In his book The Politically Incorrect Guide to Socialism, economics professor and National Review editor Kevin Williamson gives the reader an easily understood yet highly informative disquisition on the nature of socialism, its inherent flaws, and the reasons it continues to spread. In connection with that last point, two of Williamson’s chapters cover the political infatuation with “energy independence,” which he argues is socialist in essence, and the push to saddle Americans with the politicized medical care system known as Obamacare.

Williamson’s arguments are sharp and his examples illuminating. His book is like a wrecking ball going to work on the already feeble edifice of socialism.

“Hold on a minute,” some will say. “You can’t compare the bad things that happen in a totalitarian state like North Korea with our well-intended and generally popular public school system in America.” Williamson shows, however, that the crucial element of socialism is present in both, namely governmental control over the provision of goods and services that would otherwise be done by private enterprise. That invariably leads to waste and inefficiency—or even worse.

Williamson does a first-rate job of explaining why those arrangements stifle productivity, depress quality, and hinder innovation. It is because government officials (and the type of government is immaterial) do not know what consumers want. That information only comes from the market’s price system, which socialism prevents from working. It is also because government officials have no incentive to satisfy consumer wants since their money is not given by buyers but taken from taxpayers. Starving peasants in Korea and illiterate students in the United States—the roots are the same.

The poverty of India has been compared to the remarkable wealth enjoyed by the people of Hong Kong and Singapore before, most famously by Milton Friedman, but that is no reason not to emphasize it again. Following World War II, Williamson observes, India was seemingly poised for great economic expansion, having suffered little from the war and benefiting from infrastructure built by the British. India’s economy, however, remained stagnant due to the naive socialism of Nehru, the first prime minister, who admired Soviet central planning. Grinding poverty gripped most of the country.

Singapore and Hong Kong, in contrast, had suffered considerable war damage. Nevertheless both enjoyed rapidly rising incomes for all income classes. The fact that prosperity was widespread is important in heading off the common objection that capitalism only helps a few. Those two city-states were able to escape from poverty by rejecting socialism and adopting laissez faire: prices were free, investors could seek profitable opportunities without government interference and keep their earnings (or swallow their losses) and taxes and regulations were minimal.

Williamson also points out that in recent years India has begun rapid economic development, but only because new leaders have lightened the heavy yoke of socialism.

Defenders of socialism almost always point to Sweden and say that its experience proves that socialism can work. Williamson’s chapter “Why Sweden Stinks” refutes that notion. Sweden seemed to have the best of all possible worlds—a high standard of living combined with an expansive “safety net” and generous government benefits. The trouble is that socialism is unsustainable because it erodes the human qualities that built up the wealth that the socialist state consumes. Williamson writes that Sweden “is rapidly transforming itself into the sort of society that will not be able to support the relatively successful welfare-state arrangements that characterized it throughout most of the twentieth century.” As Hayek observed, socialism changes the character of the people gradually, undermining habits of work, thrift, and self-reliance. We are seeing that in Sweden.

Speaking of Hayek, another of his famous insights regarding socialism was that under it, the worst people usually rise to the top. I wish that Williamson had included a chapter on that point. We hear so often from socialism’s advocates that their system would work beautifully if it were controlled by good people rather than murderous dictators like Stalin. It would have been worth several pages to attack the idea that there is some magic formula to keep vicious, power-mad people from scheming their way to the top of a system that gives them what they crave.

Finally, although I applaud Williamson’s effort, he has bundled together under the label “socialism” several policies better labeled “corporatist” or “collectivist” since they don’t entail government ownership or abolition of the market economy—only interventions that hamper it. Ethanol subsidies are bad, but we don’t have a federally owned energy sector and “public education” doesn’t prevent (though it surely hampers) home and private schooling. Such distinctions are important.

In May, President Obama declared war on Americans who shelter their money in low-tax jurisdictions overseas.

Meanwhile, at the behest of politicians from high-tax nations, international bureaucracies are persecuting these tax havens. The Paris-based Organization for Economic Cooperation and Development (OECD), for instance, blacklisted 41 such jurisdictions as part of its “harmful tax competition” project earlier this decade and is now trying to bully them into changing their attractive policies. The European Commission has several anti-tax-competition schemes, including a “saving tax directive” that seeks to coerce low-tax jurisdictions into helping Europe’s welfare states track—and tax—flight capital. And the United Nations has a Committee of Experts on International Tax Matters whose objective is to impose global rules to hinder the flow of jobs and capital from high-tax nations to low-tax nations. As though this weren’t enough, the G-20 communiqué last spring singled out tax havens for a crackdown.

The common theme of all these efforts is that politicians want to replace tax competition with tax harmonization. Tax competition exists when politicians feel pressure to improve tax policy so the geese that lay the golden eggs will not fly away. Ever since the Reagan and Thatcher tax-rate reductions began the process of tax competition, nations have been racing to lower rates in hopes of attracting—or retaining—jobs and investment. Since 1980 average top personal income tax rates in the developed world have dropped about 26 percentage points and corporate tax rates more than 21 points. And there are now 27 jurisdictions with flat taxes, an amazing development. No wonder the global economy—notwithstanding current turmoil—is so much stronger today than it was in the 1970s.

According to stereotypes, tax havens are little islands in the Caribbean, and indeed that’s true of some of the world’s premiere offshore centers. But to be more accurate, a tax haven is any jurisdiction that satisfies two criteria: First, its tax laws are attractive to global investors and entrepreneurs, and second, it protects its fiscal sovereignty by choosing not to enforce the bad tax laws of other nations, at least when they are trying to tax economic activity outside their borders. This means, of course, that individuals and businesses from high-tax nations have the option of using those jurisdictions as havens against excessive taxation.

Havens Are in The Nationality of The Beholder

So what are the tax havens? Places such as Liechtenstein and the Cayman Islands belong on the list, but so do many “onshore” nations. One of the world’s leading experts on offshore issues, Marshall Langer, wrote in Tax Notes International that “the most important tax haven in the world is . . . Manhattan. . . . [T]he second most important tax haven in the world is London.” The United States and United Kingdom are havens because the law enables foreigners to invest money and not report the income to their tax police. That’s good for the U.S. and U.K. economies, and for foreign taxpayers.

By some counts there are more than 70 tax havens in the world, ranging from big nations like the United States to obscure, tiny jurisdictions such as Melilla, an autonomous part of Spain on the coast of Morocco, and Sark, a tiny British-controlled island off the coast of France. In some cases, such as the United States, the tax-haven policies are designed to attract global capital and are only available to foreigners. In other cases, such as the Bahamas, the beneficial tax rules are open to both residents and nonresidents.

Tax havens are good for the global economy primarily for four reasons. First, they promote good policy around the world by pressuring politicians in high-tax nations to lower tax rates. The pro-growth changes noted earlier have been happening mostly because of tax competition, and tax havens are valuable precisely because politicians are less likely to be greedy when they know taxpayers have escape options. Remarkably, even OECD economists understand that tax competition is a pro-growth force in the world economy. They have admitted that “the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.”

Tax havens have been especially helpful in convincing politicians to reduce the double taxation of income that is saved and invested. Many nations have lowered or eliminated death taxes and wealth taxes because the politicians have finally figured out that oppressive tax laws simply lead taxpayers to move their money to havens such as Luxembourg or Panama. Likewise, nations have reduced double taxation of dividends, interest, and capital gains. The politicians figure it’s better to have a low rate and collect some money rather than to have a high rate and drive investment to Switzerland or Singapore.

From an economic perspective, these lower tax rates are critical because they reduce the tax bias against saving and investment. This encourages people to set aside more of today’s income to finance tomorrow’s growth—and even socialist economists agree that capital formation is the key to long-run prosperity and rising living standards.

Second, tax havens generate high living standards. According to World Bank data, nine of the world’s 13 richest jurisdictions are tax havens. Not surprisingly, academic researchers have confirmed that tax havens grow faster and create more prosperity for people than higher-tax areas. This is especially important in the developing world, where poor nations that become tax havens enjoy big reductions in poverty.

Third, tax havens promote better governance. One of the problems plaguing the developing world is the lack of sound institutions. Property rights, the rule of law, and sound money are the indispensable building blocks for wealth creation and economic growth. Two academics, James Hines and Dhammika Dharmapala, found that the desire to become a tax haven leads nations to improve their institutions for the simple reason that global investors don’t want to place their money in poorly governed jurisdictions. And the World Bank’s governance indicators find that tax havens rank very high. This is something that should be applauded not assaulted.

Fourth, tax havens promote economic activity in high-tax nations. This seems paradoxical, but most countries, even high-tax nations, generally have more favorable tax rules for inbound investment than for their citizens’ economic activities. Politicians figure their own citizens are captive customers who can be overtaxed, but they understand that they have to compete for global investment. Moreover, academic experts have found that citizens in high-tax nations often take advantage of this preference and use a neighboring tax haven as a platform to invest in their own country. This additional investment, which otherwise would not have taken place, increases the prosperity of the high-tax nation.

The case for tax competition also is bolstered by Nobel laureates who recognize that competition between nations is a critical force for better policy. To cite just three examples, James Buchanan wrote that “tax competition among separate units . . . is an objective to be sought in its own right,” and Milton Friedman noted that “Competition among national governments in the public services they provide and in the taxes they impose is every bit as productive as competition among individuals or enterprises in the goods and services they offer for sale and the prices at which they offer them.” Gary Becker, meanwhile, wrote that “competition among nations tends to produce a race to the top rather than to the bottom by limiting the ability of powerful and voracious groups and politicians in each nation to impose their will at the expense of the interests of the vast majority of their populations.”

Shelter From Persecution

Low-tax jurisdictions also offer a safe haven for people subject to persecution. The vast majority of the world’s population lives in nations where governments fail to provide the basic protections of civilized society. Indeed, in many cases governments are the problem since ruling elites use their power to exploit people. Corruption often is rampant, expropriation common, and crime endemic. There is also widespread persecution. Not surprisingly, people with money are common targets of oppression—particularly if they are members of religious, political, ethnic, racial, or sexual minorities.

