Comparing the Economies of All Countries on Earth in 2023

From time-to-time, I compare the economies of all the countries on Earth for which there is data. This serves several purposes. The most important of these is that the comparison shows what kinds of government policies work and which do not. Secondly, it demonstrates that these conclusions are essentially culturally independent and are useful for every country on Earth. Finally, they suggest the reasons why they are culturally independent and what the optimal economic policies (and enabling social policies) should be.

An Assertion and a Program for Proving or Rebutting It

Mostly, the peoples of the world are fighting over how much power should be given to their governments. The more a people allows to governments, the less control they have over their own lives. So these are also fights over how many personal freedoms should be allowed to all the country’s people. All these conflicts ultimately devolve into how much economic power governments possess. After all, when governments run the programs they think best, economic assets must be allocated to support them. In addition, the larger the fraction of a country’s GDP is allocated by government, the smaller the share of national assets is available to maintain or increase new wealth.

In all the ideological brawls we see around the world, there are two major sides with an enormous number of subdivisions. One major side would grant governments enormous power, and the other would strictly limit those powers. In the U.S. those sides are respectively the progressives and the so-called “conservatives.” I put scare quotes around the word conservatives because almost none of them is actually a conservative. They do not fit the definition created by Edmund Burke as being reflexively in support of the country’s elites. Instead, today, they are primarily populists fighting most of the elites. Also, they do not fit the more common definition as being opposed to all change. Both the progressives and the “conservatives” have some things about society they would like to change and some things they would like to conserve. Their lists are just different. The progressives of course have never met a corporation they could not hate. They are almost automatically anti-free market. For a summary of the meanings of these and other ideological terms, see here.

Rather than referring to the American Right as “conservatives,” they are more accurately labeled as neoliberals. A neoliberal is a classical liberal in the mode of John Locke who also believes in free-market capitalism.

I belabor all this only to make it clear what we are talking about. What we want to do is to determine which of the two types of policies, progressive or neoliberal, are best for the nation, and indeed for all nations. I will propose the following assertion, the truth or falsity of which would determine what kinds of policies we should adopt.

Governments lack both the competence and the capability to solve or ameliorate most of societies’ problems.

This is a very broad assertion. How should we go about determining whether it is true or not? I have advertised that it is not only true, but true for all nations. This means I must show that its truth is culturally independent. First, we need a number of figures of merit that show how well a government’s policies are benefiting its citizens. Choices of these figures of merit include per capita GDP, GDP growth rate, the Ginni index, and the United Nations’ Human Development Index.

Second, we need an index that shows how much a government controls society, most particularly its economy. Control of the economy implies control over the rest of society. I will use the Heritage Foundation’s Index of Economic Freedom (IEF).

Thirdly, we need a source for data on all the figures of merit for as many countries as possible. For this purpose, I have mostly used the World Bank and the United Nations. In most of the charts I show below, I will make scatter plots of the nations’ figures of merit versus their index of economic freedom. In any particular plot I will also graph the best fit of some function to the data.

Where the Data Comes From

Almost all the data used in this essay comes from the World Bank. In turn, the World Bank gathered most of it from the Organization for Economic Cooperation and Development (OECD). Some data came from the U.S. Federal Reserve’s Federal Reserve Economic Database (FRED). Some came from the Heritage Foundation’s Index of Economic Freedom.

The Heritage Foundation’s Index of Economic Freedom plays a particularly important role in this discussion. It is a measure of how much a government controls its country’s economy. The index is constructed to have a value of zero when a government has total (or close to total) control of its economy. A value of zero means there is absolutely no economic freedom for the individual citizen. At the other end of the scale, a value of 100 denotes absolutely no government influence on the economy. Needless to say, no actual country will reach either end of the scale.

The Index of Economic Freedom is calculated as a simple arithmetic average of 12 quantitative and qualitative factors. Each one measures a different way in which a government interacts with its country’s economy. They are grouped in four separate categories, which are shown in the list below, with their individual components listed below them.

• Rule of Law
  • Property Rights
  • Government Integrity
  • Judicial Effectiveness
• Government Size
  • Government Spending
  • Tax Burden
  • Fiscal Health
• Regulatory Efficiency
  • Business Freedom
  • Labor Freedom
  • Monetary Freedom
• Open Markets
  • Trade Freedom
  • Investment Freedom
  • Financial Freedom

Click here to see a detailed explanation of the Heritage Foundation’s methodology in calculating the index. For the rest of this essay, I will usually refer to a country’s Index of Economic Freedom simply as its economic freedom. We are now prepared to compare all the nations on Earth for which data is available.

What the Data Tells Us

The source of all assets a country has to solve social and economic problems is its GDP. In particular, we need to know how much can be used for each person. Therefore, we need to see a scatter plot of each country’s per capita GDP versus their economic freedom.

The red curve in this plot is the best fit of an exponential to the scattered data. The fact there are more dots above the fitted curve with IEF greater than 60 demonstrates the growth of per capita GDP with increasing IEF is actually superexponential. This plot is unequivocal in showing that if you want a higher per capita GDP, you want to increase economic freedom and reduce the government’s control of the economy.

The next plot of GDP growth rates versus economic freedom presents something of a problem.

The best fit to the data is a straight line, but the positive slope is rather small. One could argue it does not mean much.

