Economic Freedom And Innovation – Why We Should All Be Worried
By Ed Miseta, Chief Editor, Clinical Leader
By Ed Miseta, editor, Outsourced Pharma and Clinical Leader
Are you concerned about the ranking of the United States in regard to the Economic Freedom of the World Annual Report? If not, you should be – and here’s why. Economic freedom is not just about politics or tariffs or regulations. It is about people. It is about being able to work where you want, when you want, trade the way you want, and live in a society where you are protected from others. It is also about the level of your health and your life expectancy.
Near the top of my list of favorite living economists (believe it or not, I do have such a list), would be Professor Bob Lawson. Dr. Lawson holds the Jerome M. Fullinwider Endowed Centennial Chair in Economic Freedom in the O’Neil Center for Global Markets and Freedom in the Cox School of Business at Southern Methodist University. In short, he is a smart guy and an expert on the subject of economic freedom.
He is also co-author of the Economic Freedom of the World Annual Report, which ranks countries from around the world (144 in all) on their level of economic freedom, defined as the ability of individuals to conduct transactions on their own behalf without the interference by others (i.e. government). The key ingredients of economic freedom measured by the report are:
• personal choice;
• voluntary exchange coordinated by markets;
• freedom to enter and compete in markets; and
• protection of persons and their property from aggression by others.
Things that would lead to greater economic freedom include free trade, smaller government, lower taxes, and a sound money supply. Things that would cause your economic freedom to be reduced include tariffs, inflation, government bailouts, eminent domain, and price controls.
Anyone involved in innovation and manufacturing should be concerned about economic freedom, including individuals employed by pharma companies, CMOs and CROs. Things that infringe on our economic freedom also infringe on ability to manufacture, invest, reinvest, grow, compete, and most importantly, innovate.
So knowing that, where do you think the “land of the free” ranks in this latest report? Number one, two, or three? Top five? Would you be shocked to learn the U.S. is no longer even in the top 10? Unfortunately, in the latest (2012) report, we barely make the top 20.
Number one, two, and three are Hong Kong, Singapore, and New Zealand, in that order. On a scale of 1 to 10 (1 being least free and 10 most free), all three have a rating of over 8.35. Hong Kong, which has a top tax rate of 15%, has a ranking of 8.90. France, which just raised its top tax rate to 75%, ranks 47th with a score of 7.32. At the bottom of the list are Zimbabwe, Myanmar, and Venezuela, all with scores less than 4.35.
The report is full of numbers, but as mentioned earlier, this is really about people and their standard of living. Countries with the highest levels of economic freedom have the highest levels of economic growth, income, and wealth. They also have the lowest incidence of disease, the cleanest environments, and the longest life expectancies. Citizens of the freest countries also live, on average, 20 years longer than citizens of the least free countries.
In the pharmaceutical world, innovation is very important (see A Call To Action From Celgene’s CEO, Life Science Leader, April 2013). Recently Professor Lawson and I discussed economic freedom and its links to innovation. “The correlation between economic growth and innovation is very clear,” he says. “Numerous reports have been published on the topic, showing that higher levels of economic freedom lead to greater competition. That competition leads to greater innovation, which then drives economic growth. For example, if we had one company producing cell phones, your phone would most likely not have a camera, video recorder, text messaging capability, or ability to access the web. It is the competition between these companies, and their desire to sell more phones than their competitors, that drives the innovation. Economic freedom is the engine that allows more companies to get into the market and compete against each other.”
Where exactly does the U.S. rank, and what kind of trend are we seeing? You may want to sit down for this. In 2000 when George W. Bush was elected president, the U.S. ranked number 3. By the end of his second term we had dropped to number 7. A year later we were number 10. In the most recent report we plummeted to number 18. Canada, for comparison purposes, is tied for fifth.
Where we have been is less important than where we are going. Unfortunately, since that last report, government deficits and debt have increased, taxes have gone up, and the minimum wage will most likely be increasing. If we continue this downward trend, it will not be good news for growth OR innovation. It seems the “land of the free” is becoming less so each year. For more information, or to download a free copy of the report, go to www.freetheworld.com.