Criticisms
The claimed correlation between economic freedom and growth has been critically analysed by a number of studies. De Hann and Siermann find that the relationship is not robust, while Heckelman and Stroup argue that the weighting procedure used in the construction of the index is arbitrary. They examine the components of the index individually and find that many – including a low top marginal tax rate – are negatively, rather than positively correlated with economic growth.
A frequent criticism is that China, and other developing nations, have high growth rates but relatively low economic freedom. Developing nations can have higher growth rates than developed nations, as they have cheap labor and can import investment, technology and organizational skills from rich countries.
Independent research does not support all of the ideals of laissez-faire capitalism. When examining the subcomponents of the index, any positive effect that a low level of taxes might have is more disputed than the importance of rule of law, lack of political corruption, low inflation, and functioning property rights. Many north European nation, such as Iceland (# 70), Denmark (# 15), Finland (# 11) and Sweden (# 39), have extensive welfare states, which are strongly opposed by advocates of laissez-faire. It is argued these countries have less regulation than most others, and research using the Ease of Doing Business Index suggests that the effect of business regulations is more important than government consumption. The Global Competitiveness Report looks at several other factors that effect economic growth such as infrastructure, health, and education.
The World Bank is a strong supporter of the importance of economic growth for reducing poverty but does not believe that laissez-faire policies, if they allow large inequalities of wealth to develop, are an effective way to achieve this goal. It argues that an overview of many studies shows that:
- Growth is fundamental for poverty reduction, and in principle growth as such does not seem to effect inequality
- Growth accompanied by a more egalitarian distribution of wealth is better than growth alone
- High initial income inequality is a brake on poverty reduction
- Poverty itself is also likely to be a barrier for poverty reduction; and wealth inequality seems to predict lower future growth rates
Read more about this topic: Economic Freedom Of The World
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