others struggle to purchase even the basic necessities. The need for redistribution from rich to poor is broadly accepted across the political spectrum. Thus the government taxes the rich more than the poor and then transfers some of the proceeds to the poor, either as cash benefits or in kind.”

The chapter seeks to explain the phenomenon of inequality but, almost imperceptibly within this opening paragraph, implicitly suggests that under such unequal situations, there are poor people who “struggle to purchase even the basic necessities.” In fact, this is not necessarily the case.

Inequality in relation to income simply means the existence of a gap between those who earn the most and those who earn the least. The mere existence of an income gap, even if it’s widening, says nothing about the actual income levels of those who do earn the least. In other words, an income gap does not necessarily mean that those at the lowest income brackets are poor. Just because Bill Gates is loaded with greenbacks and is many times richer than I am does not, by itself, suggest that I am “poor” in an absolute sense.

It is clear that a society with a very uneven distribution of income can still be one with high levels of absolute prosperity, in such a way that even those who earn the least (relatively) have enough to survive – comfortably.

Implications of the Conflation

Not only is it possible that the least well-off in unequal societies have enough to survive, it is actually likely for them to be much better off in unequal societies than in more equal ones.

Assuming the absence of crony capitalism, income inequality is a corollary of a free, dynamic, and growing economy that increases prosperity for all.

Attempts to close inequality through standard welfare-state policies such as redistributive taxes, subsidies, minimum wage laws, price controls, and the public provision of “free social goods” like health care can, and often have, slowed down economic growth. Thus impacting the generation of wealth that the least-well-off depend on.

If poor people were truly at the centre of our attention, we should endorse inequality.

Put another way, policy attempts to fight inequality retard economic growth, slow down poverty reduction at best, and exacerbate poverty at worst.

Aside from the economic costs of state-centric welfare programs, there are less quantifiable human costs as well. Generous welfare programs often trap individuals in a state of dependency on the government, which not only disincentivizes them from working but robs them of the dignity and sense of achievement that comes from earning their own income and being independent and self-sufficient.

Consequently, if poor people were truly at the center of our attention, we should endorse inequality, or at least the market system it is based on. When people are left free to trade, invest and innovate in the market, inequality is inevitable simply because people are different, and some may be more adept at spotting profit opportunities. Yet, if this system is left largely unhampered, it generates vast amounts of wealth that benefits everyone, including the least well off.

This is precisely why poverty rates have fallen dramatically in the recent age of globalisation, and, to that extent, so has global inequality.

The above does not mean that there is no role for government in social policymaking. Yet there is a need to ensure that implemented policies facilitate wealth-creation for all rather than redraw the relative shares of the economic pie. The social policies implemented in the country of Singapore provide useful lessons on how best to help the least well off in any society.

Social Policies that Reward Working

Singapore’s main “welfare” scheme is titled “Workfare”.

Singapore’s social-welfare system is based on the fundamental principle of meritocracy,considered a cardinal principle in the Singaporean psyche. It has been said that one of the shared values in Singapore is “work for reward, reward for work.” Even where government assistance is provided to the least-well-off, such schemes are carefully designed to promote and encourage work and thus to promote self-reliance. The belief is that Singaporeans should work and take care of themselves, rather than solely depend on the government.

These principles are reflected in several key initiatives. A testament to its pro-work orientation, Singapore’s main “welfare” scheme is titled “Workfare”. One of its components is the Workfare Income Supplement, which provides a cash payment to low-income individuals who are working. It is not a “free handout” but essentially an incentive to encourage work.

A further illustration of Singapore’s pro-work orientation is the other component of this policy: a training support scheme, which incentivizes workers to upgrade their skills in order to increase their productivity and thus their earning potential.

Singapore has also deliberately rejected a national minimum wage law. In its place, it has instead introduced a targeted “Progressive Wage Model” in several low-wage sectors such as cleaning, security, and landscaping. Employers in these sectors are expected to pay their workers a minimum but are also incentivized to send them for retraining in order to increase their productivity. Where typical minimum wage legislation simply expects employers to pay the mandated wage, Singapore’s take on it goes further in its encouragement of productivity improvements.

