January 4, 2006 Wednesday 12:44 AM EST

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Economic Freedom Advances, 2006 'Index of Economic Freedom' Shows

WASHINGTON, Jan. 4. The world is economically freer today than it was a year ago, according to the 12th annual Index of Economic Freedom, released today by The Heritage Foundation and The Wall Street Journal -- and that means greater prosperity for those countries that embrace open markets.

The Index findings are straightforward, according to editors Marc A. Miles, Kim R. Holmes and Mary Anastasia O'Grady. "The countries with the most economic freedom also have higher rates of long-term economic growth and are more prosperous than are those with less economic freedom," the report says.

Of the 157 countries graded in the 2006 Index, 99 improved their overall scores, compared to 51 whose scores worsened and five that remained unchanged. Overall, 20 are classified as "free," 52 as "mostly free," 73 as "mostly unfree" and 12 as "repressed."

Countries receive a 1-5 rating -- with one being the best -- on 10 broad measures of economic freedom: trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation and informal (or black) market activity. Those scores are averaged to create an overall score. The top finishers are classified as free economies, followed by mostly free, mostly unfree and repressed economies.

Hong Kong and Singapore, the economic jewels of Asia, finished 1st and 2nd in the rankings for the 12th straight year. Ireland overtook Luxembourg and Estonia and moved up to No. 3, and Iceland moved up three spaces to No. 5, where it is tied with the United Kingdom. The United States improved enough to re-enter the top 10 after falling out last year for the first time ever. It's tied for 9th worldwide with Australia and New Zealand.

The Most Free

Hong Kong (1st)

Singapore (2nd)

Ireland (3rd)

Luxembourg (4th)

Iceland (5th)

United Kingdom (5th)

Estonia (7th)

Denmark (8th)

Australia (9th)

New Zealand (9th)

United States (9th)

The Least Free

Turkmenistan (148th)

Laos (149th)

Cuba (150th)

Belarus (151st)

Libya (152nd)

Venezuela (152nd)

Zimbabwe (154th)

Burma (155th)

Iran (156th)

North Korea (157th) The links between countries that embrace economic freedom and prosperity are long established. Those in countries with "mostly unfree" or "repressed" economies earn 70 percent less than those in countries with "mostly free" economies, the Index editors say. And those in "free" economies enjoy a per capita income more than twice what those in "mostly free" economies earn.

Here are the economies that have made the greatest changes since the 2005 Index:

Top 10 Improved (Score Change)

Pakistan (0.40)

Romania (0.39)

Kyrgyz Republic (0.35)

Suriname (0.33)

Armenia (0.32)

Turkmenistan (0.32)

Georgia (0.31)

Turkey (0.30)

Tajikistan (0.29)

Kazakhstan (0.26)

Top 10 Worsened (Score Change)

Iran (0.30)

Italy (0.22)

Guinea (0.22)

Bolivia (0.21)

United Arab Emirates (0.20)

Oman (0.20)

Equatorial Guinea (0.16)

Sri Lanka (0.16)

Egypt (0.16)

El Salvador (0.15)

Nicaragua (0.15)

Over the last 10 years, more and more countries have embraced policies that promote economic freedom. As a result, this year the average Index score falls into the "mostly free" (2.98; the cutoff is 3) category for the first time -- although the median score (3.04) remains just over the line in the "mostly unfree" category.

Sadly, this message doesn't seem to get through where it's needed most. The prosperous countries of the North America/Europe region -- spurred by rapid moves toward economic freedom by the former Soviet republics -- show consistent improvement. But regions such as Latin America, the Middle East and Sub-Saharan Africa, which, to its credit, continues to improve on its Index scores -- continue to lag behind in prosperity because of the protectionist economic policies of their governments.

North America and Europe

The world's most economically open region holds seven of the world's 11 freest economies and 15 of the top 20. Thirty-three countries, led by Austria, Germany and Cyprus, which joined the ranks of "free" economies, improved their scores; only 10 declined. Romania was the region's most improved country and the world's second most improved, and Georgia joined the ranks of "mostly free" economies for the first time. The region received a boost when the 10 eastern European countries that joined the European Union in May 2004 adopted its more open trade policies (albeit unevenly) and improved as a result. Belarus remained last in the region in economic freedom.

Latin America and the Caribbean

Economic freedom improved marginally this year with 15 countries improving on their Index scores and only 10 declining. Chile, the region's most dynamic economy, remains its only member of "free" economic club. The region also includes three "repressed" economies -- Cuba (which showed some improvement), Haiti and Venezuela. It also includes three countries among the 10 that showed the biggest declines this year -- Bolivia, El Salvador and Nicaragua, which slipped from the "mostly free" to the "mostly unfree" category.

North Africa and the Middle East

The only region to experience a net decline in economic freedom in last year's Index, North Africa and the Middle East saw another decline this year as seven of 11 countries recorded worse scores. Bahrain declined for the second straight year but remained the freest in the region despite deriving 80 percent of its revenues from the state-controlled oil company. Iran and Libya remain the two least-free economies, but they're moving in different directions. Libya is still consider "repressed" due to state-dominated industry, trade protectionism and heavy regulation, but it was the most improved in the region for the second straight year, thanks to better scores in fiscal burden of government, capital flows and foreign investment and banking and finance. Iran, meanwhile, continued its downward spiral -- it recorded its lowest score since 2002 -- because entrenched bureaucrats and Islamic hard-liners continue to conspire against reform.

Sub-Saharan Africa

The region still lacks a free economy, but one, Botswana, did vault into the world's top 30, with improved scores on government intervention and fiscal burden of government. Regional improvement did continue, with economic freedom advancing in 25 countries and declining in just 12. Angola and Burundi were ranked in the Index for the first time. Benin was the region's most improved, while Guinea suffered the biggest decline.

Asia-Pacific

This region remains a study in contrast. Hong Kong and Singapore continue to lead the world in economic freedom, and the region includes four of the nine freest economies. In all, 19 countries in the region improved their Index scores from 2005, and just nine declined. Also, four Asia-Pacific countries -- Pakistan, Kyrgyz Republic, Turkmenistan and Kazakhstan -- are among the 10 most improved. Uzbekistan and Tajikistan no longer qualify as "repressed." But the region also is home to more "repressed" economies than any other, including last-place-finisher North Korea.

The Index was edited by Marc Miles, director of the Center for International Trade and Economics at The Heritage Foundation, Kim Holmes, Heritage's vice president for foreign affairs, and Mary Anastasia O'Grady, who is a member of the Journal's editorial board and edits the "Americas" column. Copies of the 2006 Index (422 pp., $24.95) can be ordered at http://www.heritage.org/index or by calling 1-800-975- 8625.

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Contact: Jim Weidman of the Heritage Foundation, 202-675-1761 or

jim.weidman@heritage.org, Robert Christie, 212-416-2636 or

robert.christie@dowjones.com, Melanie Spencer (Europe), 44-20-7842-9685 or

melanie.spencer@dowjones.com, Joe Spitzer (Asia), 852-2831-6482 or

joe.spitzer@dowjones.com, all for the Wall Street Journal