Tax havens protect people from venal and incompetent governments by providing a secure place to invest their assets. A Jewish entrepreneur, for instance, would be foolish to keep his money in a local bank when the government is controlled by anti-Semites. Indeed, Switzerland’s admirable, centuries-old human-rights policy of protecting financial privacy was strengthened in the 1930s to protect German Jews who wanted to guard their assets from the Nazis.

Many groups in the world face discrimination and hostility, often from government. The ethnic Chinese in nations such as Indonesia and the Philippines frequently are resented by the local population. The same is true for people of Indian descent in East Africa. When people belong to groups that are unpopular and susceptible to being targeted by the government, it makes sense for them to protect their families’ interests by putting money someplace like Hong Kong, where the politicians from their country have no feasible way to find out about it. The same financial-privacy laws that make tax havens so attractive to French families and Swedish entrepreneurs who want to escape oppressive taxation also protect other people from different forms of persecution.

Tax Hypocrisy, Not Harmonization

It is worth noting that even the international bureaucracies acknowledge the valuable role of tax havens and financial privacy. The UN, for instance, admitted in a 1998 report that “For much of the twentieth century, Governments around the world spied on their citizens to maintain political control. Political freedom can depend on the ability to hide purely personal information from a Government.” The leader of the OECD’s anti-tax-competition campaign, Jeffrey Owens, admitted to the U.K.-based Observer that “tax havens are essential for individuals who live in unstable regimes.”

The campaign against tax havens interferes with the right of jurisdictions to pursue pro-growth policies, which is especially discriminatory against poor nations. Having “no or low taxes” is the main criterion for being listed as a tax haven by the OECD. Yet most OECD nations did not have income taxes during the 1700s and 1800s, when they climbed from agricultural poverty to middle-class prosperity. We should all be offended that such nations now want to deny that same opportunity to poor nations. It is rather unseemly for powerful white-governed nations in Europe, which control the OECD and European Commission, to target less powerful nonwhite jurisdictions in places such as the Caribbean.

Another issue is the OECD’s hypocritical treatment of capital compared to labor. The Paris-based bureaucracy is upset that investment funds are flowing to low-tax jurisdictions, many of which are in the developing world. But OECD nations are big beneficiaries of a “brain drain” from developing nations. This flow of talent is beneficial to “labor-inflow” nations, just as global financial flows are beneficial to “capital-inflow” nations. Yet the OECD is not suggesting that developing nations have the right to tax emigrant income earned in OECD nations. So why should OECD nations be allowed to tax flight capital in non-OECD nations?

Another example of hypocrisy is that the United States, United Kingdom, Austria, Belgium, Switzerland, and Luxembourg are all OECD members and yet were not on the original OECD blacklist even though they are tax havens for foreign investors. (The list was later revised.) Only smaller less-powerful nations were subject to this form of discrimination. And of course the ultimate hypocrisy of all is that the bureaucrats who work at the OECD and UN all get tax-free salaries, yet they run around the world demanding that other nations raise taxes.

Politicians from high-tax nations and their agents at the international bureaucracies often admit that the moral issues are pertinent. But then they say that they are worried that havens enable some of their residents to avoid the tax net. But why is that the fault of jurisdictions with better tax policy? If high-tax nations want better compliance, shouldn’t they fix their tax systems instead of trying to bully other nations into surrendering their fiscal sovereignty and becoming vassal tax collectors? In any event, the notion that there are huge amounts of unpaid tax is just one of several myths disseminated by opponents of tax competition. Let’s have a look at these myths.

Myths of Anti-Competition

Myth 1: Tax havens result in $100 billion of unpaid taxes. President Obama wants to dramatically increase the power of the Internal Revenue Service, claiming that this is the only way to collect the money that supposedly is hiding in low-tax jurisdictions. The number is phony. The IRS—which certainly cannot be considered a fan of tax havens—estimates that the overwhelming share of the so-called tax gap is the result of what happens in the United States. Part of the make-believe $100 billion apparently comes from a former John Kerry staffer, who concocted an estimate of $70 billion in unpaid individual income tax. But when the Congressional Research Service (CRS) asked for the method used to generate the number, the staffer confessed, for all intents and purposes, that he made it up. According to the CRS memo, he “was not able to send us a written discussion of his estimating procedure” and he “indicated that the estimate was an uncertain one.” That’s the understatement of the century.

Myth 2: Cracking down on tax havens is the best way to improve compliance. Politicians from high-tax nations and bureaucrats at the OECD claim that “offshore” jurisdictions deprive politicians of much-needed tax revenue. This assertion is rather strange since tax receipts were at record levels in OECD nations until the current downturn. But how best to improve tax compliance? Academic research strongly indicates that the biggest factor in tax compliance is tax rates. When tax rates are excessive, people are less likely to obey the law. And if they can’t protect their income using tax havens, they’ll use the domestic underground economy. Or they’ll be less productive. The world’s leading expert on the issue, Friedrich Schneider at the Johannes Kepler University in Austria, explains that income and payroll taxes are “the main causes for the existence of the shadow economy” and higher tax rates increase “the incentive . . . to work in the shadow economy.”

Myth 3: Tax Havens Lead to Higher Taxes for ordinary people. One of the worst myths is that low-tax jurisdictions reduce taxes on sneaky people and this causes politicians to raise taxes on others to make up the difference. But if this were true, increasing amounts of money flowing to tax havens should be accompanied by higher tax rates in the outflow countries. Yet, as noted, the opposite has occurred. Politicians are lowering tax rates because of the competition from tax havens. This means that all taxpayers benefit because of the risks taken by those who invest in low-tax jurisdictions.

Myth 4: Tax havens are money-laundering centers. Contrary to this routine smear, all the objective evidence shows that they have the toughest rules against dirty money. Not a single tax haven is on the blacklist of the Financial Action Task Force. A few tax havens are considered money-laundering centers by the CIA, but there are far more non-havens on its list. The State Department says the same thing. It’s also worth noting that every major tax haven has been cleared by the IRS for having good know-your-customer laws to hinder dirty money, and all of the major havens also are members of the Egmont Group, which is open only to jurisdictions that have effective financial intelligence units to fight dirty money. No wonder an Australian academic found it was much easier to launder money in onshore nations than in offshore jurisdictions.

When he was a senator President Obama sponsored legislation designed to persecute tax havens, and his chairman of the National Economic Council, Larry Summers, is a harshly ideological opponent of low-tax jurisdictions. Now Obama has made good on his word. That places the U.S. on the side of countries like France and Germany, giving the OECD’s previously stymied tax-harmonization efforts new life.

Advocates of economic liberty need to resist these efforts. The Center for Freedom and Prosperity, which was founded in 2000 to help protect tax competition, has done an excellent job (I’m a board member, so perhaps I am biased). But preserving tax competition in the new political environment is going to be a major challenge.

Speaking at the Boao Economic Forum on the southern Chinese island of Hainan on Saturday, [actor Jackie] Chan, who was born in Hong Kong, cited the territory as an example of the negative aspects of relaxed controls. “I’m not sure if it’s good to have freedom or not,” the 55-year-old action superstar told delegates when pressed by fellow panel members to give his views on China’s rigorous controls on the media and restrictions on film-makers.”I’m really confused now. If you’re too free, you’re like the way Hong Kong is now. It’s very chaotic. Taiwan is also chaotic.”I’m gradually beginning to feel that we Chinese need to be controlled,” he continued. “If we’re not being controlled, we’ll just do what we want.”

That last statement is surely correct.

Friedman’s evaluation corresponds to Hong Kong’s consistent ranking at the top of both the Heritage Foundation’s Index of Economic Freedom and the Fraser Institute’s Economic Freedom of the World reports. In the 2008 Index, for example, Hong Kong scored 90 percent or better on seven of the ten measures of economic freedom. Impressively, Hong Kong’s weakest score (freedom from corruption, where it ranks 13th of the 180 countries rated in 2006 by Transparency International) put it well ahead of the United States (fifth most free overall, 20th on freedom from corruption).

Why has Hong Kong been so free?

Hong Kong never would have become the economic powerhouse it is today if either British or Chinese senior politicians had had any say in the matter. Britain acquired Hong Kong island in 1842 (additional territory came later) through a deal between the British representative, Captain Charles Elliot, and the Chinese negotiator, the Marquis Ch’i-ying, to settle a small war that had broken out over trade issues. (Compensation for a Chinese seizure of British opium was one issue, but the dispute was broader than the issue of opium, and recent scholarship tends to cast doubt on the conventional labeling of the dispute an “opium war.”)

The resulting deal was unpopular both with the Chinese Imperial Court and the British government. The Chinese authorities disliked any cession of territory to the British and worried about the impact on tariff revenues of creating a British-controlled port. Moreover, the Chinese disdained the British obsession with trade. The British government thought Hong Kong a poor location compared to the possible alternatives, such as Formosa. Nonetheless, the limits to communication in the nineteenth century had forced the two governments to delegate the authority to resolve the dispute to their representatives on the scene, so they were left with what Frank Welsh’s excellent one-volume history, A History of Hong Kong, terms “a source of embarrassment and annoyance to its progenitors since it first appeared on the international scene.” (Unless otherwise indicated, quotations are from Welsh’s book.)

Early History

Early assessments of Hong Kong’s potential were pessimistic. Lord Palmerston, in possibly the worst prediction ever made by a British diplomat, concluded that it was “a barren island, which will never be a mart of trade.” The colonial treasurer, Robert Montgomery Martin, a prolific writer on Britain’s overseas possessions (including a five-volume History of the British Colonies published in 1840), echoed Lord Palmerston’s assessment in 1844, finding that “there is no trade of any noticeable extent in Hong Kong. . . . There is scarcely a firm in the island but would . . . be glad to get back half the money they have expended in the colony and retire from the place. . . . There does not appear the slightest probability that, under any circumstances, Hong Kong will ever become a place of trade.”

