Institutions in the background (abstract)
Institutions are in the background of many processes and outcomes. This analysis confirms a powerful institutional and policy connection between the best-ranked countries in democracy, capitalism, and competitiveness.
More than two-thirds of the TOP 20 globally best-performing countries are from Europe, especially the EU/EEA, while the rest are predominantly Anglo-Saxon countries. Also, more than three-quarters are officially members of the NATO alliance or associated with NATO. Furthermore, more than three-quarters of the TOP 20 countries belong to the Nordic, Continental European, or Anglo-Saxon models of capitalism. Also, over two-thirds of the TOP 20 countries have a predominantly Protestant societal and historical background. Finally, all TOP 20 countries belong to the transatlantic geopolitical circle or at least have close ties with it.
Therefore, the main question is how to foster policy exchange and policy education among countries. That way, less developed countries would be able to work on improving their institutional indicators.
Keywords: geopolitics, institutions, competitiveness, economic freedom, democracy
Author
Daniel Hinšt is an ex-founder and currently a Board member of the Croatian think tank Centre for Public Policy and Economic Analysis (CEA), on behalf of which he is the author of this article. At the Faculty of Political Science in Zagreb, he became a Master of European Studies. He graduated in Political Science, specializing in public policy, public management, development, international relations, and diplomacy. Accordingly, his additional study and later research interests are Euro-Atlantic integrations, geopolitics, national security, and economic policy. He acquired several certificates in Enterprise Risk Management and digital marketing through additional education.
Highlights: Presentation
Article: Transatlantic Institutions in the Background of the Best Rankings (in Croatian)
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1. Introduction
Some countries constantly occupy the top positions in terms of overall competitiveness, freedom, and democracy. The relevant global rankings show in which policy areas such countries have achieved success.
This article considers the relevant global methodologies and their policy indicators.
Figure 1. Global rankings of competitiveness, freedom, and democracy
| Global methodologies and rankings | Organizations |
| Global Competitiveness Report | World Economic Forum |
| World Competitiveness Ranking | International Institute for Management Development |
| Economic Freedom of the World | Fraser Institute |
| Index of Economic Freedom | Heritage Foundation |
| Human Freedom | Cato Institute & Fraser Institute |
| Democracy Index | Economist Intelligence Unit |
Source: Author
Although many popular recipes essentially do not understand the public policy process (Hill, 2010), it is important to underline the importance of political science since it deals with institutions and governance, public policy, and public management. All this is relevant for understanding why certain nations improve their global rankings.
2. Institutions behind competitiveness
Alongside many economically relevant factors affecting business sector performance, competitiveness directly or indirectly depends on many institutional and public policy indicators.
Institutions are stable and valued patterns of behavior (Huntington, 1968), values, norms, and (formal and informal) rules within (public) organizations and systems. They organize certain policies as courses of action within a decision-making process. In addition, public policy refers to decisions and actions governments choose to take or not take to address various societal problems.
The policy concept, with its Western origin, puts focus on the outcomes of government activities (Colebatch, 2008) and structured interaction among people who make decisions (Colebatch, 2005). The policy concept is relevant for the new approach to governance when decreased government control leads to its return toward fundamental functions (Petak, 2008). Finally, the policy approach assumes a consistent and coherent coordination system within public administration (Petak, 2008).
2.1. World Economic Forum
The Global Competitiveness Report defines competitiveness as a set of policies, institutions, and factors that determine productivity. Therefore, the competitiveness report provides an assessment of long-term drivers of growth by offering data-driven analysis for rational policymaking. Indeed, there is a need for a holistic approach to competitiveness, and far-sighted leadership, rather than focusing on particular factors alone (World Economic Forum, 2018). In line with that, competitiveness requires a whole-of-government and whole-of-society approach to managing decision-making risks.
In the Global Competitiveness Report, Porter and Schwab (2008) emphasize that institutions exceed the legal framework, since government policies toward freedom and the market are also important, to deal with red tape and excessive bureaucracy, judiciary, and corruption.
