Lands of Liberty 2000

[This is Navigator's third annual survey of world freedom. 1998, 1999 ]

Objectivists typically measure America's freedom by looking backward or forward-backward to the early republic or forward to their ideal republic. But another useful standard can be obtained by looking outward-to the world's other republics, and to its non-republics as well. Fortunately, three publications now make that easy to do. For several decades, Freedom House has conducted an annual survey of global liberty. (This article uses the organization's report Freedom in the World, 1998-1999.) However, as Freedom House itself recognizes, its survey is limited to just two aspects of freedom: political rights (democracy) and civil liberties. The obvious missing element is economic freedom.

Two publications now attempt to make up for that lack. The Fraser Institute of Canada, in conjunction several dozen pro-capitalist institutes from around the world (including the Cato Institute), publishes an annual report called Economic Freedom of the World, written by James Gwartney and Robert Lawson. The Heritage Foundation and the Wall Street Journal likewise publish an annual Index of Economic Freedom. Integrating the results of these surveys with Freedom House's thus allows one to make at least a comparative estimate of how liberty is faring around the world. Of course, given the time required for research and writing, neither survey can offer up-to-minute evaluations of freedom. For example, neither economic survey takes account of the Labour government recently elected in New Zealand.

Political Rights

To call a system democratic is to say only that its citizens determine the actions of its government, directly or through representatives. It says nothing about the scope of that government. Still, democratic mechanisms are an important part of a free society. The fundamental principle of liberty, after all, is that a person ought to be in charge of his life, in every aspect. Since government is the means by which people carry out the extremely important activity of defending themselves against coercion, it follows that they ought to be in charge of that aspect of their lives. If we had our rights protected by a benevolent monarch, we would be like children let out on our own-but within a yard fenced off by our parents.

For evaluating a country's level of democracy ("political rights"), Freedom House uses an eight-point checklist, including such unexceptionable criteria as free and fair elections for the chief executive and for legislators; real power for representatives; a significant opposition; the right to organize new parties; and so forth. Once Freedom House has evaluated a state according to its eight points, it places the country in one of seven categories, from "most free" to "least free." In Freedom House's ratings, 1 is "most free" and 7 is "least free." But this essay has put those ratings on a 0-to-10 scale, so that zero is least free and 10 is most free. States that are in the second tier of freedom are thus rated 8.33, and those in the third tier 6.67. (The advantages of this approach becomes clear when Freedom House's ratings are integrated with other institutions' ratings for economic freedom.)

The results of the Freedom House survey are these: Of 191 independent countries surveyed, 59 (30 percent) win a most-free 10 for political rights. That is impressive. But the bad news is that those countries were all rated most free last year. No new countries were added to the top rank, although two were added last year. Thus, the situation remains static.

In Western Europe, all but one of the twenty-four countries surveyed garnered a 10; odd man out was Prince Rainier's Monaco, which was in the second tier of democracies. In East-Central Europe, seven states formerly under communist dictatorship are rated "most free": the three Baltic states (Estonia, Latvia, Lithuania), plus the Czech Republic, Hungary, Poland, and Slovenia. Oceania remains a treasure trove of democracy, with ten states top-ranked: Australia, New Zealand, and eight small island-states. But only four states in Sub-Saharan Africa are rated "most free" and only one of those is of any size (South Africa, with a population of 40 million). Asia adds two countries to the top of the list: Israel and Japan. In North America, Canada and the United States are dubbed "most free," as are seven Caribbean nations. Central America adds two more (Belize and Costa Rica) and Latin America another two (Bolivia and Uruguay).

Now, I said above that Freedom House's criteria for democratic rights were unexceptionable. But that is not entirely true of the organization's Point Eight, which may give pause to classical liberals. It is: "Do cultural, ethnic, religious, and other minorities have reasonable self-determination, self-government, autonomy, or participation through informal consensus in the decision-making process?" One can look at that in two ways. A wholly individualist state might well allow minorities no autonomy or self-determination, on the grounds that people become citizens of the state as individuals, not as members of a minority. To grant minorities self-determination within the country would be collectivism: It would imply that the members of a minority deserve representation not for their ideas but for their genes.