Some trade did begin, however, as a result of the establishment of British merchants’ warehouses. But early British policies concerning their new territory did little to promote economic growth. An 1847 Parliamentary investigation of the economic situation in Hong Kong found that British rule had initially brought with it a government bent on raising “as large a revenue as possible” and that this had damaged trade, concluding that the restrictions on trade instituted by the early British administration to raise revenue meant that “[f]rom this time may be dated the reverses of Hong Kong.”

Hong Kong physically expanded twice during the nineteenth century. Territory on the mainland opposite Hong Kong island, Kowloon, was acquired in a “casual way” for 500 taels during a Sino–British conflict in 1859 in a deal between a British Consul and a Ch’ing official. And in 1898 Britain leased for 99 years the New Territories, additional mainland territory plus some islands. In both cases, the rationale for expansion was to protect the harbor from the range of guns located on the mainland. Although the British hoped to eventually make the New Territories lease a more permanent arrangement, their agreement to the lease rather than a permanent cession of control played an important role in the eventual return of the entire territory to the People’s Republic of China in 1997.

Britain did relatively little with its new colony, beyond establishing public order and extending the rule of law. The result was essentially a treaty port, much like those that European powers established on the mainland under the Treaty of Nanking in 1842–43. One reason for Britain’s relatively hands-off policy was the persistence of the view formed by early colonial officials that the Chinese residents did not want or appreciate British lawmaking. This attitude is clear in the testimony to a mid-nineteenth-century Parliamentary committee looking into administration of the colony by Col. John Malcolm, an aide to the governor, who told the British M.P.s that “the Chinese are a peculiar people, and they do not like being interfered with. They do not understand us; they cannot understand our ways; and when they are told that they are to do first one thing and then another, they get frightened and will not come to us.” Whether it was a characteristic “peculiar” to the Chinese to dislike arbitrary government or not, the avoidance of conflicting mandates and general tendency to leave people alone—policies adopted in pursuit of trade—gave the colony the benefit of the rule of law from the start.

A Natural Trading Center

What did Britain create in Hong Kong? The combination of the excellent harbor and the rule of law meant Hong Kong was a natural trading center. But it was not the best place to trade in China, and by the early twentieth century Shanghai was successfully winning trade away from Hong Kong. Shanghai offered a more educated population, a more convenient location, access to European protection under treaty concessions by the Chinese government, and relatively little Chinese-government interference due to the decline of imperial power. By the 1910s Shanghai had become a significantly more important center of trade than Hong Kong. With the British choosing the more defensible Singapore as the center of British naval power in the region, Hong Kong also lost importance for the British government. As a result, the colony languished as a backwater, becoming known as a center for prostitution and gambling rather than the economic powerhouse it is today.

One thing Britain did not create in Hong Kong was a democratic government. No local democratic institutions were permitted to develop, as were allowed in most other British colonies, because the British were unwilling to give the Chinese majority a real voice in administration. As a result, as Welsh concludes, “Hong Kong was to continue as authoritarian an administration as any Chinese government, but the final authority was to be the law, rather than individual whim.”

China’s imperial central government rarely favored economic freedom, and the late nineteenth and early twentieth centuries were no exceptions. As the central government’s power ebbed away, regional warlords began to establish rival, but equally predatory centers of power. European, American, and Japanese power in China also expanded, focusing on access to the Chinese market for their nationals, but not creating economic freedom for the Chinese within their spheres of influence. Hong Kong’s stability increasingly drew migrants from elsewhere in China. Population grew from 600,000 in 1920 to over a million in 1938. As conditions worsened in China with the Japanese invasion and fighting between regional warlords, the Kuomintang (Nationalists), and communists, 5,000 migrants a day began to pour into Hong Kong. By March 1950 the city had 2.3 million people, which brought Hong Kong both a significantly increased workforce and the human capital of Chinese entrepreneurs who escaped ahead of Mao’s armies. Moreover, the communist victory on the mainland meant that Shanghai ceased to be a serious competitor.

Finding Freedom in Hong Kong

Life on the edge of communist China was not easy. During the Korean War, embargoes on trade hurt the city’s entrepot business, forcing many Hong Kong traders to reinvent themselves as manufacturers. The continuing influx of refugees from the mainland strained the colony’s infrastructure. But the flood brought refugees like Jimmy Lai, one of the millions of penniless individuals who sought freedom in Hong Kong.

While working in the Shanghai railway station as a porter, Lai was given his first chocolate bar by a traveler. Hungry, Lai immediately ate it. Running after the man, he asked where this wonderful food came from and the answer was “Hong Kong.” Determined to get to the place where such wonders were available, Lai eventually persuaded his mother to allow him to escape and was smuggled out of China in the bottom of a fishing boat. On his arrival in Hong Kong, he went to work the same night in a garment factory. Today, Lai is a billionaire, owner of one of the most successful media companies in Asia. His drive and entrepreneurial skills played a major role in his success, of course. (Lai movingly tells his story in the Acton Institute’s documentary The Call of the Entrepreneur.) But it was the freedom available in Hong Kong that allowed him to put his talents to work. That freedom took many forms, including an absence of the currency restrictions in force at the time in the United Kingdom and much of Europe, and few laws regulating businesses. As a result, Hong Kong began to flourish.

Why? As Hong Kong’s last British governor, Christopher Patten, wrote in his memoir, East and West, the refugees from communism who flooded into Hong Kong arrived in China’s only free city; it was indeed (in the words of Chinese journalist Tsang Ki-fan) “the only Chinese society that, for a brief span of 100 years, lived through an ideal never realized at any time in the history of Chinese society—a time when no man had to live in fear of the midnight knock on the door.” Hong Kong had a competent government, pursuing market economics under the rule of law. It was a government that fully met the Confucian goal—“Make the local people happy and attract migrants from afar.”

The laissez-faire attitude of the Hong Kong government on economic matters was cemented by Sir John Cowperthwaite, the colony’s financial secretary from 1961 to 1971, whom Welsh called a “political economist in the tradition of Gladstone or John Stuart Mill” and the personification of “unreconstructed Manchester-school free traders.” Cowperthwaite had almost complete control of Hong Kong government finances and used it to implement his policy of “positive nonintervention.” Friedman gave Cowperthwaite a great deal of the credit for Hong Kong’s success, citing approvingly Cowperthwaite’s refusal to collect most economic statistics on the grounds that “[i]f I let them compute those statistics, they’ll want to use them for planning.” Jimmy Lai has a bronze bust of Cowperthwaite at his company’s entrance (as well as ones of Friedman and F. A. Hayek).

Cowperthwaite deserves the accolades he has received. During his decade as financial secretary, real wages rose by 50 percent and the portion of the population in acute poverty fell from 50 to 15 percent. What is remarkable is that Hong Kong accomplished this with no resource other than its people. The colony had no real agricultural land, no natural resources, and even the one resource it did have—people—lacked much education. Indeed, few at the time thought that the masses of refugees who reached Hong Kong during the 1950s would amount to anything other than a burden for the state.

Most remarkably, Hong Kong’s transformation occurred when social democrats ruled Europe and Lyndon Johnson’s Great Society dominated American politics, both reflecting the consensus among the political elites in Europe and North America that the welfare state and interventionist economic policies were the only sensible direction for advanced societies. Even in the developing world, interventionist economic policies like industrialization through import substitution, which relied on high tariff walls to protect domestic industries, were widely accepted. Tiny Hong Kong thus managed to adopt and hold to free-market and free-trade policies that ran counter to the policies of the British government and the consensus of policy analysts and development economists everywhere, and did it while perched precariously on the edge of a massive communist dictatorship in the midst of self-destructive policies like the Great Leap Forward and the Cultural Revolution.

No Libertarian Paradise

While consistently freer than most places, Hong Kong has never been a libertarian paradise. Government-subsidized housing has long dominated Hong Kong’s residential market, with 60 percent of residents living in it at one time. And the government manipulated (and continues to do so) the land market to maximize sales revenues for public coffers, which plays an important role in causing the housing shortages that required the public housing “solution.” Medical care has also long been socialized. Moreover, Hong Kong had serious corruption problems even during the height of the Cowperthwaite era, with the police in the 1960s and early 1970s “riddled with corruption,” according to former Governor Patten.

Then there is Hong Kong’s persistent “democratic deficit.” Hong Kong managed to escape the post-World War II wave of democratization in the rapidly dwindling British Empire because, as one British official put it in a radio interview in 1968, “the electorate of Britain didn’t care a brass farthing about Hong Kong.” Indeed, Britain showed almost no interest in expanding representative government in the colony until it became clear that Hong Kong would “return” to China in 1997 when the lease on the New Territories expired.

In some sense this democratic deficit served Hong Kong well, for men like Cowperthwaite and Patten held classical-liberal ideas on economic freedom and so largely refrained from actions that might have won popular approval (and certainly would have in Britain). But the lack of representative government also allowed Britain to treat Hong Kong’s residents shamefully when Britain rejected allowing Hong Kong passport holders the right of residence in Britain, fearing a flood of refugees in advance of the return to China. (The rest of Europe behaved no better.)

“One Country, Two Systems”

Hong Kong returned to China in 1997 under an agreement negotiated between Britain and the People’s Republic which provided a guarantee that for at least 50 years Hong Kong and China would be “one country, two systems.” (Formally, Hong Kong and the former Portuguese colony of Macau are both “Special Administrative Regions” of China.) The return itself was inevitable, as was China’s willingness to preserve capitalism in its midst. Not only were Hong Kong island and Kowloon unsustainable without the leased New Territories, where much of the water supply was located, but British voters still didn’t care a farthing for Hong Kong in the 1990s. China’s interest in the preservation of the goose that laid the golden eggs was also clear. The People’s Republic had long made use of Hong Kong—which it could have seized by force at any time—as a means of accessing foreign markets and sources of capital. At times 80 percent of China’s foreign income came through Hong Kong. China also wanted to demonstrate to Taiwan that peaceful reunification was possible.