Various forms of political risks, such as wars, ethnic violence, nationalism, terrorism, social unrest, cyber threats and espionage, regulatory capture and burden, expropriations, discriminatory taxes, and foreign ownership rules, can affect businesses (Rice & Zegart, 2018).
The Global Investment Competitiveness Report emphasizes that governments can reduce risks to investors through an institutional framework that enables a business climate and good governance, including reliable regulations and institutions. The enabling policy environment should include proper coordination mechanisms across institutions. Moreover, reforms that improve transparency, rule-based decision-making, and investment protection can reduce political risks for investors (World Bank Group, 2018).
Pillar 1 (‘Institutions’) within the global competitiveness report consists of six sub-pillars and 20 indicators, including security from terrorism, reliability of police, social capital, transparency, policy stability, government regulations, property rights, checks and balances, public-sector performance, and future orientation of government (World Economic Forum, 2018).
However, institutional factors of competitiveness go beyond Pillar 1, such as infrastructure (due to its dependence on government decisions); critical thinking in teaching (since civic education and media literacy are necessary for democratic development and for deterring disinformation); pro-competition policies (directed against politically protected vested interests); or starting a business (which is a matter of administrative and regulatory requirements).
The TOP 20 competitiveness ranking consists of strong liberal democracies, market economies, and open societies with high social trust, led by Singapore, the United States, Germany, Switzerland, the Netherlands, the United Kingdom, the Nordic countries (Sweden, Denmark, Finland, and Norway), Australia, New Zealand, Canada, Japan, Taiwan, South Korea, and Israel.
2.2. International Institute for Management Development
Similarly, the World Competitiveness Ranking within the International Institute for Management Development (IMD) shows how countries achieve long-term value creation, wherein economic competitiveness is not just about productivity and GDP since enterprises cope with social, cultural, and political dimensions.
The World Competitiveness Ranking contains indicators that are directly relevant to issues of governance and institutions. Therefore, the area of government efficiency measures institutional and regulatory framework (how governments regulate businesses and competition), bureaucracy, country credit rating (including political risks), policy adaptability, political instability, transparency, corruption, democracy index, as well as public finance (which depends on many governmental decisions and political interests).
For example, Denmark is at the top of the world competitiveness ranking, especially regarding government efficiency in delivering a competitive institutional and societal framework (IMD, 2022).
In addition to these governance indicators, there are certain societal indicators, such as issues of homicide, social cohesion, income distribution, equal opportunities, and freedom of the press. Other indicators are mainly economic, although a large majority of economic indicators depend on political and institutional decision-making processes.
This means that the roots of different factors of a country’s competitiveness go beyond a superficial understanding of their exclusive economic relevance. Therefore, a multidisciplinary scientific approach offers a broader perspective on understanding complex societal and political risks.
IMD’s competitiveness ranking shows that 50% of the TOP 20 rankings consist of the European Economic Area (EEA) states (Nordic countries, Netherlands, Ireland, and Germany, as well as Switzerland), and an additional 10% are the Anglo-Saxon countries (United States, Canada, and New Zealand). Among the other TOP 20 countries are Singapore, Hong Kong, Taiwan, and the United Arab Emirates. Results close to the TOP 20 include Australia, South Korea, and Israel (key political allies of Western countries), while Estonia is a leader among the countries of Central and Eastern Europe.
3. Institutions behind freedom and democracy
Institutions determine the levels of economic and overall human freedom, including personal and civil freedom. Different policies and institutions can have different outcomes concerning their relationship toward freedom, which is the fundamental idea of Western civilization. Two North American think tanks analyze the relationship between governance and individual liberty, which is crucial for political science, including political philosophy and public policy.
3.1. Fraser Institute
The Canadian-based Fraser Institute publishes annual reports on the Economic Freedom of the World. The Cox School of Business at Southern Methodist University (SMU) in Texas is among the institutions that provide support for these reports.