On the other hand, one may ask: How many states today oppose autonomy and self-determination on those individualist grounds? Is it not more usual, globally, for an ethnic majority to oppose autonomy for an ethnic minority because the former wishes to use majoritarianism to violate the rights of the minority? In such circumstances, where civil liberties are weak, a wise political science might well declare that autonomy and self-determination are desirable democratic mechanisms. And those who conduct the Freedom House survey are no doubt thinking of this latter situation. But the phrasing of Point Eight could be used by ethnic collectivists to oppose both individualistic democracy and equality before the law. It therefore stands in needs of reformulation.

Civil Liberties

Freedom House uses a thirteen-point checklist for civil liberties, including freedom of speech and press; freedom of assembly; equality before the law; an impartial judiciary; and a strong civil society that is independent of government. Here again, one of the criteria is controversial. Point Twelve asks: "Is there equality of opportunity, which includes freedom from exploitation by or dependency upon landlords, employers, union leaders, bureaucrats or any other type of denigrating obstacle to a share of legitimate economic gains?" "Dependency on a bureaucrat" might well be a "denigrating obstacle" to one's share of legitimate economic gains, but "dependency on an employer"? For those who are not entrepreneurs, the only means of getting a "share of legitimate economic gains" is by dependency on an employer who has the ability to create a profitable source of work. Overall, however, the Freedom House list is well suited to its task.

Given that the world approves of democracy far more than freedom, it is no wonder fewer countries get top marks for civil liberties. Of the 191 countries surveyed, Freedom House rates only 28 (15 percent) "most free" in this field, less than half of the number that are "most free" with regard to political rights. And, once again, that figure has not improved over the last year. Micronesia, which last year was stripped of its top-ranked status, remained in the second-tier.

The failure of countries to provide civil liberty to the same extent as political liberty can be seen even in Western Europe. Of the 23 countries rated politically "most free" in that region, six (Belgium, France, Germany, Great Britain, Italy, and Spain) drop to the second tier in civil liberties, while Greece drops to the third tier. (But Monaco, though in the second tier politically, rates a 10 on civil liberties, thus bringing West Europe's total to seventeen.) All seven of the East European countries top-ranked politically fall to the second rank on civil liberties. In Africa and Asia, no country is rated "most free" for civil liberties: The four African nations given 10s for political rights receive 8.33 for civil liberties; so does Japan; Israel gets a 6.67. In Oceania, both Australia and New Zealand retain top honors, as do three of the small island-states. But of the other five island states that fared well politically, three drop to 8.33 on civil liberties and two (Fiji and Nauru) drop to 6.67. Of the thirteen states in the Americas that were rated "most free" politically, five are also top-rated for liberty: Barbados, Belize, Canada, Dominica, and the United States. The addition of St. Kitts and the Grenadines gives the hemisphere six.

Combining the Results

Having surveyed the fields of political rights and civil liberties, we may draw five conclusions. (1) Democracy does not guarantee liberty, but it helps. No country that rates a 1 for democracy is worse than a 3 for liberty, and of that combination there are only five instances: Bolivia, Greece, Israel, Nauru, and Vanuatu. (2) A independent state that is top-rated for liberty is virtually certain to be top-rated for democracy: Only Monaco and St. Vincent and the Grenadines-second-tier politically but top-ranked for liberty-escape the pattern, though it is predictably more common among some non-independent polities, such as British dependencies.

(3) States that are top-rated for civil liberty tend to be small. Of the 28 so rated, fully 15 (54 percent) are half a million or less in population. Ten more (36 percent) range between three million and ten million in population. Beyond that, there are only Australia (with twenty million people), Canada (with thirty million), and the United States (with 273 million). In short, over half of the countries top-rated for civil liberties have populations that are smaller than any of the 70 largest U.S. metropolitan regions. With only three exceptions, no country top-rated for civil liberty has more people than the two largest U.S. metropolitan areas (New York City and Los Angeles). And no country, with the exception of America itself, has more people than a large American state. (4) The top rank for civil liberty has not yet been attained by any nation that may be considered Asian, African, Slavic, Turkic, Arabic, or Latin American.

(5) Mono-ethnic countries tend to be freer than multiethnic countries. Freedom House considers a country to be relatively free if its average score (of political rights and civil liberties) is 5.83 or better. With that understanding, Freedom House president Adrian Karatnycky takes up the question of ethnicity, and he begins by defining a mono-ethnic state as one in which two-thirds or more of the population belongs to a single ethnic group. The result is that 75 percent of the world's free countries are monoethnic, and 58 percent of the world's monoethnic countries are free (versus 29 percent for multiethnic countries). Looking at electorial democracies, a similar pattern is found. Freedom House defines electoral democracies as "countries in which there are reasonably free and fair elections, characterized by significant choices for voters in a context of political organization, reasonable access to the media and secret ballot elections." Of the 117 countries considered electoral democracies by this definition, two-thirds are monoethnic, and of these 77 mono-ethnic democracies 86 percent are free (versus 55 percent for multi-ethnic democracies). Karatnycky concludes:

In the face of ethnic conflict in Africa, the former Yugoslavia, and elsewhere, many analysts have recently focused on the destructive power of contemporary nationalism. Yet the fact that nation-states [that is, mono-ethnic states] appear to provide the most durable basis for political freedom and respect for civil liberties deserves greater attention.

Economic Liberty

As mentioned above, Navigator is this year employing two attempts to rate economic freedom in the world: the Fraser Institute effort and the Heritage-Wall Street Journal effort. The former, headed by James Gwartney and Robert Lawson, uses twenty-three components and groups them into seven categories. Those categories are: (1) size of government; (2) economic structure and use of markets; (3) monetary policy and price stability; (4) freedom to use alternative currencies; (5) legal structure and security of private ownership; (6) freedom to trade with foreigners; and (7) freedom of exchange in capital markets. The end products are a 0-to-10 rating for each component, for each of the larger groups, and for the country overall.

The Heritage-Wall Street Journal work looks at ten components of economic freedom: (1) trade policy (protectionism); (2) the fiscal burden of government (including taxation and government expenditures); (3) government intervention in the economy (including transfer payments); (4) monetary policy; (5) capital flow and foreign investment; (6) restrictions on banking; (7) market or non-market determination of wages and prices; (8) protection of private property rights; (9) regulation; and (10) black market activity. Here, each factor is rated from 1 (most free economically) to 5 (least free economically), and an overall, 1-to-5 country rating is produced.

Navigator has attempted to correlate these two surveys by putting them, like the Freedom House survey, on a 0-to-10 basis. In addition, it has refigured the ratings so that the economically freest country in the two ratings (Hong Kong) is rated a 10 and the economically least free country (North Korea) is rated a zero.

What do the surveys show? (Unless otherwise specified, all of the following figures represent Navigator's reconfigured ratings, not those published by the institutes in question.) First, despite all attempts to bring the Fraser survey and the Heritage survey into harmony, it quickly becomes clear that Heritage is the harder marker. In the Fraser-based ratings, Australia is given a 9.17, less than a full point below Hong Kong. In the Heritage-based ratings, Australia gets an 8.4 rating, over 1.6 points below Hong Kong.

There are some exceptions to this overall pattern, however. For example, Heritage is soft on Bahrain. Its survey makes that country fourth freest in the world. Fraser strongly disagrees, putting it in thirty-first place. The Fraser study concedes that "Bahrain is characterized by monetary stability and liberal financial markets." But, it adds, Bahrain "is also an economy dominated by the government. In fact, 45% of all consumption expenditures are determined by the government rather than by the personal choices of its citizens."

Taiwan is another point of difference. Heritage, despite its tough grading, considers the island to be the eleventh freest country in the world; Fraser says it is the fifty-third. When one looks into the matter more closely, one wonders if the two sources are describing the same country. Heritage says: "According to the U.S. Department of State, 'State-owned enterprises account for 9.5 percent of GDP, a proportion which shrinks annually.'" Fraser, citing a World Bank report called "Bureaucrats in Business," gives the country a rating in the field of "government enterprises" that it reserves for countries where "numerous [state-owned enterprises] operated in many sectors, including retail sales, and government investment was between about 40 and 50 percent of the total."

