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This month in Indianapolis, London-based think tank Legatum Institute launched their Global Index of Economic Openness ranking 157 countries’ openness to commerce, analyzing what enables or hinders a country’s ability to trade domestically and internationally. This is central to our work on understanding how prosperity is created and perpetuated.
Why is economic openness important, and why did we choose Indianapolis as the venue to launch this international metric?
Let’s start with Indianapolis as it helps answer both these questions. The city is dominated by thriving high-tech industries including aerospace, chemical manufacturing and all five bioscience sectors, from pharmaceuticals to research and laboratory testing. Its high-quality transport infrastructure and central location has made it an important logistics center, consisting of some 1,500 distribution firms employing over 100,000 people. It excels at making some of the most advanced technologies in the world and is a testament to the renaissance of American manufacturing.
Indianapolis is the story of how the American heartland can prosper through openness and reinvention, after decades of deindustrialization including the high-profile decline of US automobile manufacturing. Indianapolis saw the plant closures of Chrysler, Ford and General Motors and the loss of tens of thousands of manufacturing jobs in the first decade of the millennium. Back in the golden years of US manufacturing during the late 1970’s, nearly 20 million Americans earned a good living by making things, but by the end of the twentieth century approximately 2 million of these manufacturing jobs were lost.
So, how has Indianapolis been successful, while other Midwestern cities have stagnated? Indiana’s pro- business, low tax, enterprising environment has attracted major foreign investment from new automobile firms such as Honda and Toyota; from specialist engineering firms like Rolls-Royce, that first came to Indianapolis over one hundred years ago and continues to invest heavily today, providing 4,300 high- skilled jobs in aircraft engine development and manufacturing; and from domestic giants such as health insurance company Anthem Inc and pharmaceutical company Eli Lilly, the largest private employer in the city. Purdue University is another draw for firms to locate here. As one of America’s leading engineering universities renowned for advancing discoveries in science, technology, engineering and math, it provides high calibre talent to the locally based high tech firms to ensure they can innovate and compete globally, feeding a culture of enterprise.
Much of this success is due to Indiana’s economic openness. An openness that has attracted international investment, created new opportunities and alternative employment in high-tech industries that has replaced lost jobs in ‘old’ manufacturing and kept the workforce globally competitive.
Trade between communities, states, countries and regions is fundamental to the advance of innovation, knowledge-transfer and productivity that creates economic growth and prosperity. Our research shows that economically open countries around the world are more productive, with a clear correlation between increased openness over time and productivity growth. In contrast, in an uncompetitive market, or one that is not designed to maximize welfare, growth stagnates, productivity wanes and crony capitalism thrives. Once protected industries become entrenched, it is difficult for governments to unseat them, especially when they lack institutional resilience. Inefficiency and corruption soon follow, when incentives arise for officials to prioritize the interests of powerful producers over the welfare of citizens.
The benefits of economic competition are widely understood and the language of openness easy to use, but with this Index we are seeking to define and measure openness in a way that can help political leaders and policy makers implement and enhance economic openness. To that end, we analyse the performance of each country on the key characteristics of openness to trade, investment, ideas, competition and talent using four pillars, comprising 23 different elements, measured by 108 discrete indicators. The first pillar is Market Access and Infrastructure, which facilitates the production and delivery of goods and services. The second is the Investment Environment, and access to domestic and foreign finance; third is Enterprise Conditions, which ensure markets are contestable and free; and the fourth pillar is Governance, looking at the rule of law, government integrity and effectiveness.
While most policy-makers focus on the big fiscal and macroeconomic policy tools at their disposal, the microeconomic factors are sometimes overlooked, and their potential to drive openness and growth is underestimated. A notable feature of this index is a focus on these microeconomic drivers of productivity. By bringing together in one report, the full range of disparate policy choices that impact and drive openness and competition, we are looking to shift the focus of policy makers towards the welfare implications of microeconomic policies by emphasizing the relationship between productivity and economic openness.
At the global level, there is much to be optimistic about economic openness. 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 and property rights and falling corruption.
Crony capitalism has waned in the last decade, most visibly in former communist countries, where many have transitioned successfully from state-led to market- and enterprise-based economies, enjoying stable economic growth and a new openness. Their move to multi-party democracy has reduced corruption and enhanced productivity. Many economies in Latin America have also become less government-dominated, resulting in fewer import restrictions and capital controls (with the painful exception of a government-induced crisis in Venezuela). Most significant of all, is the dramatic transformation enjoyed by so many Asian economies over the last 20 years, including both China and India’s distinct reforms that have brought prosperity to millions of people.
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, or were pushed, to protect their domestic industries and producers. 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.
The benefits of economic openness are also under increasing scrutiny in Western countries, giving rise to nationalism and populist politics. President Trump’s election on an ‘America First’ platform, the UK’s vote to leave the EU and protests across France are all consequences of those communities fearing a threat to their livelihoods from global competition, both off-shore and at home from immigration. The rise of populism can also be attributed to many people’s perception that the economic system is rigged for the benefit of insiders, enabling huge gains for an elite set of gatekeepers without benefiting ordinary citizens.
Despite the noisy maelstrom of populism, despite real anxieties about globalisation and discontent with an economic system that many see as not working effectively for ordinary citizens, we should also remember that global prosperity has never been higher – and that we have much to lose by turning inwards. One of the biggest opportunities for policymakers is to resist protectionism and actively reinvigorate an agenda that embraces open and pro-competitive economies, both domestically and internationally and that attracts innovation, ideas, capital and talent. Open economies improve domestic and international welfare, and there are many levers for leaders to deploy that can enhance contestability.
Above all, it is domestic political will and accountability that can drive economic openness with an effective competition law as a core policy. The success of Indianapolis is a perfect example of the benefits of being open and competitive in order to prosper.