As do many economists, I get emails from various cranks and conspiracy-theorists. Occasionally I get an interesting question regarding my research on economic liberty. My research is complex, but to summarize, it shows that, in general, countries with greater economic freedom (i.e. lower taxes, stronger rights of private property, less inflation and more regulations), perform better across most socio-economic measures.
A Hong Kong-based email correspondent asked recently: How are Hong Kong and Singapore - the two countries with the greatest economic freedom in the entire world – also "so costly that you will not have enough funds to achieve personal financial freedom?" I am curious how people who support free-market capitalism can reconcile with this. How can it be that the "best" (most capitalist countries) in the world are also some of the hardest to survive in?
This is my answer:
It is undeniable that countries with greater economic freedom have higher average incomes. We are now talking about actual incomes, which means that the data have been adjusted to local prices by using the best purchasing power parity methods. These cost-of living adjustments may not be perfect, but the differences in actual incomes between countries far outweigh any measurement errors in the PPP adjustment. Bottom line: it's simply not true that it's harder to 'get by' in more economically-free places.
The confusion is caused by people who have first-world incomes. This includes those in Hong Kong, Singapore, or other developed economies. They may see cheaper living costs in poorer and more socialist countries, and think, "Wow, I could live like royalty in Tanzania or Bolivia!" This person does not understand that anyone but the ruling class can earn a high-income in such countries. Is it really true that the average Tanzanian earns just $2,600 per year, according to World Bank figures, compared to an average Hong Konger earning $60,000? A person earning the average Hong Kong salary would be able to get by in Tanzania better than they could in Hong Kong. But how many Tanzanians can earn an income similar to that of Hong Kong? No one.
Adam Smith said, "There is much ruin in a country." Hong Kong and Singapore, two relatively free-market places, do a lot of stupid things. This is most evident in their land-use policies, which prevent the construction of residential housing and, therefore, keep housing costs down. Hong Kong is the worst example of this in the world, even though it does so many other things right, such as its trade policies, taxes, and regulations. Hong Kong has just 9 million residents, which is not much more than DFW. But its refusal to build residential housing on 95% the land it owns is insane. DFW, at least relative to other cities, is affordable. This is partly because of its size, but also because of the relatively liberal policies it follows when it comes to building. Even in relatively free countries, there are many things that can cause the cost of living to increase. These are to be condemned.