Free Markets Unquestionably Help the Poor

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For the last several decades, the CATO Institute and the Fraser Institute have produced an annual report on economic freedom in the different countries around the world. This report is a fabulous reference for finding countries that truly believe in free markets and practice what they preach. In this year's report, the top five countries are: Hong Kong, Singapore, New Zealand, Switzerland, and the United Arab Emirates. If you are looking for a good escape hatch for when the U.S. is completely ruined or searching for a great country to start a business, the report can help you out. It is also an important piece of evidence about the economic importance of economic freedom.

The Economic Freedom of the World report measures economic freedom in five areas: the size of government, the legal system and property rights, the soundness of money, the freedom to trade internationally, and the amount of regulation. Ratings in each of these areas are based on subcomponents and then the ratings in the five areas are combined into a single composite ranking.

The report clearly documents that the countries with more economic freedom experience higher rates of economic growth over the long run. The countries are broken into quartiles (one-quarter of the countries in each group) from those with the least to most economic freedom. The least free quartile experienced economic growth of 1.09 percent from 1991-2011. The next quartile grew at an average rate of 2.81 percent. The third group grew at 3.15 percent per year. Finally, the quartile with the countries with the highest amount of economic freedom grew at an average annual rate of 3.69 percent. Clearly, if a country wants to get richer, policies that enhance economic freedom are good ones to follow.

In direct contradiction to the claims of most liberals, more economic freedom is good for the poor, not bad. The report clearly shows that the average income earned by the poor is much higher in countries with more economic freedom. To examine the fate of the poor, the report looked at the average income of the poorest 10 percent of the people in a country in the year 2011. The countries with the least economic freedom had a poor with an average income of only $932. This compares to the quartile of countries with the most economic freedom whose poor earn an average of $10,556 per year. It sure looks better to be poor in a country with economic freedom.

In case people think that the reason for the enormous difference in incomes of the poor described above is simply because rich countries have more economic freedom, the report also looks at the income share of the poor in countries based on their economic freedom. The share of income earned by the poorest 10 percent is a measure of income inequality and does not depend on the level of income in the country so it is easier to compare rich and poor countries fairly using this measure.

In the quartile of countries that have the least economic freedom, the poorest 10 percent earned 2.57 percent of the income. The countries in the two middle quartiles had poor people who earned 2.34 and 2.28 percent of the total income. In the quartile of countries with the most economic freedom, the poor earned 2.76 percent of the income. Thus, the poor not only earned the highest average income in the countries with the most economic freedom but also earned a slightly larger share of the income pie. While the difference in the poor's share of the pie is small across different levels of economic freedom, the difference in average income is enormous. Getting the same share of a bigger pie is clearly a better deal. Either way you look at it, economic freedom is good for the poor.

The common misperception among liberals (and many poor people) that more government interference in the market helps the poor. However, an annual cross-country study has again shown that economic freedom helps both to increase economic growth and decrease income inequality. Free markets lead to more economic growth, so the economic pie is bigger. Free markets also result in the poorest members of society getting a bigger piece of that bigger pie. Flying in the face of conventional wisdom, it is economic freedom that leads to prosperity for all, not government meddling.

Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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