The Wall Street Journal_Foreword
Content
Foreword
he world economy has had another stellar year, growing in the neighborhood of 5 percent and continuing what has become the strongest four-year expansion since the 1970s, defying war, terrorism, and $75-a-barrel oil. This is testament in part to the policy lessons highlighted these past 13 years in this Index of Economic Freedom. As we greet 2007, however, there are warning signs that adherence to those lessons may be starting to fray. On the surface, to be sure, the economic news continues to be mostly good. While the United States is shifting to a slower pace of growth following the boom from mid-2003 to early 2006, there continues to be no sign of recession. The major issue in the next year is whether the decline in housing will be so deep that it sinks the larger economy. That answer depends in part on how much the Federal Reserve must raise interest rates to compensate for its mistake of keeping monetary policy so loose for too long in 2003 and 2004. The early evidence is that rising corporate profits and a robust labor
T
market will offset the housing slump, but that is no certainty. China and India are roaring ahead, notwithstanding the return of a center-left government in New Delhi that has tried to temper the pace of economic change. Center-left isn’t the economic drag it used to be even in India, however, and the emergence of India as a global economic player continues. Japan seems finally to have shaken its decade-long deflation, and even Old Europe left the doldrums in 2006, albeit in relatively modest terms. The pace of world trade and investment continued to accelerate, and millions more of the world’s poor entered the middle class. One lesson of this Index, however, is that what really matters is the direction of policy: that is, the change at the margin. And on that score, there is some reason for worry about an erosion in economic freedom. Start with the U.S., where the congressional election campaign created bipartisan policy stampedes against foreign investment from China and
ix
Dubai. Congress, in its lack of wisdom, is also seeking to add even more political hurdles to foreigners who want to create jobs by investing in America. The election also moved Congress to the left economically, with strong new voices rejecting the free trade consensus of the past 50 years. President Bush retains his office lease and veto pen for two more years, but the most he may be able to accomplish is to prevent any major policy mistakes. He will almost certainly not be able to extend his trade promotion authority, for example, when that expires in mid2007. Political gridlock is probably the best we can expect until the policy showdown that is likely to take place in the 2008 presidential contest. This is all the more reason for the world’s policymakers to complete the Doha Round of trade talks as soon as possible. At this writing, however, the talks remain caught between a French-led Europe that refuses to reduce its farm subsidies and an assertive bloc of developing nations that won’t bend on manufacturing and services without such a European concession. This is short-sighted in the extreme, and one question is whether this is a temporary setback due to weak political leadership, or whether it reflects a larger popular backlash against the dynamic forces of globalization.
My guess is the former, but I would prefer not to test that proposition in the teeth of a global recession. This policy drama is all the more reason to welcome the refinements in this year’s Index. The shift to a 0–100 freedom scale allows for more nuanced distinctions among countries. The introduction of a measure for labor freedom is also notable and informative because labor mobility has clearly become crucial to national prosperity and competitiveness. Merely contrast the job creation in the U.S., where labor mobility is high, with the record in France and Germany to prove that point. The slight overall decline in average world economic freedom—down 0.3 percentage point from a year earlier—also suggests the policy setbacks I have described. There are no permanent victories in politics or economics, which is one reason that this Index exists to chronicle annual progress or regression. The next year is one to watch carefully for setbacks and to remind forgetful politicians of the benefits of economic freedom.
Paul A. Gigot Editorial Page Editor The Wall Street Journal November 2006
x
2007 Index of Economic Freedom
he world economy has had another stellar year, growing in the neighborhood of 5 percent and continuing what has become the strongest four-year expansion since the 1970s, defying war, terrorism, and $75-a-barrel oil. This is testament in part to the policy lessons highlighted these past 13 years in this Index of Economic Freedom. As we greet 2007, however, there are warning signs that adherence to those lessons may be starting to fray. On the surface, to be sure, the economic news continues to be mostly good. While the United States is shifting to a slower pace of growth following the boom from mid-2003 to early 2006, there continues to be no sign of recession. The major issue in the next year is whether the decline in housing will be so deep that it sinks the larger economy. That answer depends in part on how much the Federal Reserve must raise interest rates to compensate for its mistake of keeping monetary policy so loose for too long in 2003 and 2004. The early evidence is that rising corporate profits and a robust labor
T
market will offset the housing slump, but that is no certainty. China and India are roaring ahead, notwithstanding the return of a center-left government in New Delhi that has tried to temper the pace of economic change. Center-left isn’t the economic drag it used to be even in India, however, and the emergence of India as a global economic player continues. Japan seems finally to have shaken its decade-long deflation, and even Old Europe left the doldrums in 2006, albeit in relatively modest terms. The pace of world trade and investment continued to accelerate, and millions more of the world’s poor entered the middle class. One lesson of this Index, however, is that what really matters is the direction of policy: that is, the change at the margin. And on that score, there is some reason for worry about an erosion in economic freedom. Start with the U.S., where the congressional election campaign created bipartisan policy stampedes against foreign investment from China and
ix
Dubai. Congress, in its lack of wisdom, is also seeking to add even more political hurdles to foreigners who want to create jobs by investing in America. The election also moved Congress to the left economically, with strong new voices rejecting the free trade consensus of the past 50 years. President Bush retains his office lease and veto pen for two more years, but the most he may be able to accomplish is to prevent any major policy mistakes. He will almost certainly not be able to extend his trade promotion authority, for example, when that expires in mid2007. Political gridlock is probably the best we can expect until the policy showdown that is likely to take place in the 2008 presidential contest. This is all the more reason for the world’s policymakers to complete the Doha Round of trade talks as soon as possible. At this writing, however, the talks remain caught between a French-led Europe that refuses to reduce its farm subsidies and an assertive bloc of developing nations that won’t bend on manufacturing and services without such a European concession. This is short-sighted in the extreme, and one question is whether this is a temporary setback due to weak political leadership, or whether it reflects a larger popular backlash against the dynamic forces of globalization.
My guess is the former, but I would prefer not to test that proposition in the teeth of a global recession. This policy drama is all the more reason to welcome the refinements in this year’s Index. The shift to a 0–100 freedom scale allows for more nuanced distinctions among countries. The introduction of a measure for labor freedom is also notable and informative because labor mobility has clearly become crucial to national prosperity and competitiveness. Merely contrast the job creation in the U.S., where labor mobility is high, with the record in France and Germany to prove that point. The slight overall decline in average world economic freedom—down 0.3 percentage point from a year earlier—also suggests the policy setbacks I have described. There are no permanent victories in politics or economics, which is one reason that this Index exists to chronicle annual progress or regression. The next year is one to watch carefully for setbacks and to remind forgetful politicians of the benefits of economic freedom.
Paul A. Gigot Editorial Page Editor The Wall Street Journal November 2006
x
2007 Index of Economic Freedom