However, there is another, no less interesting fact about Taiwan. According to the Fraser Institute, the factors that its measures have not gotten worse in Taiwan over the last fifteen years. But whereas those conditions were formerly good enough to put Taiwan in the top twenty-five economically free countries, today they put Taiwan below the top fifty. Such has been the effect of global liberalization that a business climate which seemed favorable only fifteen years ago, no longer does so.

Another overall impression is that Heritage seems less favorably disposed toward underdeveloped countries that are liberalizing. Thus, Fraser rates Panama fifteenth freest country, on a par with Japan; Heritage says it is thirty-third, just above Peru. Fraser rates Costa Rica twenty-second freest country, on a par with Germany; Heritage puts it down as fifty-eighth freest, below Paraguay.

Lastly, consider one trend in the improvement of economic freedom that the Fraser Institute has found over the last three decades. (Unfortunately, not every country has been followed for that entire time.) Among the leaders in that liberalization are four countries where the United States and its in-country allies helped to defeat Leftists in the 1970s, 1980s, and 1990s. Before the Pinochet coup of 1973, Chile suffered from economic strangulation that put its rating below that of Syria or Tanzania; now, it ranks among the world's most economically free states. Before El Salavador's defeat of its insurgency, it had levels of economic freedom typical of Latin America; now, it too is among the world's economically freest countries, above many West European states. After the Sandinistas' victory in Nicaragua, the country's economic freedom sank to a level not much above pre-Gorbachev Russia; following the Sandinistas' electoral defeat, Nicaragua has risen to a level of economic freedom not much below Taiwan's. When the Maoist Shining Path was threatening to take over Peru, its economic freedom outranked only Russia, Burma, and the Sandinistas' Nicaragua. Since their defeat, it has risen to a level not much below Germany's.

The Free World

Given that we have in hand four evaluations of freedom in three major areas, how can we integrate them to describe the Free World? Let us say that a country is (comparatively) free, in terms of political rights and civil liberties, if it has an average of 9.0 or better, and it is not below the second tier (8.33) in either field. What are the results of combining these two measures? As noted in the beginning, 59 states are democratically free and all but five are at least second-tier in civil liberties. Those five are Greece, Israel, Fiji, Nauru, and Bolivia. Monaco and St. Kitts and the Grenadines, with their top-rank on civil liberties, must also be added to the list, yielding 56 states that rate as free in the two categories of the Freedom House survey.

What happens when an economic requirement is added? Let us take the same standard: A country must have a final score of 9 or better, and no individual score can be below the second-tier score of 8.33. The result is to produce a Free World of just ten countries: Australia, Canada, Ireland, Japan, Luxembourg, the Netherlands, New Zealand, Switzerland, the United Kingdom, and the United States. The hard luck kid this year is Austria, with an overall score of 9.42 but a score for economic freedom that just missed the cutoff point: 8.26. Denmark also, has reason to complain. It has two perfect 10s coming out of the Freedom House survey of political rights and civil liberties. But Heritage blackballs Denmark by putting its economic liberty below that of the Czech Republic and the United Arab Emirates. The reason: an average marginal tax rate of 46 percent and government expenditures equal to 56 percent of gross domestic product.

The Medal Winners

Now comes Navigator's controversial award of bronze, silver, and gold medals. The bottom four of the Free-World states are, in reverse order: Japan (9.07); the United Kingdom (9.09); the Netherlands (9.51); and Canada (9.55). In terms of economic freedom, the bottom two of these countries states outrank the top two but they are dragged down by their second-tier status in civil liberties. Canada, which won the bronze medal last year, does not come close this year, showing the difference that the addition of the Heritage-based ratings makes. Were just the Fraser-based evaluations used, Canada would again be third.

The three next-freest states are, in reverse order: Switzerland (9.58); Australia (9.59); and Luxembourg (9.62). Since Heritage rates Switzerland and Australia as equally free, the latter's 0.01 margin comes from Fraser's decision that Switzerland must be marked down for its use of conscription and for the percentage of bank funds held by state-owned institutions.

