Japan and China are two of the economic powerhouses of East Asia. Japan far outpaces China in economic freedom, yet lags in economic growth. What gives?
The Heritage Foundation and The Wall Street Journal recently released the 2013 Index of Economic Freedom, ranking 177 countries on key policy areas that affect economic freedom. The report defines economic freedom as “the fundamental right of every human to control his or her own labor and property.” Countries are classified as “free,” “mostly free,” “moderately free,” “mostly unfree,” or “repressed.”
According to the Index, Japan has made a lot of progress over the past year, including “improvements in fiscal freedom, freedom from corruption, and monetary freedom.”
Japan edges out China in the Index’s rule of law category, which looks into property rights and freedom from corruption. Japan earned an average rating of 80 out of 100 in the rule of law category due to its strong protection of property rights and relatively modest level of corruption supported by an effective judicial system.
On the other hand,China’s rule of law is a major concern, given the widespread corruption, weak judicial system, and considerable political influence on economic decision-making. As the 2013 Index reports:
China’s economy remains “mostly unfree.” The legal and regulatory system is vulnerable to political influence and Communist Party directives. The party’s ultimate authority throughout the economic system undermines the rule of law and respect for contracts. Corruption is widespread, and cronyism is institutionalized and pervasive. Although leaders occasionally embrace market principles that could enhance efficiency and ensure long-term competitiveness, genuinely liberalizing economic reform has largely stalled.
Japan also exceeds China in terms of regulatory efficiency, getting significantly higher scores for monetary freedom, business freedom and labor freedom.
There is one area, however, whereChinaoutranksJapan, and it makes all the difference for economic growth.
China’s government spending is equivalent to about 23 percent of its GDP. That’s significant, but nowhere near Japanese government spending, which accounts for 42.8 percent of GDP. Japanese budget deficits hover around 10 percent of GDP, and its accumulated government debt exceeds 200 percent of GDP.Japan’s government spending and the bond sales to support it dominate domestic Japanese capital allocation, an approach that has proved to be an economic disaster. The country has experienced virtually no economic growth over the last two decades.
Economic freedom is an important measure of the well-being, security, prosperity and liberty of a country. For more information on economic freedom, visit the 2013 Index of Economic Freedom.