Last updated 10/25/07.
The Heritage Foundation's "Index Of Economic Freedom" is a piece of ideological punditry masquerading as academic research. (It is also sponsored by the Wall Street Journal.)
Like most think-tank propaganda, cogent criticisms are made, but are difficult to find in the welter of popular discussion. This is the first page of what might grow to be a shadow site detailing criticisms of think-tank propaganda.
Eventually, the arguments this page links to might be condensed into a more convenient article summarizing them.
The obvious fault of the IEF is that of the three central elements of development - human development, expanding market opportunities and maintaining democracy - the IEF focuses only on the market. This is in contrast to essentially every reputable development textbook.
Undoubtedly, economic growth does depend on a degree of economic freedom, and under some circumstances, more freeedom will promote additional growth. But the paths to growth that countries take are much more complicated than the Index indicates. In the case of newly prospering countries, the Index confuses cause and effect: freedom is more often the result than the cause of development. With regard to countries already rich, the book starts from the faulty assumption that growth is all that their citizens should care about. The Index is hardly a straightforward report of scientific research.
... A high level of economic freedom today is more likely to be the result of good economic performance in preceding decades than to be the cause of that good performance. It would have been far more reasonable to use freedom ratings for 1976 to explain subsequent growth. Had the editors done that, a number of rankings in the book's analysis would have required significant adjustment.
With almost 20 consecutive years of growth exceeding 5% per capita per year, China already seems to be demonstrating that the lives of 1.2 billion people can be radically improved in an environment that sharply limits freedom. Indeed, China has one of the fastest growing economies of the past 20 years, but the Index ranks the country one-hundred-twenty-fifth -- far behind such weak economies as Zambia's and Algeria's (fifty-nineth and eighty-nineth) and it makes no comment on the anomaly.
In addition to the blind spots in its economic growth analysis, the 1997 Index Of Economic Freedom takes a narrow view of prosperity -- one that seems inconsistent with democratic government beyond the short term... As incomes have risen over the course of the twentieth century, citizens in nearly all the industrial countries have shifted their public priorities from economic growth to economic security.
This is simply a beauty-contest approach where the ratings reflect the subjective views of the authors. It is not indicative of serious research.
Perhaps none of this would matter very much if it did not lead to some unusual outcomes. Consider the case of Bahrain, a country which the 1997 Heritage Index ranks as the third freest economy in the world. Bahrain is characterized by monetary stability and liberal financial markets. It deserves high marks in these areas. But it is also an economy dominated by government. In fact, 45% of all consumption expenditures are determined by the government rather than by the personal choices of its citizens. This is the largest share-more than Sweden, more than Russia, more than any former Soviet bloc country-among the 115 countries in our study. Can a country that uses central planning and political power to allocate almost half of total consumption be classified as one of the freest in the world? In essence, Bahrain is a big government welfare state financed with oil revenues. Since the Heritage Index gives very little weight to size of government, Bahrain earns an exceptionally high rating.
The development of the Freedom House and Heritage indexes was based on a different set of objectives, including public relations and political considerations.... The Heritage Foundaton has made it clear that their index was designed to influence Congress, particularly the allocation of the foreign aid budget of the United States. As a result, the Heritage spokesmen explained, it was necessary to keep the index simple.
The bottom line is this: the indexes of both the Heritage Foundation and Freedom House are ambiguous and poorly structured, and they often generate inaccurate and misleading outcomes.
The main criteria of the Heritage/Journal study are these: trade, taxation, monetary policy, foreign investment, banking, wages/prices, property rights, and regulation. Keep the government's hands off, and you win a high score. By those standards, Nazi Germany would not have done too badly, as long as you were Aryan... The property rights of the magnates who armed the Third Reich were nicely respected.
On the second question--does laissez-faire equal economic success?-- within broad limits the reality is ambiguous. Most industrializing countries made great leaps forward with a big dose of government help. That includes everyone from the 19th century U.S. to Germany, France, Italy, Japan, Korea and Brazil. The exceptions were England, and some contemporary mini-states.
The ideological message is as crude as it is misleading. "Economic freedom," defined as freedom for the entrepreneur, is the major freedom. Political freedom is secondary.
The zealotry of the Heritage Foundation is truly lunatic fringe. It is a travesty that America's most influential financial daily has joined forces with them.