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Finance & Innovation

What is economic freedom and does it really help lower poverty rates?

The Fraser Institute is a Canadian think tank with the goal of improving Canadians’ lives through studying the effects of government policies around the world. Since 1996 they have been undertaking an annual study that ranks how economically free countries around the world are and how that affects the quality of life that citizens experience.

So, what is economic freedom?

According to the Fraser Institute economic freedom is defined by the following: personal choice, voluntary exchange, freedom to enter markets and compete, and security of the person and privately owned property.

Basically, economic freedom looks at how free businesses are to take part in the economy and whether people and property rights given adequate protection.

Countries that have high levels of economic freedom also tend to have lower levels of poverty, higher literacy rates and citizens who live long and healthier lives.

However, this kind of ranking system definitely has it’s detractors. Some, like Jeffrey Sachs, say that the notion that greater economic openness actually results in better growth is flawed and that the two concepts are not necessarily as related as the index makes them seem. Sachs points to Switzerland, which is ranked highly in terms of economic freedom (#4 according to the Fraser Institute) but has sluggish growth and China, which has a low ranking (#111) but has high growth. Switzerland has better quality of life than China, but it is because they are more economically free? Not everyone is convinced.

Others have accused this kind of ranking system of simply measuring how free businesses are from accountability and argue that indexes that measure economic freedom have little to do with freedom as we would typically think of it (being free as a person, rather than free to do business).

Both the US (ranked 16th) and Canada (ranked 9th) both have high levels of economic freedom and a high quality of life, but sacrificing measures that protect citizens and the environment from exploitation in order to make them more economically free will not benefit the majority of people.

Initially, economic freedom seems like an ideal that all countries should be striving for, but upon closer inspection, there are big issues with using economic freedom and even economic growth as a catch-all way of measuring progress.

Issues like income inequality, unequal access of resources such as education and health care can leave a large portion of a population behind while a small minority benefit from a seemingly wide open economic system.

Rankings like the Fraser Institute’s Economic Freedom of the World Report can help us understand how countries differ in their approach to the economy, but it’s not the kind of ranking that countries should be blindly trying to climb, without looking at the potential consequences that can go along with being an economically free country.