Gwartney et al. (2020) provide an overview of the Economic Freedom of the World, which measures the degree of political and institutional support for economic freedom, which includes the concepts of self-ownership, personal choice, voluntary exchange, free market entry and competition, enforced property rights, as well as personal security from violence and fraud. In addition, the methodology measures the degree to which market choices allocate resources, and how close institutions and policies are to the ideal of limited government. The index consists of 24 components in five policy areas: 1. Size of government; 2. Legal System and Property Rights; 3. Sound money; 4. Freedom to Trade internationally; and 5. Regulation of credit, labor, and business.
First, components and indicators within the area ‘Size of Government’ seem to be economic only. However, government institutions and public administrations make numerous public policy decisions to provide inputs for public finance and macroeconomic results (such as the ratio of government spending, taxation, and debt to GDP).
Second, state ownership of assets is the area with potential structural problems that lie in the political risks associated with control of assets, financial flows, and market competition. Moreover, societal resistance may also be a factor that hinders potential privatizations of state assets.
Third, in areas such as sound money and freedom to trade internationally, components related to inflation and tariffs can be associated with political risks, if certain actors put pressure on the independence of central banks, demand currency devaluation, or pursue protectionist policies.
Fourth, business regulation and regulatory policy are strongly associated with issues of institutions and governance, as well as market framework. While labor market regulations directly affect economic competitiveness, the decision-making process behind these regulations, as well as other business regulations, includes many interactions between different actors and stakeholders with different political agendas and ideas. The same is true with business regulations since government institutions can create political risks or opportunities when regulating business and investment environments.
Finally, impartial public administration is a matter of how institutions function and deliver their purposes to citizens and businesses. The position of this indicator within the area of regulation emphasizes the important link between public administration and the business environment.
The methodology of measuring economic freedom creates a framework for concrete structural reforms (Hinšt, 2021), and the institutional framework that helps or hinders markets depends on economic freedom (Powell, 2003). Hereby, political liberalization enhances economic liberalization, which stimulates growth (De Haan, et al., 2006). Moreover, economic freedom as a positive effect on the level of tolerance since the rule of law, property rights, and contracts assure that people do not fear interacting with others. In that respect, openness and generosity improve well-being and reduce group pressure (Berggren and Nilsson (2012). In addition, there is a positive relationship between economic freedom and income equality (Berggren, 1999) and a relatively small trade-off between growth and inequality (Scully, 2002).
Different areas of economic freedom can have different effects on growth (Berggren & Jordahl, 2005). The strongest influence on overall economic freedom depends on the levels of fiscal and monetary freedom (Kešeljević & Spruk, 2013), while foreign aid does not increase economic freedom in aid-receiving countries (Knedlik & Kronthaler, 2006).
The TOP 20 economic freedom ranking consists of the Anglo-Saxon, Nordic, and Continental European countries. Many of them belong to the EU and/or NATO or represent key Western geopolitical allies (such as Georgia, Australia, New Zealand, Singapore, Japan, South Korea, Jordan, and Israel). Furthermore, at least 75% of the TOP 40 countries concerning economic freedom belong to or have ties with the Western system of political institutions and values, where freedom is among the central forces (Hinšt, 2021).
3.2. Heritage Foundation
Similar to the Fraser Institute, the U.S. Think Tank Heritage Foundation publishes an annual index of economic freedom that emphasizes several institutional factors within its methodology, such as government integrity, property rights, and regulatory efficiency. For example, government integrity indicates a level of transparency in government policymaking and the civil service and the absence of corruption, including irregular payments, bribery, extortion, nepotism, cronyism, patronage, embezzlement, and graft. Corruption is a political risk that could introduce coercion and insecurity into economic relations, reduce public trust, and increase economic costs.
