Whither Economic Freedom Post-Brexit?

As events are turning out, the Brexit decision is providing an opening to revive a trend toward economic freedom and thus stronger economic growth. But will the UK leadership and their counterparts in the EU and the US take that opening?  That depends in part on whether they understand the economic benefits.

A good way to see this is to look at the following chart of recent trends in economic freedom. The index combines well-known measures of regulatory burdens and openness to international trade along with the rule of law and the scope of government, gathered together by the Heritage Foundation. econfreeNote that throughout the past two decades the UK has been well above the EU average of economic freedom. So it is not surprising that the UK economy has grown nearly 1 percent points faster than the EU as a whole and with an unemployment rate only ½ as high.

The chart also shows that the EU score rose and started to catch up to the UK during the period from 1995 to 2005, but unfortunately economic freedom has not kept that pace with that improvement in the past ten years, and that the UK has even declined.

This is where the opportunity lies: The hope is that by escaping the difficult political, and at times very bureaucratic, constraints of Brussels—which have made regulatory reform difficult—the UK will be able to get back to and surpass the level of economic freedom it has achieved in the past. Even with the possibility of a costly transition, the long term gains in income and employment would be substantial.

This will, of course, take a good deal of leadership in the UK and an embracing of the principles of–and practical ways to implement–economic freedom. It is promising that the recently declared, and already front-runner, for Prime Minister, Theresa May, has pledged to carry out a successful exit strategy without the strings of the EU, even though she was against Brexit.  It is also promising that UK Independence Party leader, Nigel Farage, suggested to the European Parliament this week that “Why don’t we just be pragmatic, sensible, grown-up, realistic and let’s cut between us a sensible, tariff-free deal.”

The danger, however, is that the EU will not be accommodating to the international trade part economic freedom—which includes free trade in goods and in services and open capital markets.  This attitude runs the risk of going in the wrong direction: pulling down the index of economic freedom—which factors in the degree of market openness—to the detriment of all Europeans.  Already there have been calls by some EU leaders to reject a continuation of open trade in goods, services, and capital between the UK and EU, unless the UK agrees to such concessions on immigration, a clear way to kill a mutually beneficial trade deal. There is also a danger that another UK ally—the United States—will turn protectionist and refuse to enter into a trade deal with the UK, which would also pull down the index of economic freedom. So the direction that economic freedom takes following Brexit now depends on the economic leadership in the UK, the EU and the US.

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