U.S. Slips on Economic Freedom Index (now behind Australia, Ireland and New Zealand)

Seeking Alpha ^ | Feb 23,2009 | Carl T. Delfeld

[SeekAndFind]

It is incredibly difficult in turbulent markets to look ahead with the big picture in mind. Let's give it a try.

I have been following for some time the annual report on the Index of Economic Freedom published by the Heritage Foundation and the Wall Street Journal. It ranks countries based on a grading system that includes ten freedoms such as property rights protection, investment freedom, tax rates, government intervention in the economy, business freedom, freedom from corruption and monetary, fiscal and trade policy.

The idea is not just to rank countries but to track movement both up and down and to highlight the proposition that freedom and prosperity are highly correlated.

Here are the top twelve countries for 2009 and their corresponding ETF.

1) Hong Kong (EWH)

2) Singapore (EWS)

3) Ireland (IRL)

4) Australia (EWU)

5) New Zealand (up one slot)

6) United States (SPY) (slipped from #5)

7) Canada (EWC)

8) Denmark

9) Switzerland (EWL)

10) United Kingdom (EWU)

11) Chile (ECH) (slipped from #8)

12) Netherlands (EWN)

The average score for the 183 countries that were ranked was roughly what it was last year. It is interesting to note that all of the top seven slots are countries formerly associated with the British Empire (sorry, Mr. Jefferson the Francophile, it looks like Alexander Hamilton was right on, France is #48) and that half of the ten top ranked countries hail from Europe. Egypt, Mauritius and Mongolia were the three countries that moved the most up the rankings.

I was a bit surprised that some well respected economies as well as fast-growing emerging markets with high-flying stock markets did not move up much at all and actually had rather poor rankings.

Here are just a few examples.

#19 Japan (down two slots)

#25 Germany

#23 Austria (up 7 slots)

#49 Mexico (down 5 slots)

#58 Malaysia (down 7 slots)

#54 Thailand

#105 Brazil

#123 India (down 8 slots)

#131 Indonesia (down 12 slots)

#132 China (down 6 slots)

#144 Russia (down 10 slots)

This brings us to the relationship between stock market performance and the degree of economic freedom. Cynics might point to the fact that Ireland (#3) has been perhaps the worst performing market during the last year and that Chile has been sliding and Singapore has also hit a rough patch. Meanwhile, the hottest markets of the last few years were three countries ranked below #100; Brazil, India, China & Russia also so known as the BRICs.

But wait just a darn minute. First, we need a much longer perspective than just a year or even a few years to test whether this divergence is sustainable. For example, both the Ireland and Chile markets outperform any of the BRIC countries if you use a five-year time frame. Plus the MSCI emerging markets index in U.S. dollar terms is down 20% year-to-date.

The other interesting angle is just how good some of these emerging markets could perform with only marginal progress in all or some of these economic freedom categories. My opinion is that it is very unlikely that China and India can maintain double-digit growth rates without addressing these issues as soon as possible.

Then you need to look at per capita income levels. The top 20% of countries ranked have per capita incomes twice that of the next 20% and a stunning five times that of the bottom 20%. It is time for economic freedom to trickle down and the sooner the better.

And don't forget America in the #6 slot. The record of stock markets during a recession is sometimes surprisingly quite good. In the nine U.S recessions (zero to negative growth) since World War II, in four of those recessions the stock market actually soared: 40% in 1954, 22% in 1961, 30% in 1980, and 30% in 1991.

It is a tough and tricky time to put new capital to work, but why not start with the freest economies in the world?

[madison10]

...at least we’re not being Mexico yet.

[Red6]

Welcome to the Peoples Republic of America.

We are soooooo screwed economically and in security matters.

But hey, there's an upside. The French like us more now!