TOP 20 ranking in economic freedom consists of Singapore as the frontrunner, the Anglo-Saxon countries (New Zealand, Australia, United Kingdom, Canada, and the United States), Switzerland, Ireland, and Estonia (as European leaders with TOP 10), Taiwan, Lithuania, Nordic countries (Denmark, Iceland, and Finland), etc. Moreover, the TOP 30 includes Norway, Israel, Japan, South Korea, Austria, Germany, the Czech Republic, and Latvia.
That means that all Nordic, Baltic, and many Continental European countries are within the TOP 30, as are all three East Asian liberal democracies.
3.3. Cato Institute and Fraser Institute
According to the methodology of the Cato Institute and the Fraser Institute, measuring the level of human freedom consists of personal and economic freedom. The economic freedom measurement follows the Fraser Institute’s methodology. Personal freedom consists of components that have a direct and even primary link with the political science perspective: conflicts and terrorism, freedom of religion, association, assembly, and civil society, expression, and information.
The TOP 20 ranking in human freedom predominantly includes countries with liberal democratic institutions and policies (Anglo-Saxon, Nordic, and Continental European), the Baltic States (due to their complete geopolitically liberal distance from authoritarian Russia), as well as Hong Kong and Taiwan (due to their different policies compared with communist China). For example, Estonia has improved its score and stands among the best in the world, mostly due to high personal freedom.
3.4. Economist Intelligence Unit
Democratic political culture represents a set of sentiments, knowledge, and values, that substantially influence the political process based on a strong civic culture and social capital that enable the effectiveness of democracy, trust, and cooperation. Furthermore, developed states have governmental respect for market mechanisms, equal distributions of the benefits of growth, stable rule, public-private cooperation, and mass education (Hague et al., 1998).
The relationship between freedom and democracy is complex. In that context, not every electoral democracy is a liberal democracy since the latter demands standards such as the substantial presence of civil liberties and human rights, a political system, and the performance of non-political dimensions (Campbell, 2008).
In addition, purely electoral democracy obscures the challenges that democracies face. Therefore, the index of democracy can show deficiencies even under electoral regimes. Moreover, it shows that individual freedom and choices count in collective matters, which grant rights to political participation. Since the law defines democratic rights, the quality of democracy depends on the enforcement of the rule of law (Alexander et al., 2011).
The Democracy Index 2020 of the Economist Intelligence Unit measures countries based on the electoral process and pluralism, functioning government, political participation, political culture, and civil liberties. The overall score is an average of these five policy components and creates four categories of governance systems.
Full democracies are nations where civil liberties are respected even by political culture, while problems in democratic governance are limited. Countries that belong to this category are the Anglo-Saxon, Nordic, and Central European countries, as well as East Asian countries (Taiwan, South Korea, and Japan, which moved from flawed to full democracies).
Flawed democracies are nations with free elections and respect for basic civil liberties. However, they have certain issues concerning respect for some liberties, democratic governance, and an underdeveloped political culture. Some countries within this category have the potential to reach the first category, such as France, the United States, Portugal, Estonia, Israel, Italy, Malta, and the Czech Republic. On the other hand, some EU Member States have stable positions in this category, such as Slovenia, Slovakia, Poland, Hungary, and Croatia.
Hybrid regimes are nations with electoral fraud, government repression against the opposition, widespread corruption, a non-independent judiciary, and low levels of rule of law, political culture, and participation. For example, countries in the Western Balkans mostly belong to this category, as do Hong Kong, Turkey, and Ukraine. These countries have blocked their political development due to their capture by authoritarian influences from Russia or China.
Authoritarian regimes are nations without or with very limited political pluralism, while some conventional democratic institutions stand beside high abuses of civil liberties, suppression of criticism, and state-controlled media. Countries in this category include Russia, China, Zimbabwe, Syria, Iran, Yemen, North Korea, Cuba, Venezuela, and the Arab States.
The Economic Intelligence Unit shows that out of 167 covered countries, only 23 are full democracies, which is less than 15% of countries and less than 10% of the world population. The relative majority of the world’s population lives in flawed democracies (41%), while more than a third of the population lives under authoritarian regimes, with an additional 15% under hybrid regimes.
