Every person, no matter how poor or how rich, has a dream. Some dream of someday owning a huge business. Others dream of owning a home, traveling, sending their children to a good school, buying a car, or just having food on the table every day. Still others dream of a professional career. At the same time, people have skills that they can use to work, save, and achieve their dreams. In some countries, achieving these dreams is easier than in others. At the heart of our Index of Economic Freedom is the assessment of how difficult it is to achieve those dreams because of the obstacles that ordinary people face in different parts of the world in trying to fulfill their life goals.
So begins the introduction to the latest Index of Economic Freedom Report published by the Heritage Foundation. Economic Freedom is the opposite of Central Planning. Economic Freedom means Capitalism. Central Planning is Communism. In between is Socialism and a whole lot of other economic models most of which are invented ad hoc by dictators.
But it is clear from the report, yet again, that Economic Freedom and individual prosperity are linked as this graph illustrates.
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Let's take a look at some of the Countries surveyed.
The US for instance has a GDP of $10.7 trillion with a per capita income of $36,000 dollars. It's growth rate is 4.4% per year.
In contrast France has a GDP of $1.39 trillion. It's per capita income is $22,000 and it's growth rate is 2.1%.
What is the difference? Economic Freedom.
An over-regulated labor market and overly intrusive state remain the biggest drags on France's economy. France has striven to preserve its statist political economy culture by adopting protectionist trading stances. As a result, growth has remained sluggish (2.1 percent in 2004), the unemployment rate is persistently high.
It's tax rate is also high.
According to Deloitte, France's top income tax rate is 48.1 percent, down from the 49.64 percent reported in the 2005 Index. The top corporate tax rate has been reduced to 33.83 percent from 34.3 percent
Compare this to the US tax rate under the Republican controlled Congress.
According to Deloitte, the United States' top federal income tax rate is 35 percent. The top corporate tax rate is also 35 percent. In 2004, government expenditures as a share of GDP decreased 0.5 percentage point to 36 percent, compared to a 0.2 percentage point increase in 2003.
And if you don see the difference the tax rate and anti-Statist policies make, take a look at the UK.
The United Kingdom, with its strong rule of law and political and economic freedom, has become the world's fourth-largest economy, up from sixth largest when Prime Minister Tony Blair assumed power. New Labour's insistence on not undoing the Thatcher revolution continues to pay dividends. GDP grew by 3.1 percent in 2004.
The UK has a per capita income $4,000 higher than France and a growth rate that is impressive. Their tax rate is also lower than France's
The United Kingdom's top income tax rate is 40 percent. The top corporate tax rate is 30 percent.
It's a fact that Statist, top down planning is antithetical to economic growth and prosperity.
Yet, knowing this, the vast majority of aid to poor countries by the United Nations and other world organizations comes in the form of top down planning and as a result it has been a dismal failure. A failure to the tune of $2.3 trillion dollars.
PERHAPS the most important question of our time is why the West's efforts to help the world's poorest people have been so disappointing and even counterproductive. In the past 50 years, we have spent $US2.3 trillion on foreign aid, to disturbingly little effect. An important new book suggests this has had a lot to do with the arrogance of the "big push" approach favoured by many development economists and organisations such as the World Bank and the United Nations.
William Easterly is a professor of economics at New York University. He used to be a believer: for 16 years he was a research economist at the World Bank and worked extensively in Africa, Latin America and Russia. What changed his attitude was the growing amount of research showing the failures of aid, described in his book The White Man's Burden (Penguin in the US, not published in Australia).
Easterly says the $US2.3 trillion hasn't achieved what it should have. This is because much of it has been given as part of a never-ending series of internationally planned and co-ordinated "big plans". He believes the alternative would be to encourage more market-oriented activities among the poor themselves.
Those, such as Bono, Bob Geldof and the economist Jeffrey Sachs, who still advocate the traditional approach he calls Planners, while those looking for a bottom-up alternative are Searchers. According to Easterly: "In foreign aid, Planners announce good intentions but don't motivate anyone to carry them out; Searchers find things that work and get some reward. Planners raise expectations but take no responsibility for meeting them; Searchers accept responsibility for their actions … Planners at the top lack knowledge of the bottom; Searchers find out what the reality is at the bottom."
Good economies have economic freedom. Economic freedom is by definition distributed in nature as opposed to centralized. By extension it would seem to make sense that when giving aid to foreign countries, it should be done in such a way as to encourage economic growth. Give a man a fish and all that.
Centralized economic planning has never been shown to work no matter how often people claim that the opposite leads to people getting rich on the backs of "the Workers". It's a myth and it doesn't work.
Political leader in this country who advocate such models are as wrong as the the Bono's of the world who think that giving money to dictators and thugs is a way to end poverty.
The evidence is against theories.