The danger was that China’s leadership would not understand what Patten, in his book, termed “the relationship between Hong Kong’s hardware—a capitalist economy—and its software—a pluralist society—and yet it was the latter that enabled the former to function so well.” Thus far Hong Kong’s new rulers have shown themselves remarkably adept at continuing the smooth functioning of both the hardware and the software. Whether that will remain true in the long run is still an open question, of course.

Chinese Emperor Tao-kuang’s initial reaction to the British had been that “these barbarians are wanting in any high purposes of striving for territorial acquisition; they always look on trade as their first occupation.” Frank Welsh concluded his history by noting that Hong Kong “proved the Emperor’s point.” It is not just the British who made Hong Kong a success. It is the people of Hong Kong, from factory workers to entrepreneurs, who turned Hong Kong from a barren island to an economic powerhouse. They were able to do so because the Hong Kong government generally left them sufficiently alone. Hong Kong is far from perfect, and far from a libertarian dream world. But it remains a dramatic example of how far human ingenuity and entrepreneurial talent can take a society.

Why has Hong Kong been so free? Partly, Hong Kong has been fortunate to be ruled by men who understood their role as quite limited. Not quite the classical-liberal ideal, even under Cowperthwaite, but nonetheless significantly closer than any other twentieth-century society. And the combination of Britain’s failure to provide any real democratic institutions and its lack of interest in Hong Kong allowed those men to hold to those policies, even as Britain herself experienced economic disaster under the socialism of the 1950s–70s. Hong Kong also benefited from the example of China’s disastrous 1960s economic policies. With so many residents having come as refugees from communism, demand for freedom in Hong Kong was high. Freedom made possible the success of Jimmy Lai, and that of the millions who did not become billionaires but who had a higher standard of living than most of the world through their own efforts.

Hong Kong was lucky that freedom was tried. But Hong Kong’s people proved that freedom worked.

Those nations that have failed to adopt freedom as a first principle have also failed to realize the benefits of freedom. They have ignored the great liberal idea, as articulated in The Law by Frederic Bastiat in the mid-nineteenth century, that “the solution of the social problem lies in liberty.”

By “social problem” Bastiat meant the problem of coordination that confronts every society—that is, the problem of satisfying people’s wants for goods and services without central planning. The beauty of the market system, based on private property rights and freedom of contract, is that it allows individuals to continuously adjust to new information about wants, resources, and technology, and to engage in mutually beneficial exchanges. Economic freedom increases the range of choices and thus the wealth of nations.

Those countries with greater economic freedom have higher standards of living than those with less freedom (figure 1). Moreover, countries that have liberalized more quickly—as measured by the index of economic freedom—have tended to grow faster than countries that have failed to liberalize or that have liberalized more slowly (figure 2). Economists James Gwartney and Robert Lawson, the authors of the Fraser Institute’s annual Economic Freedom of the World report, find that “long-term differences in economic freedom explain approximately two-thirds of the variation in cross-country per capita GDP.” It is no secret that countries that have opened to the forces of international trade and have restrained the growth of government have prospered, while those countries that have limited the scope of the market have stagnated.

Hong Kong’s consistent adherence to market-liberal principles has resulted in long-run prosperity and the world’s freest economy since 1970. In its 2005 Index of Economic Freedom, the Heritage Foundation and the Wall Street Journal once again ranked Hong Kong number one. On hearing the good news, Financial Secretary Henry Tang remarked, “I am pleased virtues we have been upholding to keep Hong Kong flourishing as a free market economy have once again been reaffirmed by the international community.”

Those virtues include credibility and reliability, prudence and thrift, entrepreneurial alertness, personal responsibility, respect for others, and tolerance. They are fostered by private property rights, the rule of law, freedom of contract, open trade, low tax rates, and limited government. Nations that have not followed the virtues of Hong Kong have not reaped the long-run benefits of economic freedom. North Korea, Cuba, Sudan, Iraq, and Haiti are but a few examples.

The lesson is that the virtues of the market require constant practice if they are to survive and flourish. Government policy must be market-friendly and transparent; it cannot be muddled. Markets discount future effects of current policy changes. If those changes are in the direction of greater economic freedom, they will be immediately rewarded and wealth created. Illiberal trade policies, higher tax rates, increased government spending, erratic monetary policy, and wage-price controls undermine private property rights, send negative signals to the global capital markets, and destroy the wealth of nations.

The failure of central planning in the Soviet Union and China has moved those countries in the direction of greater economic freedom, but the ghost of communism still haunts Russia, while the Chinese Communist Party has yet to abandon its monopoly on power.

Leaders of emerging market economies need to recognize that economic freedom is an important component of personal freedom, that free-market prices and profits provide useful information and incentives to allocate resources to where consumers (not politicians or planners) deem them most valuable, and that markets extend the range of choice and increase human welfare. Most important, leaders must understand that ultimately economic liberalization requires limited government and constitutionally protected rights.

Emerging market economies, especially in Asia, have discovered the magic of the market; they have also found that chaos emerges when the institutional infrastructure necessary for free markets is weakened by excessive government. When politics trumps markets, coercion and corruption follow.

The Ethical Basis
The ethical basis of the market system is often overlooked, but not by those like Zhang Shuguang, an economist at the Unirule Institute in Beijing, who were deprived of their economic liberties under central planning. He compares the coercive nature of planning with the voluntary nature of the market and concludes: “In the market system . . . the fundamental logic is free choice and equal status of individuals. The corresponding ethics . . . is mutual respect, mutual benefit, and mutual credit.”¹

The moral justification for individual freedom is self-evident. In Ethics for the New Millennium, the Dalai Lama wrote: “We all desire happiness and wish to avoid suffering. . . . Ethical conduct is not something we engage in because it is somehow right in itself but because, like ourselves, all others desire to be happy and to avoid suffering. Given that this is a natural disposition, shared by all, it follows that each individual has a right to pursue this goal.”

Freedom without rules is an illusion. The famous Zen master Shunryu Suzuki wrote in his classic text, Zen Mind, Beginner’s Mind: “People, especially young people, think that freedom is to do just what they want. . . . But it is absolutely necessary . . . to have some rules. . . . As long as you have rules, you have a chance for freedom.”

The rules necessary for a market-liberal order are rules to protect the private sphere so individuals can pursue their self-interest while respecting the equal rights of others. Without clear rules to limit the use of force to the protection of persons and property, freedom and justice will suffer—and economic development, properly understood, will cease.

In 1740 the great liberal David Hume wrote that “the peace and security of human society entirely depend [on adherence to] the three fundamental laws of nature, that of the stability of possession, of its transference by consent, and of the performance of promises” (A Treatise of Human Nature). His legacy of liberty should not be forgotten.

Development and Freedom

In Economic Analysis and Policy in Underdeveloped Countries, the late Peter (Lord) Bauer argued that economic development and freedom are inseparable: “I regard the extension of the range of choice, that is, an increase in the range of effective alternatives open to people, as the principal objective and criterion of economic development.”

Economists have found that countries with secure private property rights create more wealth (as measured by real GDP per capita) than countries in which property is not protected by law. Trade liberalization is vital to the process of development. Voluntary international exchange widens consumers’ range of effective choices and lowers the risk of conflict.

There is a saying in China: “Wu wei ze wu shu bu wei”—”If no unnatural control, then there is nothing you cannot do.” In the Tao Te Clung, Lao Tzu advocates the principle of nonintervention (wu wei) as the ideal way of ruling. The wise ruler says, “I take no action and the people of themselves are transformed. I engage in no activity and the people of themselves become prosperous.”² To take no action does not mean to do nothing, but rather, as Chinese scholar Derk Bodde has noted, to refrain from those actions that are “forced, artificial, and unspontaneous.”³
Voluntary international exchange widens consumers’ range of effective choices and lowers the risk of conflict.

A natural order is one consistent with free markets and free people; it is Adam Smith’s “simple system of natural liberty.” As former Czech President Vaclav Havel so elegantly stated after the collapse of the Soviet Union, the free-market economy is “the only natural economy, the only kind that makes sense, the only one that can lead to prosperity, because it is the only one that reflects the nature of life itself.”⁴

Leaders in the West as well as the East should keep the following five lessons in the forefront of their minds as they contemplate future policy decisions: (1) private property, freedom, and justice are inseparable; (2) justice requires limiting government to the protection of persons and property; (3) minimizing the use of force to defend life, liberty, and property will maximize freedom and create a spontaneous market-liberal order; (4) private free markets are not only moral, they create wealth by providing incentives to discover new ways of doing things and increase the range of alternatives; and (5) governments rule best when they follow the rule of law and the principle of noninterference.

Notes

1. Zhang Shuguang, “Foreword: Institutional Change and Case Study,” in Zhang Shuguang, ed., Case Studies in China’s Institutional Change, vol. 1 (Shanghai: People’s Publishing House, 1996), p. 5.
2. In Wing-Tsit Chan, ed., A Source Book in Chinese Philosophy (Princeton, N.J.: Princeton University Press, 1963), p. 167.
3. Derk Bodde, trans., in FungYu-lan, A History of Chinese Philosophy, vol. 1, 2nd ed. (Princeton, N.J.: Princeton University Press, 1952), p. xxiii.
4. Vaclav Havel, Summer Meditations on Politics, Morality, and Civility in a Time of Transition (London: Faber and Faber, 1992), p. 62.

There is a long tradition in law, economics, and politics focusing on critical institutions as the source of development. Notable among these institutions are private property, the rule of law, and a stable monetary system. Together they undergird a market economy. In recent years, abundant empirical evidence has accumulated supporting the case for the free market as the path to development.

While supporters of a market economy have largely won the war of ideas, they have been less successful in winning the battle over public policy. Even in developed countries, which owe their material success to economic freedom, the market is under constant political attack. In the many undeveloped economies, the situation is far worse.

