Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Women walk past a high-end shop in Tallinn (INTS KALNINS)
Women walk past a high-end shop in Tallinn (INTS KALNINS)

Neil Reynolds

Economic freedom and the end of poverty Add to ...

Jeffrey Sachs, the celebrated American economist who once imagined the eradication of poverty in our own times ( The End of Poverty, 2005), made this putative deliverance from want contingent on greater alms from the rich, developed countries. As we now realize more clearly than ever, government spending cannot ensure prosperity. Mr. Sachs makes this point explicitly in a column published in the August issue of Scientific American. Also indispensable, he says, are "the advantages of greater economic freedom."

Mr. Sachs writes of a recent visit to Poland and Russia, countries he had advised professionally two decades ago after the tumultuous collapse of the Soviet empire. Warsaw was in the midst of a great building boom "with impressive new business towers going up despite the economic slowdown in Western Europe." St. Petersburg, in contrast, showed no such dynamism, preferring to live off the architectural treasures of its storied past.

The two cities, Mr. Sachs suggests, symbolize the economic choices made by the two countries. Poland rushed enthusiastically toward a market economy; Russia equivocated. "Because Poles maintained a healthy skepticism toward state power, Poland developed a vigorous and competitive democracy after 1989," Mr. Sachs writes. "Civil society energetically criticized state corruption and helped to keep it in check." Transparency International rates Poland as the 49th least-corrupt country in the world, he notes, "rather good for a middle-income, young democracy that has so recently emerged from decades of Communist rule."

Post-empire, Russia repudiated its early market reforms, returning political and economic power to the bureaucracy that had historically - from the time of the tsars - governed the country. Russia retained even the tsarist registration system that makes it hard for people to move from one city to another. With so much talent, Mr. Sachs writes, "Russia ... has yet to combine the best of its cultural heritage, its technical skills and the advantages of greater economic freedom." Transparency International rates Russia as the 146th least-corrupt country (out of 180) in the world.

Estonia, however, is still the Soviet-bloc country with the best "freedom record" - notwithstanding a difficult year (2009) when gross domestic product fell by 14 per cent. The country was the first of the liberated states of Eastern Europe to adopt a flat tax, starting at 26 per cent but falling to 21 per cent within six years. In the same period, Estonian GDP increased from 34 per cent of the EU average to 65 per cent; and average per capita income more than doubled to $18,800 (U.S.) - high enough for the World Bank to designate Estonia as a "high-income country."

More astonishing was Estonia's refusal to spend its way out of the European economic crisis last year with massive increases in public debt. Estonian national debt still equals only 3.8 per cent of GDP - almost precisely the percentage that now measures Canada's annual federal deficit.

It takes more than low tax rates and limited debt to gain the "advantages of greater economic freedom." But they help. Also necessary, using the criteria that determine the conservative Fraser Institute's annual Economic Freedom of the World rankings, are the absolute size of a country's government, the quality of its legal institutions, the soundness of its currency, the freedom of its citizens to engage in the marketplace, domestically and internationally, and the quality of its regulatory processes.

Judged by these standards, the Vancouver-based research enterprise last year elevated Estonia to its No. 11 position - right above Denmark and Austria.

For the record, with scores expressed on a scale of 1 to 10 (with 10 the highest), Estonia now has an "economic freedom" score of 7.81, a mere 0.08 below eighth-place Canada. Poland, ranked 74th, has a score of 6.78. Russia, ranked 83rd of 141 countries, has a score of 6.50.

Can small differences in economic freedom scores make much of a difference in real life? The Fraser Institute has compiled these rankings (in partnership with researchers around the world) since 1980. Based on a 30-year record of peer-reviewed research, it has calculated that countries in the top quintile (one-fifth) of economic freedom have average per capita incomes of $32,441 - compared with $3,802 in the lowest quintile.

In the top quintile, the average per capita income of the poorest 10 per cent is $9,105 - compared with $896 in the lowest quintile. In the top quintile, average per capita economic growth since 1980 has been 2.4 per cent - compared with 0.9 per cent in the lowest quintile.

Hong Kong has always held the No. 1 position. Three decades ago, the United States was No. 2. It is now No. 6 (score: 8.06), marginally ahead of Canada (score: 7.91). The U.S. will presumably fall further in the Fraser Institute report for 2010 - a result of policies that perversely shrink economic freedom and make economic growth more difficult. It could well fall out of the Top 10 altogether - with sober, and perhaps sombre, implications for Canada.

Next week: The economic freedom of North America.

 

In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular