Comparing the Economies of All Countries on Earth in 2021

We need to look around our world periodically to see what works for societies, and what does not. I started to do this, using statistics from a variety of sources, in June 2016 with the post Comparing the Economies of All Countries on Earth. I continued this exercise with the essays Comparing Economies of All Countries on Earth in 2018 and Comparing Economies of All Countries on Earth in 2019. Now statistics for the year 2021 are available for almost all the nations on Earth, and we should take another look. But first, I would like to make an assertion.

An Assertion and a Program for Proving or Rebutting It

All the world is convulsed over the powers of governments. Some of the conflicts come from revisionist states striving to build empires. The most dangerous of these are China, Russia, and Iran. Their motivation is not just to acquire power over other nations, but to spread their ideas on how countries should be run by governments. It is not a coincidence that all of these revisionist powers are either fascist (Russia and Iran) or communist (China).

The status quo countries are not without their own internal ideological wars. The conflicts almost always revolve around the question of how much power should be granted to governments to solve their societies’ problems. Both international and domestic ideological wars beg the question of the truth or falsehood of the following assertion.

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

How could we either validate or rebut such a broad claim? 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. Examples of these indices are the Heritage Foundations Index of Economic Freedom (IEF), and the Cato/Fraser Institutes indices of Economic Freedom, Personal Freedom, and Human Freedom. I have demonstrated the equivalence of all these indices in the essay How Much Human Freedom Can We Find in the World?

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.

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 Countries of the World Have to Tell 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.

Unfortunately, this plot does not seem to show any particular trend as economic freedom changes. If I squint really hard, I can discern an increase in GDP growth rates at lower values of economic freedom. The lower values generally belong to countries with developing economies.

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 red lines in these plots are linear best-fits to the data. They all have positive slopes, with developing and intermediate countries having the largest increases with increasing economic freedom. As advertised, developed countries increase their GDP growth rates with increasing economic freedom the least.

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. Below is a scatter plot of every country’s Gini Index versus its Index of Economic Freedom.

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.

As a final indicator of what a government’s increasing control over the economy will do, consider all the countries’ GDP growth rates versus government expenditures as a percent of GDP. This will generate an empirical Rahn’s curve.

It was originally invented 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 is an empirical Rahn’s curve generated by the scatter plot of countries’ GDP growth rates versus their governments’ expenditures as a percent of GDP.

The red curve is the best quadratic polynomial fit to the data. All of the countries of the West are on the descending branch of this curve.

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. Joe Biden’s administration is in the process of destroying the U.S. economy. I discussed this in the post The U.S. Economy is Melting Down in June 2022. The fact we have proven the proposition through a comparison of all the world’s economies shows our assertion to be culturally independent.

Although we know the assertion to be empirically true, can we give the reasons 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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