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Foreword

he world economy has had another stel- market will offset the housing slump, but that

T lar year, growing in the neighborhood of 5


percent and continuing what has become
the strongest four-year expansion since the
is no certainty.
China and India are roaring ahead, notwith-
standing the return of a center-left government
1970s, defying war, terrorism, and $75-a-bar- in New Delhi that has tried to temper the pace
rel oil. This is testament in part to the policy of economic change. Center-left isn’t the eco-
lessons highlighted these past 13 years in this nomic drag it used to be even in India, however,
Index of Economic Freedom. As we greet 2007, and the emergence of India as a global econom-
however, there are warning signs that adher- ic player continues. Japan seems finally to have
ence to those lessons may be starting to fray. shaken its decade-long deflation, and even Old
On the surface, to be sure, the economic news Europe left the doldrums in 2006, albeit in rela-
continues to be mostly good. While the United tively modest terms. The pace of world trade
States is shifting to a slower pace of growth fol- and investment continued to accelerate, and
lowing the boom from mid-2003 to early 2006, millions more of the world’s poor entered the
there continues to be no sign of recession. The middle class.
major issue in the next year is whether the One lesson of this Index, however, is that
decline in housing will be so deep that it sinks what really matters is the direction of policy:
the larger economy. That answer depends in that is, the change at the margin. And on that
part on how much the Federal Reserve must score, there is some reason for worry about an
raise interest rates to compensate for its mis- erosion in economic freedom. Start with the
take of keeping monetary policy so loose for U.S., where the congressional election cam-
too long in 2003 and 2004. The early evidence is paign created bipartisan policy stampedes
that rising corporate profits and a robust labor against foreign investment from China and

ix
Dubai. Congress, in its lack of wisdom, is also My guess is the former, but I would prefer not
seeking to add even more political hurdles to to test that proposition in the teeth of a global
foreigners who want to create jobs by investing recession.
in America. This policy drama is all the more reason to
The election also moved Congress to the left welcome the refinements in this year’s Index.
economically, with strong new voices rejecting The shift to a 0–100 freedom scale allows for
the free trade consensus of the past 50 years. more nuanced distinctions among countries.
President Bush retains his office lease and veto The introduction of a measure for labor free-
pen for two more years, but the most he may dom is also notable and informative because
be able to accomplish is to prevent any major labor mobility has clearly become crucial to
policy mistakes. He will almost certainly not national prosperity and competitiveness. Mere-
be able to extend his trade promotion author- ly contrast the job creation in the U.S., where
ity, for example, when that expires in mid- labor mobility is high, with the record in France
2007. Political gridlock is probably the best and Germany to prove that point. The slight
we can expect until the policy showdown that overall decline in average world economic
is likely to take place in the 2008 presidential freedom—down 0.3 percentage point from a
contest. year earlier—also suggests the policy setbacks
This is all the more reason for the world’s I have described.
policymakers to complete the Doha Round of There are no permanent victories in poli-
trade talks as soon as possible. At this writing, tics or economics, which is one reason that this
however, the talks remain caught between a Index exists to chronicle annual progress or
French-led Europe that refuses to reduce its regression. The next year is one to watch care-
farm subsidies and an assertive bloc of devel- fully for setbacks and to remind forgetful poli-
oping nations that won’t bend on manufac- ticians of the benefits of economic freedom.
turing and services without such a European
concession. This is short-sighted in the extreme,
and one question is whether this is a tempo- Paul A. Gigot
rary setback due to weak political leadership, Editorial Page Editor
or whether it reflects a larger popular backlash The Wall Street Journal
against the dynamic forces of globalization. November 2006

x 2007 Index of Economic Freedom