Good economic governance matters to emerging Europe more than ever

Commitment to the key pillars of good economic governance necessary for economic dynamism and renewal have never been more important.

The key message of the recently-published Index of Economic Freedom 2022 – an annual cross-country study by The Heritage Foundation measuring the economic governance and entrepreneurial environments of 177 countries – is that economic freedom matters more than ever.

Heritage’s annual index has tracked economic freedom around the world since 1995. Nations committed to limited government and free enterprise score the highest on a scale of 0 to 100 in the evaluation of four critical policy pillars, including the rule of law, market openness, and regulatory efficiency.

Now, especially, as the world is undergoing an elevated level of uncertainty, these commitments to the key pillars of good economic governance are necessary for economic dynamism and renewal.

As the Index of Economic Freedom has catalogued for more than a quarter of a century, countries that achieve higher levels of economic freedom consistently outperform others in long-term economic agility and prosperity. Countries with lower economic freedom, on the other hand, are those that fall into economic stagnation, high unemployment, and deteriorating social conditions.

Estonia leads the region

With regards to the emerging European region, there are three notable takeaways from the 2022 Index of Economic Freedom.

Firstly, on average, countries remain “moderately free”, but just barely. The global average score for economic freedom is now 60—a loss of 1.6 points from the previous year’s 61.6. A loss of one more tenth of a point would drop the average score into the “mostly unfree” category.

Secondly, data shows again that economic freedom correlates highly with overall well-being, which includes such factors as health, education, the environment, innovation, overall societal progress, and democratic governance.

Thirdly, Europe has long enjoyed the world’s highest levels of economic freedom among the five regions in the Index. More specifically, central and eastern European countries have made great strides toward greater economic freedom. It is notable that six countries from the emerging Europe region – Estonia (seventh), Lithuania 17th), Latvia (18th), Czechia (21st), Georgia (26th), and Bulgaria (29th) – are among the world’s 30 freest economies. 

While each of the countries in Central and Eastern Europe has undergone different phases of transition over the past decades, by and large they as a group have turned away from the collectivist philosophies of socialism and communism and embraced a variety of free-market policies that have led to growing prosperity and stability.

For example, Bulgaria has been transitioning to a more open and flexible economic system by implementing a number of restructuring measures over the past years. The entrepreneurial sector has grown thanks to a competitive regulatory regime supported by a relatively open market. Bulgaria’s overall score is above the regional and world averages, with its economic freedom increasing in each of the past five years. Bulgaria has been in the ranks of the “Mostly Free” countries since 2020. Many indicators related to economic freedom are positive, but further work is needed to enhance the rule of law.

Barriers to growth

Ensuring secure, stable, and economically viable strategic partners in the region is in America’s security and economic interest as well, undoubtedly more than ever. More specifically, judicial effectiveness, which is measured by perception and survey-based data points, records negative trends in many of the countries in the region. While relative fiscal soundness has been in place, government spending has been inching up too.

Generally, the emerging Europe countries still struggle with policy barriers to more vigorous economic expansion, such as costly labour regulations, high tax burdens, lingering market-distorting subsidies, and continuing problems in public finance caused by years of public sector expansion. The result has been stagnant economic growth, which has exacerbated the burden of fiscal deficits further elevated by the ongoing pandemic and a heightened level of uncertainty.

In deepening engagement with the United States, countries in the region should implement reforms that open them further to international investment and strengthen their institutions. Central to the task of advancing economic freedom and an enabling business environment in the region must be committed economic statecraft that creates a more inviting playing field for American companies and private investors, as well as ensuring the advancement of market-opening and high-standard rulemaking.

Continuing to push forward pragmatic policies that enhance economic freedom and advance shared values should be a focal point for Washington’s strategic interaction with the emerging European countries.

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