4. Results of the best-ranked countries
Based on the relevant global rankings of economic freedom, competitiveness, and liberal democracy, countries with the best-performing joint results show strong policy interlinkage between these three categories.
The analysis considers the TOP 45 from each of these three categories and calculates the average ranking result for all countries within the TOP 45 that belong to all three categories based on the global rankings from the latest relevant three reports.
Figure 2. Three categories and reports: economic freedom, competitiveness, and liberal democracy
| Global methodologies and rankings | Organizations |
| Global Competitiveness Report | World Economic Forum, 2019 |
| Economic Freedom of the World | Fraser Institute, 2021 |
| Democracy Index | Economist Intelligence Unit, 2020 |
Source: Author
The analysis shows that two-thirds of countries that belong to the TOP 45 in terms of economic freedom, competitiveness, and liberal democracy belong to all three categories of public policy.
Figure 3. Global rankings of TOP 45 in three categories: economic freedom, competitiveness, and liberal democracy
| Global ranking | Economic freedom | Competitiveness | Democracy |
| 1 | Hong Kong | Singapore | Norway |
| 2 | Singapore | United States | Iceland |
| 3 | New Zealand | Hong Kong | Sweden |
| 4 | Switzerland | Netherlands | New Zealand |
| 5 | Georgia | Switzerland | Canada |
| 6 | United States | Japan | Finland |
| 7 | Ireland | Germany | Denmark |
| 8 | Lithuania | Sweden | Ireland |
| 9 | Australia | United Kingdom | Australia |
| 10 | Denmark | Denmark | Netherlands |
| 11 | Mauritius | Finland | Taiwan |
| 12 | United Kingdom | Taiwan | Switzerland |
| 13 | Estonia | South Korea | Luxembourg |
| 14 | Canada | Canada | Germany |
| 15 | Armenia | France | Uruguay |
| 16 | Malta | Australia | United Kingdom |
| 17 | Taiwan | Norway | Chile |
| 18 | Japan | Luxembourg | Austria |
| 19 | Netherlands | New Zealand | Costa Rica |
| 20 | Latvia | Israel | Mauritius |
| 21 | Finland | Austria | Japan |
| 22 | Germany | Belgium | Spain |
| 23 | Iceland | Spain | South Korea |
| 24 | Cyprus | Ireland | France |
| 25 | Spain | United Arab Emirates | United States |
| 26 | Romania | Iceland | Portugal |
| 27 | Czech Republic | Malaysia | Estonia |
| 28 | Austria | China | Israel |
| 29 | Chile | Qatar | Italy |
| 30 | Luxembourg | Italy | Malta |
| 31 | Albania | Estonia | Czech Republic |
| 32 | Guatemala | Czech Republic | Cape Verde |
| 33 | Panama | Chile | Botswana |
| 34 | Portugal | Portugal | Cyprus |
| 35 | Peru | Slovenia | Slovenia |
| 36 | Bulgaria | Saudi Arabia | Belgium |
| 37 | Norway | Poland | Greece |
| 38 | Sweden | Malta | Latvia |
| 39 | Jamaica | Lithuania | Malaysia |
| 40 | Costa Rica | Thailand | Panama |
| 41 | Cabo Verde | Latvia | Trinidad and Tobago |
| 42 | Montenegro | Slovakia | Jamaica |
| 43 | Israel | Russia | Lithuania |
| 44 | Seychelles | Cyprus | Timor-Leste |
| 45 | Belgium | Bahrain | South Africa |
| Sources: | EFW, 2021 | WEF, 2019 | EIU, 2020 |
Based on the three global methodologies and rankings from Figure 2, this figure shows the average ranking of the TOP 20 countries.