When we come to the bronze, silver, and gold medals, it will be no surprise that, once again, the United States takes second place and New Zealand wins the gold medal as the freest country on earth. The Fraser Institute and the Heritage Institute agree on the relative ranking of the two countries, and they agree again that (in terms of their own ratings systems) the two countries are separated by only 0.1 points. The reasons for the ratings and for the discrepancies have not changed and need not be elaborated again. But, that said, one must take note of the ominous ideas of New Zealand's new Labour government. The new prime minister, Helen Clark, claims that there is "no relationship" between tax rates and economic growth. Deputy Prime Minister Jim Anderton declares that "the free market policies of the [twentieth] century failed." These new developments will mean little to those New Zealanders who believe their country enjoyed no freedom under its prior governments. But for those who took the more ordinary view that New Zealand experienced a substantial gain in freedom after 1985, the prospects are grim indeed. According to the Australian Financial Review: Further reform is now "not even on the agenda" for New Zealand.

With first and second place thus decided, the only remaining question is: What country receives the bronze medal in year 2000? And the answer is Ireland.

The Celtic Tiger

If we look at the Fraser Institute's chart of economic freedom over the last twenty-five years, we can see that between 1985 and 1997 Ireland "pulled a New Zealand." Its economy was not quite as statist as New Zealand's at the start of that period, according to the Fraser ratings, but it was nearly so. And the Irish economy is not now quite as emancipated as New Zealand's, but it comes close. For some reason, however, the Irish story is far less familiar to libertarians than the New Zealand story.

Ireland in the mid-1980s was a basket-case. Inflation soared and real wages fell, despite a militant labor movement that often won nominal wage increases. The annual growth of per-capita GDP was only 1 percent. Unemployment was 20 percent, not much below the levels commonly ascribed to America during the Great Depression. And, in contrast to previous decades, when unemployed Irishmen simply emigrated, generous social programs kept the new unemployed at home and on the dole. The educated-and Ireland had many-fled to America as soon as they graduated from college.

In this situation, government spending exceeded 50 percent of GDP, and the annual deficit was 15 percent of GDP. The national debt was 120 percent of GDP. To pay for its generous welfare programs and burdensome borrowing, the government had set both the top corporate tax rate and the capital gains tax rate at 40 percent. The top personal tax rate was 80 percent and the average rate was 35 percent.

By 1987, it became clear that something had to be done. Government, business, and labor therefore entered into a series of "social agreements." They jointly acknowledged that the government simply had to pursue a strategy of wringing inflation out of the economy, cutting government deficits, and lowering taxes. The top corporate tax rate was reduced first to 32 percent and then to 28 percent. Companies in the export and financial sectors were granted a tax rate of 10 percent. (And when Ireland's EU partners complained that discriminatory tax rates were not allowed, Dublin promptly declared that in 2003 it would institute a 12.5 tax rate on all companies-giving its partners a lesson in the right way to go about setting a single tax rate.) The top personal rate fell to 44 percent, and the average rate to 22 percent.

The measures worked, and Ireland emerged as "the Celtic tiger." Inflation came down to 1.6 percent, although it has now edged back up again. In the 1990s, the annual growth in GDP was 8 percent, and it recently hit 11 percent. Per-capita GDP was over 90 percent of the EU average. Unemployment dropped to 5 percent (versus 12 in France and Germany); Irish immigrants began returning home to enter the job market. Because of (not despite) the severe tax cuts, the government has been running an annual surplus of 3 percent. Government spending as a percent of GDP dropped to 33 percent (the average for countries of the European Monetary Union is about 50 percent); the debt-to-GDP ratio has dropped to 54 percent. Said Oliver O'Connell, editor of the Dublin-based monthly Finance: "The Laffer curve lives."

Much has been done in Ireland but much remains to be done. In the OECD's 1999 survey of countries' regulatory burdens on the market, Ireland was ranked the second-least burdensome country. But privatization has only recently begun with the opening up of telecommunications industry. Says Ireland's 1997 Entrepreneur of the Year, Denis O'Brian: "There is a lot of liberalization left to do."

And if that is true of Ireland, how much truer it is of the world.