Size of government vs. other aspects of economic freedom

In response to Anthony's query on taxes on yesterday's post:

The Fraser Index aggregates data in five categories:

1.      Size of Government: Expenditures, Taxes, and Enterprises
2.      Legal Structure and Security of Property Rights
3.      Access to Sound Money
4.      Freedom to Trade Internationally
5.      Regulation of Credit, Labor, and Business

I expect there is good data on tax rates within the "Size of Government" category, but I would have to download their data set to find it; it is not disaggregated in the public report.  But when one examines the "Size of Government" rankings, one finds that the ten nations with the smallest governments:

1.  El Salvador
2.  Hong Kong
3.  Dominican Republic
4.  Panama
5.  Guatemala
6.  Kazakhstan
7.  Singapore
8.  Cote d'Ivoire
9.  Bangladesh
10.  Kyrgyz Republic

includes two of the world's most successful economies, Hong Kong and Singapore, and eight economies that are not particularly successful (though some of them have been achieving high growth rates in recent years).  Many of these nations do not score well with respect to legal structure and security of property rights, and my sense is that having a small government will not encourage economic growth as long as they have weak property rights and lack the rule of law.

Conversely, when one examines the nations with the largest governments,

120.  Mali
121.  Belize
122.  Fiji
123.  Togo
124.  Czech Rep.
125.  Croatia
126.  Venezuela
127.  Malawi
128.  Belgium
129.  Congo Rep. of
130.  Central Afr. Rep.
131.  Sweden
132.  Denmark
133.  Gabon
134.  France
135.  Algeria
136.  Zimbabwe
137.  Guyana
138.  Slovenia

One finds a combination of European welfare states and developing world nations (none of which, to my knowledge, is experiencing decent growth rates).  On the other hand, Jeff Sachs famously argued in Scientific American last year that Scandinavia had had decent growth rates in recent years despite large governments.  A counter-argument to Sachs is that their recent economic growth may be due to the fact that they have steadily allowed greater economic freedom in recent years, so that the growth is due to increasing economic freedom rather than the fact of big government.  Marshall Stocker has shown that nations that increase their economic freedom score average double digit equity market rates, and he runs a successful investment fund based on this principle.

Without getting into a great deal of technical detail, the broad-brush picture of economic freedom that I'm getting is that of the five elements of economic freedom, the most important one is

Legal Structure and Security of Property Rights

with

Regulation of Credit, Labor, and Business

not far behind (in essence the De Soto pair).  Basically in order to have a market economy you've got to be able to own property, engage in enforceable contracts, and not be drowned in regulation.  The role of

Freedom to Trade Internationally

is a bit more complex, with conflicting data.  The short version seems to be that at some points in a nation's growth, free trade is crucial for rapid growth.  But there are some development economists who vigorously argue that there are occasionally some circumstances in which completely free trade might not be optimal.

Access to Sound Money

seems to be important in the sense that hyperinflation is extremely destructive to an economy, and yet once the monetary system is relatively stable economic growth doesn't seem to be especially sensitive to moderately inflationary policies.

Size of Government

might be the least important variable; there is, in fact, a slight inverse correlation between GDP per capita and size of government, with wealthier nations having larger governments.  Of course, the European social welfare states all had small governments when they went through their rapid stage of industrialization and became wealthy; in the first half of the 20th century Sweden had the fastest growth rate of any nation on earth, and by 1950 still had a smaller government, proportionately, than did the U.S. at the time.  Thus large governments are probably deadly for poor nations, but wealthy nations seem to be able to indulge themselves to some extent in massive government.

I'm skipping over many nuances and not citing the literature here, but in general my strategy is to communicate loudly and clearly to everyone the crucial, unambiguous importance of property rights, rule of law, and minimal regulation.  I certainly believe that if every nation had had as much economic freedom as Hong Kong for the past forty years, there would be no more poverty on earth and quite possibly no more war.

That said, the anti-capitalist mentality is so vehemently and irrationally opposed to economic freedom across the board, that I hope to first build a bridge by pointing out that the existing ideal of many anti-capitalists, Scandinavia, in fact has the most secure property rights, the best rule of law and contract enforcement, and the least business regulation of any set of nations on earth.  Hopefully by means of documenting this fact, anti-capitalists can begin to understand the foundations of successful free enterprise and poverty alleviation, and realize that Finland, Denmark, and Sweden are light-years away from Cuba, Venezuela, and Zimbabwe.

It is profoundly sad that many  of the most well-intentioned people on earth have supported economic policies that have exacerbated war and poverty for the past hundred years.  I had hoped that this perverse era had come to a close, but the enthusiasm for Naomi Klein's recent book proves that there are frightening numbers of well-intentioned people who are still prepared to fight for policies that cause poverty and violence.