What are the incentives for political leaders to adopt good economic policies? And why has that occurred in only a few countries? To answer these questions, one must look at what motivates political leaders.

All political leaders need legitimacy to continue to govern. In democracies, that legitimacy is subject to periodic tests called elections. Between the political cataclysms of elections, politicians daily seek out support to advance their political agenda. Legitimacy is tested in a government’s every political battle.

When leaders of democratic governments lose legitimacy, those governments fall. Witness Argentina. Twice in recent history, an Argentine president has left office before his term expired because he had lost political legitimacy. Recall the experience of President Nixon, who resigned his office when he lost political legitimacy.

By contrast, a leader can do unpopular things if his legitimacy is accepted. Prime Minister Tony Blair led his country into an unpopular war. His Spanish counterpart, José María Aznar, did the same against even greater opposition. Aznar’s party eventually lost power, but only after a miscalculation by Aznar over the identity of the perpetrators of a horrific terrorist act on March 11, 2004. As the examples illustrate, it matters little whether the form of democratic government is parliamentary or presidential. Loss of political legitimacy is a democratic government’s downfall.

Authoritarian governments lack the many sources of political feedback that are a hallmark of democracy. Thus systemically bad economic policies can endure in such countries. North Korea is a prime example. As authoritarian and totalitarian as that regime may be, however, it must keep its legitimacy to govern. There are signs that its legitimacy has been undermined and the political leadership is changing its economic policy as a consequence.²

Even the most cynical observer must accept that political leaders take account of the most important desires of the citizens. One need not ascribe benevolence to politicians, only a desire to stay in office. Citizens of all countries not only want to avoid starvation; they want to enjoy a higher standard of living for themselves and their children. In short, they want to prosper.

Whether governments care about economic freedom depends on how widespread is an understanding of the connection between that freedom and prosperity. The evidence is that empirical measures of economic freedom have broadened and deepened that understanding among leaders and ordinary people alike.

Economic and Political Freedom

Milton Friedman’s analysis of the relationship between economic and political freedom, his book Capitalism and Freedom, was the inspiration for the empirical measures of economic freedom. He debunked the myth that the two freedoms are disconnected; that, Chinese menu-style, one can choose freely from political systems and then pair that choice with an economic system. He went so far as to say that “a society which is socialist cannot also be democratic, in the sense of guaranteeing individual freedom.”

Friedman reversed the priority customarily accorded to political freedom, describing economic freedom as “an indispensable means toward the achievement of political freedom.” He argued that societies could be economically free but not politically free. There is at least the appearance of a contradiction in Friedman’s argument. On the one hand, he asserts that you cannot pick and choose among freedoms. On the other hand, he suggests that you may be able to do so to a limited extent. Societies can possess economic freedom without political freedom (but not the other way around). Yet in the end, economic freedom will lead to political freedom, although political freedom will not necessarily lead to economic freedom.

Controversial when made, the argument became more so when economic reforms in Chile were introduced under the authoritarian government of General Pinochet. Today we have other examples of economic freedom advancing more quickly than political freedom, China being the most notable case.

When Friedman wrote Capitalism and Freedom, “economic freedom” was a scarcely used phrase, much less understood. It needed definition. And it needed to be measured if there were to be widespread acceptance of its importance for economic development. Hence, two indexes of economic freedom were born, from the Heritage Foundation/Wall Street Journal and Fraser Institute.³

Economic freedom is “the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself.”⁴ The definition is inherently Lockean in conception. Accordingly, it echoes the truth set down in the most important American political document, the Declaration of Independence: “that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness—That to secure these Rights, Governments are instituted among Men, deriving their just Powers from the Consent of the Governed.”

Economic freedom cannot be directly measured. But its institutional determinants are susceptible to measurement. These are the institutions that guarantee “personal choice, voluntary exchange, freedom to compete, and protection of person and property.”⁵ Foremost among these is private property.

The great English jurist William Blackstone defined property as “that despotic dominion that one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe.”⁶ That stark formulation emphasized an important element of property ownership—the ability to exclude other users and uses.

Only with a protected domain of choice can a property owner appropriate all the benefits and incur all the costs of his decisions to allocate his property to different uses. That weighing of costs and benefits ensures that maximum value accrues from the use of property. It is only through the protected domain of private property and the calculus of decision-making that claims can be sustained about the efficiency of a market economy.

Along with Ronald Coase and Harold Demsetz, Armen Alchian is the founder of the modern property rights school of economics. He formulated the scope of property rights as follows:

By a system of property rights I mean a method of assigning to particular individuals the “authority” to select, for specific goods, any use from a nonprohibited class of uses. . . . [T]he concepts of “authority” and “nonprohibited” rely on some concept of enforcement or inducement to respect the assignment and scope of prohibited choice. A property right for me means some protection against other people’s choosing against my will one of the uses of resources said to be “mine.”⁷

Enforcement and Transferability

In addition to exclusivity, there must be enforcement and transferability of property rights. Without protection and enforcement of private property rights, the right would be nugatory. Transferability enables an owner to produce and exchange on the market, and to capture the full value of his property.

These elements enable individuals to choose and act, and to engage in voluntary exchange. It is out of that human choice and human action that competition arises. “Competition” is a term of art in economics. A competitive system is one in which producers strive to satisfy consumers at the lowest cost. It is a system in which anonymous individuals cooperate through the market, each to achieve his own goals.

The stronger the protection of private property, the more will individual choice guide economic decisions. These choices will respond to market prices; it is prices that guide decision-making. They communicate information to producers about the intensity of consumer preferences and the relative scarcity of resources needed to satisfy those wants.

Private property ensures that producers can appropriate the returns from efficient use of resources to satisfy consumers. That expectation provides the incentive for individuals to invest their assets productively in the service of consumers they may never know. The stronger the protection of private property, the more effective an economy will be in creating wealth.

Richard Pipes, the distinguished historian of Russia, argues in Property and Freedom that property is the source of liberty: “While property in some form is possible without liberty, the contrary is inconceivable.” Property is the source of the legal and political institutions guaranteeing liberty. As such, property is the bedrock of a free society.

Pipes’s view reverses the normal analysis in which the rule of law and political liberty are the preconditions for the emergence of private property. His view, however, better explains the history of liberty. Property took the form of possession long before there was legal recognition of such claims, much less formal legal title. “Prolonged tenure” was the source of such claims, which “custom” recognized.

A system of law recognizing property in land, titling it, and governing its transfer comes only after possession and prolonged use. For Pipes, the fact of inherited property is the source of a law of inheritance, not the other way around.

Pipes’s historical treatment is consistent with de Soto’s analysis of possession as the basis for titling land. De Soto has identified the absence of a system of legal titling of property as the source of undevelopment. He contends that “the only way to find the extralegal social contract on property in a particular area is by contacting those who live and work by it.”

Pipes’s position is somewhat different from Friedman’s. In Capitalism and Freedom, Friedman acknowledged that the relationship between economic and political freedom “is complex and by no means unilateral.” He supports the priority of economic freedom, however.

By contrast, Pipes argues that property rights are the source of both economic and political freedom.

I am not suggesting a great chasm on the issue. Pipes’s view focuses our attention, however, on one key institution as the source of both economic and political liberty: property rights. If he is correct, then the debate over economic and political freedom has been misguided. Neither is prior to the other. Instead, each is a consequence of a third factor, private property. Property is the source of all liberty.

The Scope of Private Property

While there are multiple factors, or variables, used in both the Heritage and Fraser indexes, a number of them are really measuring aspects of property rights. For instance, when government regulates economic activity it attenuates property rights. It does so by putting conditions on the use of property over and above those imposed by the abstract rules of the law of property.

Economists have long understood how economic regulation can hobble market activity. That insight has been confirmed on a global scale by a surprising source: the World Bank. In its second annual report on regulation, Doing Business in 2005, it measures the regulatory burden in 145 countries. Using seven measures of the ease with which a business can be started, gain credit, expand and hire labor, and contract and discharge labor, the Bank finds that the regulatory burden is negatively associated with prosperity in individual countries.

Inflation erodes the value of private property and effects nonmarket transfers of wealth among creditors and debtors. Inflation also interferes with market pricing by distorting relative prices and resource allocation. Consequently, inflation undermines the system of property rights.

Restrictions on trade and capital flows interfere with the rights of property owners. What is called “foreign” trade and investment are just transactions between contracting individuals. They are not transactions between nations. When governments inhibit these transactions, they attenuate private property rights of their own citizens.

Measures of the degree of black-market activity and corruption—the two being highly correlated—actually measure the consequences of other market interventions. If individuals are prohibited from engaging in mutually beneficial exchange, they will seek to circumvent the prohibitions. That may lead to extralegal market transactions and payments to officials to overlook the prohibited activity. Yet corruption introduces its own problems, in addition to those resulting directly from the interference with property rights.

Corruption is an effect of interference with property rights. But it attenuates property rights further by making them insecure. In corrupt societies the rule of men is substituted for the rule of law. The ability to conduct business is governed not by rules, but bureaucratic whim.

Of course, eliminating the attenuation of property rights would go a long way to rooting corruption out of a society. As a practical matter, that is easier said than done. The conceptual point, however, is that even when there appear to be other determinants of liberty, they are either aspects of, or intertwined with, property rights.

Economic Freedom: The Record

Economic freedom has increased every year since the first Heritage Index was published in 1995. The Fraser report goes back to 1970. According to that measure, economic freedom declined in the 1970s, reached its nadir in 1980, and has been increasing ever since.

Economic freedom improved despite any number of regional economic crises and upheavals in individual countries. There was the Mexican peso crisis of 1994–95, the Asian financial crisis of 1997–98, the Russian debt debacle of 1998, and more recently, the return of left populism in Latin America.

There are two striking features of the most highly rated countries. All have strong protection of private property. And nearly all are seafaring nations with a long history of international trade.

