On the 2018 Index for Economic Freedom, which we wrote about yesterday, it wasn’t surprising to see that three Communist countries – Cuba (#178), Venezuela (#179) and North Korea (#180) – are at the bottom of the index. Economic freedom in those countries is nonexistent.
Estonia has greater economic freedom than the U.S.
What was surprising is that many countries that we think of as being socialistic finished ahead of the United States. In a truly socialistic country, the means of production are owned and controlled by the state. In Marxist theory, socialism is considered a temporary state, existing as a country makes the transition from capitalism to communism.
Today, even communist countries have allegedly private enterprises, but overall the government controls everything and personal freedom is limited.
Many left-leaning Americans think of Scandinavian countries as a role model for an American style of socialism. Likewise, Canada, England and other European countries are known for their socialized healthcare systems.
So it’s surprising to see that Sweden (#15) and Denmark (#12) rank higher on the index than the United States (#18). Canada and the United Kingdom rank even higher, at #9 and #8, respectively. Remarkably, two countries that were part of the United Soviet Socialist Republic now rank above the U.S. – Estonia is #7, while Georgia is #16.
To understand why these countries outrank the U.S., it’s important to know the criteria used to determine economic freedom. Factors fall into four categories:
- Rule of Law. Property rights, government integrity and judicial effectiveness.
- Regulatory Efficiency. Business freedom, labor freedom and monetary freedom.
- Government Size. Government spending, tax burden and fiscal health.
- Open Markets. Trade freedom, investment freedom and financial freedom.
Sweden’s ranking is based on improvements in judicial effectiveness, government integrity, and property rights, which outpaced lower scores for business freedom and monetary freedom.
“Sweden’s enviable living standards result from an economy that performs optimally because of regulatory efficiency and open-market policies that enhance flexibility, competitiveness, and large flows of trade and investment,” according to The Heritage Foundation. “A transparent regulatory regime encourages robust entrepreneurial activity. Banking regulations are sensible, and lending practices have been prudent. The legal system provides strong protection for property rights, buttressing judicial effectiveness and government integrity.”
In other words, for the United States to become more like Sweden and Denmark, it needs to embrace capitalism, not replace it.
Estonia, which regained independence from the Soviet Union in 1991, is a stable multiparty democracy that is a member of NATO, the European Union and the Organisation for Economic Co-operation.
“Successive governments have pursued a free-market, pro-business economic agenda and sound fiscal policies that have resulted in balanced budgets, low public debt, and greater economic freedom,” according to The Heritage Foundation. “The rule of law remains strongly buttressed and enforced by an independent and efficient judicial system. A simplified tax system with flat rates and low indirect taxation, openness to foreign investment, and a liberal trade regime support a resilient and well-functioning economy. Management of public finance has been notably prudent and sound.”
How will the U.S. rank next year? Tax reform and deregulation are bound to improve the overall score, but protectionist measures, such as the recent steel and aluminum tariffs, will likely negate those advances.
On a positive note, the world average score of 61.1 is the highest recorded in the 24-year history of the index. The average has increased by more than three points since the index began in 1995. Scores improved this year for 102 countries and declined for 75.