Like many economics professors, I frequently get emails from a variety of cranks and conspiracy theorists. Occasionally, I get an interesting email question about my research on economic freedom. It’s complicated, but in a nutshell, my work generally shows that countries with more economic freedom (i.e., lower taxes, stronger private property rights, less inflation, freer trade and fewer regulations) perform better on most, if not all, measures of socio-economic progress.
Recently, an email correspondent who lives in Hong Kong asked: How can Hong Kong and Singapore, the countries with the highest economic freedom in the world, also be two places that are “so expensive that you won’t have sufficient funds to have personal financial freedom?” He continued, “I am wondering how we, as people who love free-market capitalism, can reconcile this? How can the ‘best’ (most capitalist) countries in the world also be some of the most difficult to get by in?”
Great question. Here is my reply:
First, it is indisputably the case that average incomes are higher in countries with more economic freedom. And here we are talking about real incomes; the data are adjusted for local prices using the best “purchasing power parity” methods available. While these cost-of-living adjustments are far from perfect, the differences in incomes across countries swamp whatever measurement error might be in the “purchasing power parity” adjustments. Bottom line: It is simply not the case that it is more difficult “to get by in” more economically free places.
The confusion here stems from people with first-world incomes, like those living in Hong Kong, Singapore or other advanced economies.
These individuals may observe cheaper living costs in other poorer, more socialist nations and think: “Wow I could live like a king in Tanzania or Bolivia!” But this person fails to grasp that it is all but impossible for anyone, except the ruling elite, to earn a first-world income in such a country. Does anyone think it is easier for the average Tanzanian who earns, according to World Bank data, just $2,600 a year “to get by” compared to the average Hong Konger who earns $60,000? Yes, a person with the average Hong Kong income would get by better in Tanzania than in Hong Kong, but how many people in Tanzania can earn a Hong Kong-like income? Basically, no one can.
Second, as Adam Smith remarked, “there is a great deal of ruin in a nation.” Even relatively economically free places like Hong Kong and Singapore do tons of foolish things, and nowhere is this more evident than in land-use policies that prevent people from building residential housing, which would keep housing prices down.
Despite doing so much else right in terms of its taxes, trade policies and regulations, Hong Kong is probably the most egregious example in the world. The territory has only 9 million people, making it only a bit larger than Dallas-Forth Worth in terms of population, but its refusal to allow residential housing to be built on 95 percent of the land in Hong Kong is insane. DFW is quite affordable, at least in a relative sense, partly because it is a larger area but mostly because it has relatively liberal building policies. There are many things even relatively free countries do that cause living costs to rise, and these are to be condemned.
In short, it might indeed be better to be rich in a poor, unfree country — if you’re lucky (or corrupt) enough to actually get rich in such a place, but regular people are better off in rich, freer countries.