Trade is important because it opens countries up not only to goods, but also ideas, including political ideas, and institutions, including the rule of law. As countries become more commercially driven and outwardly oriented, they evolve strong commercial codes. Sometimes the legal codes are imported, as when Dutch-Roman law became the basis for Scottish law.

There are two notable groupings of such highly rated countries with a common history. First are Great Britain and its former colonies. Britain and five of its former colonies occupied six of the top ten positions in the Heritage 2004 Index. The former colonies are Hong Kong, Singapore, New Zealand, Ireland, and the United States. And Australia fell next at number 11. (In the 2005 Index the United States dropped to number 12.)

The second grouping consists of the Nordic countries: Estonia, Denmark, Sweden, and Iceland. (Estonia is typically listed as a Baltic country, which it clearly is. But in temperament, history, culture, and language, it is also a Nordic country. Ask an Estonian.) The Netherlands also fits the overall theme of strong property rights and a history of openness to trade. The Nordic countries also share a common history of alliance with the Hanseatic League.

The good showing of many member states of the European Union puts the lie to the contention that Europe is a monolith. Brussels’s bureaucrats may very well wish that every policy were centralized. But their pleadings for tax harmonization and centralization only prove that economic policies remain diverse within the Union.

Some governments use Brussels as an excuse to implement bad policies. Others, such as Ireland and Denmark, persist in asserting their sovereignty against diktats from Brussels. Ireland is a low-tax country for business; Luxembourg remains a tax haven for financial capital; and Britain, Denmark, and Sweden retain their monetary sovereignty. (Europe’s political leaders are generally rhetorically anti-Thatcherite, but often practically Thatcherite in their policies.⁸)

One can go on with the theme of trade and property. Bahrain is a bright spot in the Middle East. It has a seafaring history and strongly protects property rights. Chile, the freest economy in Latin America, is a trading nation that has strong protection of private property. And Chile pioneered the privatization of social security.

There are no counterexamples to this theme until the Bahamas. A former British colony that still strongly protects property rights, the Bahamas is highly protectionist. As with a number of Caribbean nations, it finances government spending with tariffs.

Needless to say, countries at the bottom of the rankings have weak property-rights systems and are protectionist. While Asia has four of the freest economies in the world, it also has the largest number—six—of repressed economies: Tajikistan, Uzbekistan, Turkmenistan, Burma (Myanmar), and North Korea.

With this overview in mind, I now turn to the central question of the article. Do governments care about economic freedom and have the economic indexes had an impact?

How Governments Respond

The difference between poverty and prosperity is freedom. How well do governments understand that connection? Surely, the answer is that it varies. That variation helps explain why some governments put in place policies promoting prosperity, while others promote penury.

Understanding is not enough. Politics play a role. Frequently, leaders understand that free markets and open economies underpin economic growth. But they face political hurdles erected by rent-seeking beneficiaries of an interventionist system.

The political leaders of Estonia grasped the connection and overcame the political opposition.⁹ That country and its economy suffered under 50 years of Soviet occupation, and the economy was a “shambles,” according to Mart Laar, the prime minister who led a successful government of reform. The reformers understood the importance of the rule of law: “There can be no market economy and democracy without law, clear property rights, and a functioning justice system.”

The Estonian reformers stuck with their plan even when the going got tough:
All tariffs were abolished, forcing domestic producers to compete on the world market. 
All subsidies to enterprises were ended. 
A flat personal income tax was introduced. The tax on corporate income was abolished for re-invested profits.

The term “shock therapy” has been used to describe the transition in some countries. If Poland employed shock therapy, then Estonia employed electrocution for the old economic regime. The reformers introduced so many changes so fast that their opponents had no time to regroup. There is a lesson there for other reformers. Gradualism can become a death sentence for economic reform.

In western Europe, Ireland is a standout for its economic reforms. In the 1970s it was an economic basket case. Human capital was a major export—people emigrated. Ireland underwent a series of reforms, including tax reform and deregulation. The “Celtic Tiger” has experienced a return of its diaspora, and now imports labor from all over the EU and the rest of Europe.

When he became prime minister of Great Britain, Tony Blair made a decision not to undo the main features of Thatcherism but to tinker at the edges. It is unlikely, however, that Britain’s freedom rankings played a role in that calculus. Nonetheless, at some level the Blair government understands that free markets deliver the goods to its constituents.

The most notable successes chronicled in both indexes have been Hong Kong and Singapore, ranking in the top two positions. They are two open economies, virtual free ports. Each has strong protection of property rights and takes a light regulatory touch with business. Neither is a Western-style democracy, though elections are held in each city-state.

There has been intense rivalry between Hong Kong and Singapore for top position not only in the Heritage and Fraser rankings, but also in other measures of economic success. The Hong Kong government has always been jealous of its rankings. Both governments vigorously defend policies when criticized.

Hong Kong in particular has shown a willingness, however, to moderate or even reverse policy if its preeminent position as a free economy is threatened. The most notable example of this flexibility involved the company shares purchased by the government on the open market in August 1998 to support the Hong Kong dollar. In June 1999, under intense criticism from the Heritage Foundation and others, the government announced it would place the shares in a “Tracker Fund” and sell most of them off.

Receptive to Criticism

For many years, Singapore dismissed outside criticism of its policies. In recent years, however, the government has become more receptive to criticism and even solicits it. Whether in response to that criticism or for its own domestic reasons, the government is lowering marginal tax rates. The cuts will be phased in over three years. Whether by accident or design, the cut in the first year was just sufficient to improve its freedom score in the Heritage rankings.

The Hong Kong and Singapore stories show the difficulty of identifying whether there is a feedback loop from freedom ranking to policy. Domestic political forces can push in the same direction as advice from U.S. think tanks. In the case of Hong Kong, outside criticism—especially from the Heritage Foundation, which has a Hong Kong presence—gets magnified in the local press and is soon echoed in local criticism.

Throughout east Asia, excluding Japan, the freedom rankings receive great attention in the local press. Governments must respond to what then becomes domestic opposition to policies. That is true even in a developed country like Australia. (I was in Australia for a release of the 2001 Heritage Index. There was a raucous debate in the Senate over whether the Liberal government or the Labor opposition deserved the most credit for the nearly 20 years of successful economic reform in the country. We were as warmly received by the Laborites as by the Liberals. In reality, both political parties deserve credit, as each recognized in private.)

New Zealand, one of the most open economies in the world, is an interesting case study. Free trade is supported strongly by the Labor party. Mike Moore, formerly the head of the World Trade Organization, is an old Labor Party politician. A firebrand, he can talk of manning the barricades in defense of free trade against the antiglobalists. “Free trade is the best hope of the worst off,” he says.¹⁰

The Kiwis were proud of their 2004 third-place ranking in the Heritage Index. In New Zealand’s case, however, no outside criticism is needed to keep the country on its free-trade path. Were it not for its large government sector and tax burden, along with intrusive environmental regulations, it could be the freest economy in the world.

In recent years, some governments produced elaborate reports to try to influence their rankings in the Heritage Index. One country even graded itself using the Heritage methods and format. It was accurate and quite a good job. Heritage staff did its own assessment, however.

In Asia, especially, a good case can be made that the freedom rankings have influenced public policy. That influence varies by country and is not significant in Japan.

Latin America

The Heritage Index has been taken note of in parts of Latin America since it began its Spanish-language edition in 2001. In late 2000 we visited with Chile’s vice president, a member of the social democratic ruling party, who greeted us warmly. He clearly had read that year’s report on Chile and absorbed it, including its critical elements. He repeated our argument about not slackening in the reform process. Later that week he gave a speech to a business group repeating that message. The Index certainly reinforced his better instincts on economic issues.

In Latin American countries the message of economic freedom is conveyed to the local population through the press and public events. It is not received equally well in every country. In a country like Chile the message can be accepted as reinforcing what is long-standing public policy. Surprisingly, some of the largest turnouts and most favorable receptions have been in Venezuela. The people of that country hunger for freedom.

Finally, if it need be said, countries not doing well in the rankings frequently complain. Those countries are typically more interested in improving their rankings than their policies. That they complain suggests that outside criticism matters to them. This category includes the government of one country on the State Department’s list of state sponsors of terrorism.

The freedom rankings of both Heritage and Fraser can play a useful role in reinforcing good policies in countries committed to them. And they can occasionally help turn back bad policies. Not much can be done in a country with a political culture inimical to freedom. Even then, as with Venezuela, ordinary people can be reached by the message. There is no way to tell in the long run how that influence might be felt. We have witnessed the long-run influence of liberal ideas in countries in central and eastern Europe living under communist-party rule.

Governments care because they need to be re-elected and, ultimately, require legitimacy. At every stage, a government wishing to promote economic freedom will face opposition from entrenched interests. That some governments are able to overcome such opposition confirms that leadership matters in public policy.

The connection between government policy and a ranking in the freedom reports can become fairly indirect. Even in the case of North Korea, the most closed economy in the world, leaders must eventually respond when bad policies produce repeated catastrophes.

The Heritage and Fraser efforts can best be viewed as spotlights casting their beams on the dark corners of policy, bringing transparency and political accountability where they are lacking. And they brilliantly illuminate the policy successes in the world. That seems to be impact enough.

