Economic Freedom in Decline

Thomas Benjamin Kennington: The pinch of poverty (1889) // Public domain

Economic freedom in the world has declined to a record low, shows the Economic Freedom Index published by the Fraser Institute.

The recent World Economic Freedom Index is based on data for 2020 but it shows a clear trend: as the government sector grows, it is becoming harder for citizens and businesses to breathe. The Fraser Institute analysts say this is largely due to the COVID-19 pandemic. The Institute refrains from assessing whether or not governments have taken appropriate measures to stop the spread of the coronavirus, which is a matter for scientists and health organizations.

The recorded rapid growth in government spending, bans on the movement of people, and restrictions on the activities of companies and organizations have undoubtedly contributed to the sharp decline in economic freedom worldwide. We are now in the same hole we fell into during the 2008 financial crisis. Only this time the hole is three times bigger.

Lithuania scored 7.82 out of 10 in the 2022 World Economic Freedom Index. This knocks Lithuania out of the top ten countries with the strongest defense of economic freedom and places Lithuania in the 12th position. Lithuania received the highest score for monetary policy stability (9.2 out of 10) and the lowest by government size (6.6 out of 10) and labor market and business regulation (7.7 out of 10).

The size of the government sector dragged Lithuania back the most. In this category, it dropped from 39th place before the pandemic to 87th out of 165 countries; thus, it is now in the same league with Brazil, Botswana, and Zambia. The size of government indicator measures the extent to which a country supports personal choice and the market, and the extent to which it places itself in the hands of political authorities. Obviously, the desire to prevent the spread of the COVID-19 virus led the government to impose both restrictions on private activity and to increase public spending.

Regulation remains a major area of concern for Lithuania. According to the Economic Freedom Index, the administrative and regulatory burden on businesses remains heavy, and the space to create and respond flexibly to changing market needs is limited. Lithuania ranks 21st in terms of administrative burdens on businesses and 74th in terms of labor market regulations, including recruitment and dismissal procedures. Stringent restrictions on employment relationships and excessive bureaucracy never play out well, but in times of economic hardship, they place burdens on people and businesses that are simply too hard to lift.

Hong Kong and Singapore share the top spots in the World Economic Freedom Index, followed by Switzerland and New Zealand. Denmark rounds out the top five.

Estonia moved from the 13th to 8th place in the Index, Latvia from 20th to 16th, and Poland dropped from the 75th to 80th position. Argentina, Syria, Zimbabwe, Sudan, and Venezuela ranked at the bottom of the World Economic Freedom Index. Japan ranks 12th, Germany 25th, Italy 44th, France 54th, Mexico 64th, Russia 100th, India 89th, and China 116th in the World Economic Freedom Index.

In 2020, the growing role of the state in the economy and restrictions on economic activity at the expense of the incentives to work and enterprise were among the main reasons why so many countries underperformed in the Economic Freedom Index. The economic situation has only aggravated in the last two years, so we can hardly expect much of an improvement. Still, this index serves as a reminder of what direction needs to be taken to help people and businesses breathe in times when the odds are not on their side.

The Fraser Institute publishes the World Economic Freedom Index every year in partnership with independent research institutes in the Economic Freedom Network from nearly 100 countries. The Lithuanian Free Market Institute is a member of the Network.

The following indicators are used to assess a country’s economic freedom in five areas: the size and coverage of the government sector, the rule of law and protection of property rights, stable monetary policy, freedom of foreign trade, and regulation of borrowing, the labor market, and business.

See Economic Freedom of the World 2022 ranking

Read the full publication Economic Freedom of the World 2022

Not only theory but also practice shows that there is a direct link between economic freedom and prosperity. Analysts at the Fraser Institute pointed out that it is the most economically free countries that provide the best living conditions for their citizens. The index shows that the income of a person living in the quarter of the most economically free countries is almost 7 times higher than that of a person living in the quarter of the most economically constrained countries. Life expectancy differs by almost 14 years between the most and least free countries.

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