Singapore’s leaders have opted to pursue growth-oriented policies.

Subsidies are also provided but only in a limited and targeted fashion. In the healthcare sector, for example, individuals are expected to make co-payments for their medical expenses and cannot rely on government subsidies to simply cover 100% of their bill. More aid is in fact given to the neediest individuals who cannot afford even basic essentials, but the principle of self-responsibility looms heavy in the Singapore system. Not surprisingly, health outcomes in Singapore far exceed those of the United States, even though it spends only a fraction of its GDP on health care in comparison to the USA.

Growth-Oriented Policy

These Singaporean social policies might remain anathema to purist libertarians, who prefer to eliminate all social assistance entirely, but if we must have social welfare policies in the world of here and now, there is a lot to admire in this system.Particularly when observing its targeted, limited nature and its pro-work, pro-responsibility orientation.

Singapore’s leaders have managed to identify the difference between inequality and poverty, and have opted to pursue growth-oriented policies, sometimes even at the expense of the income gap. The Prime Minister Lee Hsien Loong said in 2013:

If I can get another ten billionaires to move to Singapore, my Gini coefficient will get worse, but I think Singaporeans will be better off because they will bring in business, bring in opportunities, open new doors, and create new jobs.”

In conclusion, there is cause for concern about most societies’ obsessive focus on inequality at the expense of the very poor. Conflating inequality and poverty can ironically lead to misguided policies that ultimately hurt the poor.

The next time you’re asked about whether you care about the “problem of inequality”, respond in the negative and that you care too much for poor people instead. Market advocates should always frame markets as a powerful, poverty-killing device, and regain the moral high ground in this most essential debate.

References:

Sloman, John, & Wride, Alison (2009). Economics (7th ed.). Edinburgh Gate: Pearson Education.

Republished from FEE.org

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Twelve Economic Concepts Everyone Should Know

By Richard N. Lorenc


When I tell people that I work at the Foundation for Economic Education, they sometimes ask: “What economic ideas should people understand?”

We at FEE have thought about this quite a lot for our articles, courses, seminars, and videos. We have distilled “economic thinking” into 12 key concepts. The following list has guided us internally for a few years, and I figure it’s now time to share it with the world.

1. Gains from trade: In any economic exchange, freely chosen, both parties benefit–at least in their own minds.

2. Subjective value: The value of any good or service is determined by the individual human mind.

3. Opportunity cost: Nothing is free, and the cost of anything is what you give up to get it.

4. Spontaneous order: Society emerges not from top-down intention or planning but from individuals’ actions that result in unplanned outcomes for the whole.

5. Incentives: Individuals act to maximize their own reward.

6. Comparative advantage: Cooperation between individuals creates value when a seller can produce a given item or service at a lower cost than the buyer would spend to produce it himself.

7. Knowledge problem: No one person or group knows enough to plan (and force) social outcomes, because information necessary for social order is distributed among its members and revealed only in human choice.

8. Seen and Unseen: In addition to the tangible and quantifiable effects, there are quite often invisible costs and unmet opportunities to any action or policy.

9. Rules matter: Institutions influence the decisions individuals make. For example, property rights extend from the reality of scarcity which demands that ownership must be vested in individuals and not a collective.

10. Action is purposeful: Each person makes choices with the intention of improving his or her condition.

11. Civil society: Voluntary association permits people of all backgrounds to interact peaceably, create value, cultivate personal character, and build mutual trust.

12. Entrepreneurship: Acting on an opportunity to gather underused, misused, or undiscovered resources and ideas to create value for others.

You might think about all the ways and places these principles appear–as you shop, socialize, and plan your future. As we like to say, economics is everywhere!

Republished from FEE.org

Richard N. Lorenc

Richard N. Lorenc is the Chief Operating Officer of FEE and serves as managing director of FEE’s Youth Education & Audience Research (“YEAR”) project to develop and promote new content and distribution techniques for free-market ideas.

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