It is well known that economic growth is generally much faster for undeveloped countries than for developed ones. The reason is developing countries have large quantities of unutilized labor and available capital (often from foreign investors). All they need for further development is to put that labor and capital to work. However, as they transition to developed status, most labor and capital have already been used. GDP growth slows. The only way a developed economy can increase growth is to do the harder job of discovering new ways of becoming more efficient. Another way to increase growth for a developed economy is to create new useful products. A more analytical way of explaining this can be found in the following three posts:

• The Solow-Swan Model and Where We Are Economically (1)
• The Solow-Swan Model and Where We Are Economically (2)
• The Solow-Swan Model and Where We Are Economically (3)

Since growth rates are dependent on the level of economic development, we should make three separate scatter plots for three levels of development. If a country’s per capita GDP is less than $20,000 in current U.S. dollars, we will classify it as a developing economy. If its per capita GDP is between $20,000 and $40,000, we will call it an intermediate economy. A per capita GDP of greater than $40,000 will denote a developed economy. By doing this we get the following three plots.

The dotted red curve is the linear best fit to the growth rates of developing countries.

I will not even attempt to find a best fit for this mish-mash. About the only thing that can be said about it is that this group of nations generally have growth rates below those of developing nations. Undoubtedly the strains of the covid pandemic have knocked a lot of countries into transient states.

As advertised, countries with advanced economies generally have smaller growth rates. The trend line still has a positive albeit very small slope. While still increasing with rising economic freedom, their GDP growths increase at a smaller rate with increasing economic freedom than those of developing nations.

It is good to have a large per capita GDP. However, if a large GDP serves a country’s people well, it should be evenly distributed across the population as much as possible. How evenly it is spread is measured by the Gini Index. If the Gini Index were zero, then the GDP would be totaly evenly spread across the population. If it were 100, then only one person in the entire country would possess the entire GDP. The smaller a country’s Gini Index is, the more widely spread the GDP is distributed. Below is a scatter plot of every country’s Gini Index versus its Index of Economic Freedom.

Clearly, as economic freedom increases and the government’s control over the economy diminishes, GDP tends to be more evenly distributed. Why should this be? Why isn’t the economy’s output taken mostly by the rich in accordance with the so-called “Iron Law of Wages?” The answer seems to be that the labor of skilled workers from the low and middle classes is a scarce economic commodity. Companies will bid up wages to attract skilled labor away from other companies. This same factor creates a limit to income inequality arising from profits from capital investment. In addition, most modern industrialized countries have gone through the demographic transition from high birth and death rates to low birth and death rates. In such societies, no longer needing large numbers of children to provide a kind of “social security” in old age, an income increase does not translate automatically into an increase of procreation and a larger supply of labor.

Next, the figure of merit to be considered is the U.N.’s Human Development Index. The HDI is a geometric average of a life expectancy component, an education component, and an income component. Each of these components varies from zero to one, with one being an optimal value. As a geometric average, the HDI will also vary from zero to one, with one being optimal. Zero would be catastrophic for a nation. What the HDI is designed to measure is the capability of a country to give each of its citizens a satisfying life. Below is the scatter plot for all the world’s countries of their HDI versus economic freedom.

Not only does the HDI get better as the government is excluded from control, but the scatter of the countries’ points becomes less.

We can look at the effects of government control over the economy in a somewhat different way. Let us ask what happens to a country’s economic growth when the government’s espenditures increase as a percent of GDP. If we plotted a dot for every country in a scatter plot of their growth rates versus government expenditures as a percent of GDP, we would get an empirical Rahn’s curve.

This curve was originally conceived by Dr. Richard Rahn as a model for what he thought reality would produce with increased government spending. The model is shown below.

The basic idea is as follows: If there were no government spending and therefore no government, we would be living in Thomas Hobbes’ state of nature, with a “war of all against all.” In Hobbes’ famous words, our lives would be “solitary, poor, nasty, brutish and short.”  When government spends less than the optimal amount, increasing the spending for domestic and foreign security, commonly accessed infrastructure, and other necessities improves our ability to cooperate with each other to create wealth.

However, beyond some optimal level of government expenditure, government can not competently and efficiently allocate capital. Precious scarce capital would be wasted and growth rates will fall.Below we have a scatter plot of all the countries’ GDP growth versus their governments spending as a percent of GDP in 2022. Along with it, I have the plot of the same data in 2021.

There are several things to be noted about this comparison. First, although you can, if you squint hard enough, perceive something a Rahn’s Curve for 2022, the data is more scattered than in 2021. I suspect this is mostly due to the lingering bad effects of the Covid pandemic. Nevertheless, the 2022 data does suggest a peak at government expenditures of around 30%. The 2021 data on the other hand suggest a broad peak around 40% of GDP.

Having compared all of the world’s economies, what does it all mean?

What Does All This Say About Our Assertion?

Every single one of a country’s figures of merit at which we looked became better on average as government control over its economy decreased. Per capita GDP, GDP growth rates, the Gini Index, and the U.N.’s Human Development Index all told the same tale. We have decisively demonstrated empirically that governments have neither the competence nor the capability to solve the most important of our problems.

But then, all American citizens should understand this conclusion through their own experience. Despite all the happy talk from Biden about how well his economic policies are working, the American middle and lower classes are finding it harder to live on what they earn. Prices are still rising.

Although we know the assertion to be empirically true, can we explain why it is true? If you wish to find explanations, read the posts How is the Weather Like a Country’s Economy? and How Progressive Democrats Try to Violate the Classical Laws of Economics.

Government cannot be the solution of our problems. Government is the problem.

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