Notes

1. For more comparisons and sources, see Gerald P. O’Driscoll, Jr., and Lee Hoskins, “Property Rights: Key to Economic Development,” Cato Institute Policy Analysis No. 482, August 7, 2003, pp. 2–3.
2. Gordon Fairclough, “North Korea Allows Markets to Grow, Eases Central Control,” Wall Street Journal, June 20, 2003.
3. James Gwartney and Robert Lawson, Economic Freedom of the World: 2004 Annual Report (Vancouver, B.C.: Fraser Institute, 2004); and Marc A. Miles, Edwin J. Feulner, and Mary Anastasia O’Grady, 2004 Index of Economic Freedom (Washington, D.C.: Heritage Foundation and Dow Jones & Company, Inc., 2004).
4. Miles et al., p. 50. Italics in the original.
5. Gwartney and Lawson, p. 5.
6. William Blackstone in Ehrlich’s Blackstone, ed. J. W. Ehrlich (San Carlos, Calif.: Nourse Publishing Co., 1959), p. 113.
7. Armen A. Alchian, Economic Forces at Work (Indianapolis: Liberty Press, 1977), p. 130.
8. See Gerald P. O’Driscoll, Jr., and Sara J. Fitzgerald, “Thatcherism Triumphant? The New Business Climate in Europe,” In the National Interest, February 26, 2003, www.inthe
nationalinterest.com/Articles/Vol2Issue8/vol2issue8Odriscollfitzgerald.html.
9. Mart Laar, “How Estonia Did It,” in Gerald P. O’Driscoll, Jr., Edwin J. Feulner, and Mary Anastasia O’Grady, 2003 Index of Economic Freedom (Washington, D.C. Heritage Foundation and Dow Jones & Company, Inc., 2003), pp. 35–37.
10. Quoted in “Moore’s Code,” New Zealand Herald, August 31, 2002.

Most visitors to the former Crown Colony, now known as the Hong Kong Special Administrative Region (SAR), would think that little had changed there. And they are partly right. Little has changed on the surface. Unfortunately, there has been a constant erosion and corrosion of the basic institutions Beijing promised to leave unsullied and intact.

It is clear that China’s authoritarian leaders hope that they can subvert these institutions to serve their own ends. On the one hand, they implemented a rigged electoral system that dilutes the democratic process and marginalizes reformists who promote democracy. At the same time, Beijing appointed a congenial but administratively challenged chief executive for the SAR to ensure compliance with their demands.

This would have been bad enough. However, there has also been a weakening of the judicial system. It bears pointing out that the openness and transparency of Hong Kong’s legal system was perhaps the most important underpinning of the material success and freedoms enjoyed there. Ironically, with the exception of Jimmy Lai, Hong Kong’s tycoons are too busy cutting deals with Beijing to realize what is happening. Most of the super-rich do not understand that the rule of law allowed them to become wealthy.

They are relying on their personal connections, guanxi in Chinese, to arrange favorable treatment from corrupt mainland officials. The bad news is that as these practices become perfected they will inevitably seep into business dealings in Hong Kong. The good news is that the forces of globalization assure that corrupt, authoritarian governments will join the Suharto regime in Indonesia in the dustbin of history.

A recent interference with Hong Kong’s affairs was revealed in a warning issued by Wang Fengchao, an official of the central government’s Liaison Office in the SAR. He insisted that the Hong Kong media not publish views advocating independence for Taiwan, declaring that journalists have a responsibility and an obligation to support reunification of China. In addition, the media should not disseminate information that might be interpreted as advocating the “two states” theory articulated by former Taiwan President Lee Teng-hui or any others that might encourage independence. At the same time, Mr. Wang urged the SAR government to move quickly to enact an anti-subversion law based on Article 23 of the Basic Law, which authorizes national-security legislation.

A State Matter

In his warning, Mr. Wang asserted that his proposed limitations had nothing to do with press freedom because Taiwan is a state matter that should be dealt with differently from other news items. As if Beijing’s continued human rights abuses were not enough, Mr. Wang’s comments provide ample evidence that Communist Party officials do not understand the nature or the value of individual rights and freedoms.

The media has now been instructed that it must handle Taiwan-related news differently. Compliance with this demand would be tantamount to self-censorship and undermine editorial independence as the foundation of press freedom. In effect, the media would be reduced to being a tool to promote policies of the current ruling party.

At present, the Basic Law guarantees press freedom along with freedoms of speech and publication. It would be a stretch to imagine that restricting such freedoms is consistent with the spirit of Article 23.

These misguided actions are further corrupting the Basic Law and serve to make more implausible the terms offered to the Taiwanese people for unification under the conditions of autonomy promised to Hong Kong. At the same time, a crackdown in Hong Kong would destroy investors’ confidence in its laissez-faire institutions.

In another instance, Beijing violated the spirit of noninterference in Hong Kong’s internal affairs by indicating its displeasure with a ruling that would grant an extended right of abode to some mainland citizens. In response, the SAR government reversed the decision and issued a statement acknowledging Beijing’s right to reinterpret the Basic Law.

The insensitivity of China’s authoritarian leadership to Hong Kong citizens’ wish for greater economic and political freedoms sullies its own image. At the very least, it casts a pall over expectations of Beijing’s willingness to uphold international agreements that it considers inconvenient.

Although Marxism may have been sidelined for the moment, China remains in the grip of a Leninist power structure that is rigidly authoritarian. In its present incarnation the leadership in Beijing is not only going against the tide of human history; it also violates Lenin’s vision of anti-imperialism. In response to the colonial imperialism of his day, Lenin supported the rights of self-determination for all people. This should presumably include people in Hong Kong and Taiwan.

Meanwhile, Beijing insists on disregarding the expressed preferences of Chinese people in both places. The current leadership should build on the successes of Deng Xiaoping, who oversaw the modernization of China’s economy. It should yield to the inevitable forces of history that demand a modernization of China’s political system.

Christopher Lingle is a professor of economics at Universidad Francisco Marroquín and author of The Rise and Decline of the Asian Century.

-JOHN TEMPLETON¹

The mutual fund magnate John Templeton traveled around the world during the 1930s, noting in particular the extreme poverty in two Asian nations under British control, India and Hong Kong. Forty years later, in the 1970s, Templeton returned. Once again he witnessed the incredible poverty in India. But Hong Kong had changed tremendously. “The standard of living in Hong Kong had multiplied more than tenfold in forty years, while the standard of living in Calcutta has improved hardly at all.”²

Today neither country is under British rule, but the contrast is even more clear. Hong Kong enjoys the greatest concentration of wealth in the world. India suffers the greatest concentration of poverty in the world.³

Twenty years ago, development economist P. T. Bauer wrote a famous little essay in which he pondered, “How would you rate the economic prospects of an Asian country which has very little land (and only eroded hillsides at that), and which is indeed the most densely populated country in the world; whose population has grown rapidly, both through natural increase and large-scale immigration; which imports all of its oil and raw materials, and even most of its water; whose government is not engaged in development planning and operates no exchange controls or restrictions on capital exports and imports; and which is the only remaining Western colony of any significance?”⁴

Indeed, the prospects for Hong Kong were dismal. Yet by making cheap products for export to the faraway West, it managed to become the powerhouse of Southeast Asia. Today its citizens’ incomes rival the Japanese, despite its teeming seven million people crowded into 400 square miles. What broke the vicious cycle of poverty? According to Bauer, Hong Kong’s economic miracle did not depend on having money, natural resources, foreign aid, or even formal education, but rather on the “industry, enterprise, thrift and ability . . . of highly motivated people.”⁵ Hong Kong’s “overpopulation” turned out to be an asset, not a liability.

Equally important, Britain did not interfere in private decision-making. It adopted a laissez-faire economic policy, except in the area of subsidized housing and education. Communist China has pursued a largely noninterventionist approach since it took over in 1997. Hong Kong continues to flourish with a stable currency, free port, and low taxes. Its maximum income tax rate is 18 percent, and it imposes no capital-gains tax. In its economic freedom index, the Fraser Institute has always ranked Hong Kong number one in the world.⁶

Tragic India

India is an entirely different story. Its population of one billion remains relatively poor. Unlike Hong Kong, India has valuable natural resources–forests, fish, oil, iron ore, coal, and agricultural products, among others. It has achieved self-sufficiency in food since independence in 1947, yet deep poverty persists.

Many pundits blame India’s anti-capitalist culture, its fatalistic caste system, its overpopulation problem, and its hot and humid climate (it reached 117 degrees when we visited the Taj Mahal last June). But Milton Friedman identified the real culprit when he wrote, “The correct explanation is . . . not to be found in its religious or social attitudes, or in the quality of its people, but rather in the economic policy that India has adopted.”⁷

Indeed, in the decade after independence, Nehru and other Indian leaders were heavily influenced by Harold Laski of the London School of Economics and his fellow Fabians, who advocated central planning along Soviet lines. India adopted five-year plans, nationalized heavy industries, and imposed import-substitution laws. Worse, they perpetuated the British civil-service tradition of exercising controls over foreign exchange and requiring licenses to start businesses.

Even today, India is a bureaucratic nightmare.⁸ Parth Shah, an economist and head of the Centre for Civil Society (www.ccsindia.org),⁹ describes how he recently returned to India and toiled to find an apartment in New Delhi (thanks to rent controls), then spent half a day standing in line to pay his first telephone bill and another half a day to pay his electricity bill. “Corruption has become the standard among those who are in public service at every level,” reports Gita Mehta, a well-known Indian writer.¹⁰ India has ranked around number 100 over the years on the Fraser Institute’s index of economic freedom.

Yet there is hope. In 1991, facing default on its foreign debt, India abandoned four decades of economic isolation and planning, and freed the nation’s entrepreneurs. It sold off many of its state companies, cut tariffs and taxes, and eliminated most price and exchange controls. As a result, India became one of the world’s fastest-growing economies in the 1990s, averaging nearly 10 percent growth per year. Most important, while the rich have gotten richer, poverty rates fell sharply in India.

What can the new prime minister, A. B. Vajpayee, do now? Can India ever catch up to Hong Kong? India must cut its government deficits (currently 10 percent of GDP); cut tariffs and taxes further; privatize state enterprises; eliminate red tape; and restore honesty in government. It’s a tall order but the only way to achieve what Adam Smith called “universal opulence which extends itself to the lowest ranks of the people.”¹¹

1. Quoted in William Proctor, The Templeton Prizes (New York: Doubleday, 1983), p. 72.
2. Ibid.
3. For an excellent updated survey of India, see “Unlocking India’s Growth,” The Economist, June 2, 2001.
4. P. T. Bauer, “The Lesson of Hong Kong,” in Equality, the Third World and Economic Delusion (London: Weidenfeld and Nicolson, 1981), p. 185.
5. Ibid., p. 189.
6. James Gwartney and Robert Lawson, Economic Freedom of the World, Annual Report 2001 (Vancouver, B.C.: Fraser Institute, 2001), p. 172.
7. Milton Friedman, Friedman on India (New Delhi: Centre for Civil Society, 2000), p. 10.
8. See John Stossel’s amazing example in his ABC Special “Is America #1?” available on videotape from Laissez Faire Books, 800-326-0996.
9. The other free-market think tank, the Liberty Institute, is run very capably by Barun Mitra. Shah and Mitra hosted my visit to India in June 2001.
10. Gita Mehta, Snakes and Ladders: A Modern View of India (London: Minerva, 1997), p. 16.
11. Adam Smith, The Wealth of Nations (New York: Random House, 1965 [1776]), p. 11.

