Small Countries Make It Big with Economic Freedom

September 16, 2005

In a recent Washington Times commentary, Richard W. Rahn, director general of the Center for Global Economic Growth, examines the reasons many small countries’ economies have flourished recently. Historically, small countries generally had lower per capita incomes than larger countries, but many have become considerably wealthier in the past fifty years, including Luxembourg, Hong Kong, Denmark and Ireland.

Rahn asserts that many newly prosperous small countries have one thing in common: increased economic freedom.

Two of the success stories:

Mart Laar, former prime minister of Estonia, was the principle architect of his country’s remarkable economic transformation from impoverished vassal of the Soviet Union into one of the world’s freest (No. 4 in the world according to the 2005 Index of Economic Freedom) and most dynamic economies. Mr. Laar said he succeeded by following the teachings of Nobel Prize-winning economists F.A. Hayek and Milton Friedman.

Former Iceland Prime Minister and current Foreign Minister David Oddsson detailed how he took a typical, economically stagnate, Scandinavian socialist welfare state and turned it into an economic tiger …. Iceland has been engaged in a massive tax reduction (for instance, the corporate tax rate has been cut from 50 to only 18 percent, and the inheritance tax to a maximum 5 percent). Yet government revenues have steadily increased because of the resulting economic dynamism, and the national debt has fallen from 50 percent of gross domestic product to only 15 percent.

For more on tax reform in other counties, see Tax Foundation Backgound Paper #47, Fundamental Tax Reform: The Experience of OECD Countries.

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