Global Index of Economic Openness

The Legatum Institute’s mission is to create the pathways from poverty to prosperity, and our work is focused on understanding how prosperity is created. To that end, with the generous support of the Templeton World Charitable Foundation, we have created a Global Index of Economic Openness to rank countries’ ability to interact with, and benefit from, both domestic and international commerce.

A report for the Global Index of Economic Openness programme by Stephen Brien

Published 16 May 2019

This publication was made possible through the support of a grant from Templeton World Charity Foundation.

Our mission at the Legatum Institute is to create the pathways from poverty to prosperity, by fostering open economies, inclusive societies and empowered people. Our work is focused on understanding how prosperity is created and perpetuated. Prosperity is much more than material wealth; it also encompasses welfare, security, wellbeing, freedom and opportunity.

Without an open, competitive economy, it is very challenging to create lasting social and economic wellbeing, where individuals, communities and businesses are empowered to reach their full potential. That is why we view this work on Economic Openness as so important. With the generous support of the Templeton World Charitable Foundation, we are creating a Global Index of Economic Openness to rank 157 countries’ openness to commerce, assessing the environment that enables or hinders their ability to trade both domestically and internationally.

Our ambition for this Index is that it becomes a valued tool for leaders and advisers around the world, to help set their agendas for economic growth and development.

At the global level, there is much to be optimistic about Economic Openness. We can and should celebrate the rise of open and competitive economies around the globe over the last 30 years. Economic Openness has driven and delivered prosperity for millions of people in recent decades, and it has lifted approximately one billion people out of poverty since 1990. Economic Openness is at its highest global level ever, with more economies becoming more open and competitive, in turn spreading ideas, innovation and prosperity. We are seeing an improving environment for business start-ups and scale-ups, more trade deals, upgraded trading infrastructure, better investor protection, more comprehensive property rights, and falling corruption.

However, our research also reveals a deterioration in the quality of Governance in both developing and developed nations, and this represents a brake on Economic Openness. Failure to implement effective competition policy gave rise to the oligarchs of the former Soviet Union and the cronies of Latin America, who dominated entire industries in their respective domestic markets. Furthermore, in the aftermath of the global financial crisis, when trade flows slowed dramatically, many governments contemplated protecting their domestic industries and producers, or were indeed pushed in this direction. The degree of protectionist policies was not as bad as some had feared, but progress on openness has stalled, and even reversed in some countries, where new barriers to trade and policies have been introduced to stifle competition.

While the Index covers 157 countries around the world, we are most ambitious about engaging with the middle 90 countries where the greatest opportunities exist to effect change through insight and closer working relationships. The top 40 most open economies are, by definition, countries that have developed strong economic systems over time, and these can provide lessons for the aspiring middle 90 countries. To this end, we are publishing case studies of the United States and United Kingdom, and will publish studies of several middle-ranked nations over the next two years.

Introducing the Global Index on Economic Openness

This report marks the inaugural publication of the Legatum Institute’s Global Index of Economic Openness. It measures the extent to which the economic systems of 157 countries around the world enable trade, competition and productivity, by measuring four pillars that describe the policy choices for countries:

We examine four characteristics of open economies, assessing the extent to which they have:

  • Market Access and Infrastructure, such that products and services can be easily produced and delivered to customers;
  • Investment Environment, such that domestic and foreign sources of finance are widely available;
  • Enterprise Conditions that ensure markets are contestable and free from burdensome regulation;
  • Governance that is underpinned by the Rule of Law, as well as Government Integrity and Effectiveness.

This year there are four key findings:

  1. Economic Openness is at its highest ever level, with some of even the lowest-ranked countries improving, and lifting millions of people out of poverty
  2. Countries with greater levels of Economic Openness are more productive
  3. Economic Openness, and therefore economic growth, can be improved by policy choices
  4. Governance is key, yet the quality of Governance is stagnating, acting as a brake on Economic Openness

Economic Openness is at its highest ever level

Globally, Economic Openness is at its highest-ever level, improving by 8% over the last 10 years. 130 countries, representing 90% of the world’s population, have risen since 2009. Furthermore, the gap between the lowest and highest score has closed, albeit slowly. Over the last 10 years, the bottom fifth of countries have closed 5% of the gap with the top fifth of countries.

Countries with greater levels of Economic Openness are more productive

Our analysis indicates a clear link between the extent to which a country’s economy is open and its productive capacity. This link is supported by a long history of academic literature, and can be seen in the economic histories of those countries that have achieved a high level of economic wellbeing. The following graph shows the relationship between Economic Openness and productive capacity.

Economic Openness, and therefore economic growth, can be improved by policy choices

Economic Openness is driven by policy choices. Some elements of Economic Openness, such as Transport and Resources, require a long time and large investment to develop, while most of the other elements, such as Market Contestability or Investor Protections, are dependent on reforms that can be implemented over a shorter period. All reflect direct policy choices. The Index shows that countries around the world have made different policy choices, resulting in different degrees of Economic Openness and productive capacity.

Quality of Governance is stagnating, acting as a brake on Economic Openness

Economic Openness is dependent on having good quality Governance. A stable and trustworthy state is one of the central and underlying components of economic exchange. However, Governance has seen the least change at a global level, and three out of seven regions have seen a decline. In Latin America and the Caribbean and MENA, there has been a deterioration in Executive Constraints, Rule of Law and Political Accountability.

In sub-Saharan Africa, there has been a fall in Government Integrity and Government Effectiveness. Countries whose score fell often did so because of violence and failures of Governance. While, in comparison to the overall improvements globally, the declines among some countries have been modest, they are still significant. Notable fallers are Yemen, Venezuela, Mauritania and Hungary, due to increasing authoritarianism or violence. Yemen for example has seen significant conflict, while Hungary’s government has become increasingly authoritarian. And while this affects primarily the Governance pillar, there are flow-on effects to other pillars.

The future of Economic Openness and Prosperity

Global Economic Openness is at its highest measured point, which is good news for those participating in economies around the world. Yet too many of the world’s inhabitants are not enjoying the benefits of this openness. Our broader work on measuring prosperity shows that much needs to change to enable all nations to fulfil their potential, not only in terms of economic systems but also building strong institutions and investing in social wellbeing. Given the different political, cultural and geographic contexts in which nations find themselves, the solutions to realising such potential could scarcely be more wide-ranging.

Our hope is that our Index can help all leaders and policy makers to identify the pathways to prosperity for all.

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Global Index of Economic Openness:

This publication was made possible through the support of a grant from Templeton World Charity Foundation.

By Stephen Brien

May 2019

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