In a world of plenty want abounds. To blame are big corporations, international trade, and open markets, according to demonstrators who have been attacking the World Trade Organization. In fact, they couldn’t get it more wrong. Economic liberty and exchange offer the world’s poor the best hope of a better future.

For most of the post-World War II period, developing nations shared the protesters’ aversion to free markets. Countries throughout Africa, Asia, and Latin America chose state-run development strategies in an attempt to quickly bridge the yawning economic divide between rich and poor. The result was disaster.

Economies collapsed. Societies dissolved. Countries imploded. Small, wealthy elites emerged, while the mass of people languished. So foreign aid became the mantra. The United States alone contributed more than $1 trillion (in current dollars) to a variety of aid programs.

But, alas, that turned into another dead end. In 1996 the United Nations declared that 70 countries were poorer than they were in 1980; an astounding 43 were worse off than they had been in 1970. All were on the aid dole. Many of the biggest recipients of assistance—India, Sudan, Tanzania—were among the worst performers.

Indeed, there were few positive results to cite. The U.S. Agency for International Development admitted: “much of the investment financed by U.S. AID and other donors between 1960 and 1980 has disappeared with out a trace.” Similar has been the more recent experience with Bosnia, the Palestinian Authority, and Russia.

With the collapse of the argument that development depends on First World charity, Third World analysts looked elsewhere for answers. Resource endowments, population densities, and cultural attitudes all have impacts in particular cases, but none correlate with overall growth levels. Economic freedom does, however. The results of the latest volume of Economic Freedom of the World, written by James Gwartney, Robert Lawson, and Dexter Samida, could not be clearer.

The average income of people in the top fifth of economically free countries is nine times as high as that of those in the bottom fifth. The countries with greater economic liberty grew an average 2.27 percent annually last decade; those with the least economic freedom shrunk by 1.32 percent a year. People in the most free nations live 20 years longer than those in the least free states.

Hong Kong and Singapore tie as the most liberal economic systems. Both are particularly impressive examples.

Neither possesses natural resources. Both are relatively crowded urban areas. Neither collected endless streams of foreign aid. Instead, they opened their economies to domestic and foreign competition alike.

Hong Kong has consistently topped the economic freedom list. Its government is small, its economy is relatively unregulated, and its currency and financial markets are free. Where Hong Kong lags—and fell significantly from 1995—is in the rule of law and enforcement of contracts. Nevertheless, despite China’s takeover, the economy remains the envy of the world.

Singapore bests Hong Kong in the rule of law, and matches it in open currency and financial markets. However, its government is bigger and its regulations are more intrusive. Number two to Hong Kong throughout the 1990s, Singapore gained a share of the number one spot by holding its rating steady while Hong Kong slipped.

New Zealand, ranked number 32 in 1985, zoomed to number 3 a decade later and continues to hold that position. It has reduced government spending, dramatically deregulated its economy, and freed its currency and financial markets. There may be no better example of the way policy reform can transform economies than New Zealand.

The fact that the Asia-Pacific hosts the top three nations helps explain the region’s remarkable growth. In a sense, Asians have conducted a dramatic experiment on the impact of economic liberty. The successes include Australia, which scores 7-8 (indicating a tie), and Japan and Thailand, which land in the top 21.

The region also shows what not to do. Some of the high-flyers that have suffered economic turbulence of late would benefit from an extra dose of economic liberty. For instance, Malaysia hits 37-39, South Korea ranks 47-48, Indonesia is at 49-50, and China comes in at 75-77.

Then there are the three leading powers in South Asia, Bangladesh, India, and Pakistan, which are abysmal, ranging between 86 and 96. Myanmar comes in at the very bottom, at 123 (insufficient information was available to rate all nations).

The United States ranks number four. America does well regarding freedom of currency and financial markets. Its standing on economic regulation is anemic, however, and government spending and subsidies are higher than those of Hong Kong, Singapore, and New Zealand.

Obviously, such market imperfections have not prevented the United States from growing dramatically and steadily. But America would get an extra spurt—and solidify past gains—if it addressed its policy shortcomings, mild though they are compared to those of so many other nations.

Europe, like Asia, provides an interesting mix. Great Britain, transformed two decades ago by Margaret Thatcher, runs fifth. It was 33 in 1975 and 16 in 1980. The government is still too large, but the economic role of state enterprises has shrunk dramatically. Marginal tax rates are lower, monetary policy is more stable, and trade barriers are down.

An economic tiger of more recent vintage is Ireland. A decade ago Dublin ranked 28. By 1995 it was up to six, its present position. Ireland has freed up its economy, cut taxes, deregulated its financial markets, and opened access to the international economy.

Also in the top dozen are Luxembourg, the Netherlands, and Switzerland. Following closely are Denmark, Belgium, and Spain.

But then the reason for Europe’s ongoing economic problems become evident. Its poorer performers lag in their protection of economic liberty. Germany comes in at 22-24. Austria, France, and Sweden follow at 25-30. Italy runs 31-34.

Greece comes in at an anemic 42-46, along with Hungary, the first former communist state to appear. The Czech Republic follows, with Estonia, Latvia, and Lithuania limping behind. The first Balkans nation, Slovenia, appears at 70-74.

Every other former East Bloc state trails even Haiti. Latin America tends more toward the middle, but still exhibits some range of ratings.

The bottom half of the rankings is filled with African states. Until the African people protect economic liberty, they are likely to remain poor.

Economic Freedom of the World offers an important lesson: The path to prosperity is simple—liberty.

Sir John Cowperthwaite served in Britain’s administration of Hong Kong for over 25 years. From 1961 to 1971 he was Hong Kong’s financial secretary, a position that gave him vast power over that colony’s economic affairs. It was under his guidance that the theory of positive nonintervention was used to promote Hong Kong’s astounding economic progress.

One of Sir John’s crusades was to prevent the gathering of statistics on many aspects of Hong Kong’s life. In Hong Kong, he said, “we are in the happy position where the leverage exercised by the government on the economy is so small that it is not necessary, nor even of any particular value, to have these figures available for the formulation of policy.” For him, statistics were the tools of interventionists anxious to use the government to produce an outcome consistent with their collectivist view of society.

Amen.

The United States has taken a different route. The U.S. Constitution provides for the enumeration of citizens for the purpose of determining the number of each state’s representatives in Congress. However, over the years, the Census Bureau has embarked on the collection of statistics far beyond those necessary for that purpose. We now gather data detailing every nook and cranny of our lives, thus providing fodder for the collectivist meddlers.

Most of those statistics are simply synthetic. They force disparate things into an artificial whole that exists only in the mind of the synthesizer. The statistics are the lifeblood of those whose view of society submerges the individual in such groups as the poor, blacks, men, women, children, gays, senior citizens, to name a few. To the synthesizer, the individual has an identity only as he is a member of some collection of people.

For collectivists, not only is the individual identified by his group, but so is his behavior. Thus, we can no longer tell if one’s behavior is good or bad, right or wrong, until we find out his group identity. And individuals are taught to test their behavior, not against any individual standard, but how it compares with what is socially—collectively—acceptable in their group. When someone’s behavior does not measure up, it is society’s fault, not his.

Similarly, class welfare is defined, from above, by the collectivized statistic without any reference to those who comprise the class. There is some higher measure of welfare that exists only in the eyes of the collectivist. In this world, the collective can be “better off” or “worse off” even if no individual in it is. Since income equality is “good” in the eyes of the collectivist, a society where everyone is equally poor is better than one where everyone is unequally richer. Any grouping of people, defined from above, is automatically better if minorities are represented at least proportionally. Individual human values are submerged for some collective, suprahuman measure of value that exists only in the mind of the collectivist. Suprahuman values are abstractions that have no meaning for individuals.

Statistics necessarily aggregate across individuals. These aggregates are, of course, the result of human action, but as aggregates they are not of human design. The unit of society is the individual, not the group. In aggregation individual action and choice are lost. The only groups that matter to individuals are those voluntarily joined. Any other group into which an individual is classified comes from the outside and exists only in the mind of the classifier.

Statistics that purport to describe groups say nothing about the causal mechanism that produced the data. In many cases, the observed statistic results from individuals each choosing what is best for them. If this is true, then the resulting statistic is an artifact that tells us nothing about the well-being of the individuals behind it. If the underlying decisions were all made by people doing what was best for them, then the outcome must be best from the perspective of those people. Synthetic statistics about the collective results are irrelevant.

Of course, even if the underlying process is right from each individual’s perspective, collectivists will still claim that any statistics that show inequality or disproportionality prove that something is wrong. Beneath this claim is the implicit, but hotly denied, belief that people are all the same. The idea that people are different, and that statistical disparity merely reflects this, simply does not occur to the collectivists. These are the same people who celebrate multiculturalism and moral relativism.

The operational consequence of statistical collectivism is the demand for the state to deal collectively, and coercively, with the artificial problems suggested by these statistics. Differences become gaps: gaps in income, gaps in education, gaps in housing, gaps in health, gaps in other necessities. Problems are created and tackled from above by the collectivist mindset consumed with gapology. Leaving individuals and their associations alone is ruled out. Statistics fuel the interventionist engine.

One wonders what Sir John must be thinking now.