Figure 4. Average ranking of TOP 20: economic freedom, competitiveness, and liberal democracy
| TRIO ranking | Countries | Average ranking |
| 1 | Switzerland | 7 |
| 2 | Denmark | 9 |
| 3 | New Zealand | 9 |
| 4 | Netherlands | 10 |
| 5 | United States | 11 |
| 6 | Canada | 11 |
| 7 | Australia | 11 |
| 8 | United Kingdom | 12 |
| 9 | Finland | 13 |
| 10 | Taiwan | 13 |
| 11 | Ireland | 13 |
| 12 | Germany | 14 |
| 13 | Japan | 15 |
| 14 | Sweden | 16 |
| 15 | Iceland | 17 |
| 16 | Norway | 18 |
| 17 | Luxembourg | 20 |
| 18 | Austria | 22 |
| 19 | Spain | 23 |
| 20 | Estonia | 24 |
Source: Author (based on the global rankings from the following reports: Fraser Institute, 2020; World Economic Forum, 2019; Economist Intelligence Unit, 2020)
The so-called “TRIO ranking” shows that the top 20 best-performing countries concerning average results in economic freedom, competitiveness, and liberal democracy are Switzerland, Denmark, New Zealand, the Netherlands, the United States, Canada, Australia, the United Kingdom, Finland, Taiwan, Ireland, Germany, Japan, Sweden, Iceland, Norway, Luxembourg, Austria, Spain, and Estonia.
Figure 5. Integration Pattern and societal background behind the TOP 20 best-ranked countries
| TRIO ranking | Countries | Average ranking | Countries associated with the EU/EEA | NATO + associated | OECD members | Predominantly Protestant background |
| 1 | Switzerland | 7 | 1 | 1 | 1 | 1 |
| 2 | Denmark | 9 | 1 | 1 | 1 | 1 |
| 3 | New Zealand | 9 | 0 | 0 | 1 | 1 |
| 4 | Netherlands | 10 | 1 | 1 | 1 | 1 |
| 5 | United States | 11 | 0 | 1 | 1 | 1 |
| 6 | Canada | 11 | 0 | 1 | 1 | 1 |
| 7 | Australia | 11 | 0 | 0 | 1 | 1 |
| 8 | United Kingdom | 12 | 1 | 1 | 1 | 1 |
| 9 | Finland | 13 | 1 | 1 | 1 | 1 |
| 10 | Taiwan | 13 | 0 | 0 | 0 | 0 |
| 11 | Ireland | 13 | 1 | 1 | 1 | 0 |
| 12 | Germany | 14 | 1 | 1 | 1 | 1 |
| 13 | Japan | 15 | 0 | 0 | 1 | 0 |
| 14 | Sweden | 16 | 1 | 1 | 1 | 1 |
| 15 | Iceland | 17 | 1 | 1 | 1 | 1 |
| 16 | Norway | 18 | 1 | 1 | 1 | 1 |
| 17 | Luxembourg | 20 | 1 | 1 | 1 | 0 |
| 18 | Austria | 22 | 1 | 1 | 1 | 0 |
| 19 | Spain | 23 | 1 | 1 | 1 | 0 |
| 20 | Estonia | 24 | 1 | 1 | 1 | 1 |
| Ratio: | 70% | 80% | 95% | 70% |
Source: Author
5. Dominant policy patterns of best-ranked countries
Among the TOP 20 globally best-performing countries, more than two-thirds are from Europe. They predominantly and officially belong to the European Economic Area (EEA), which consists of the European Union (EU) and the European Free Trade Association (EFTA). Although the UK is out of the EU, its long-term results arise from its membership in the EU. Although Switzerland is not officially in the EU or EEA, it strongly benefits from its single market. The rest of the TOP 20 countries are Anglo-Saxon countries and two East Asian countries.
Among the TOP 20 globally best-performing countries, more than three-quarters are officially members of the NATO alliance or closely associated with NATO[1], while all the remaining countries are to a certain geopolitical extent associated with NATO. Accordingly, all TOP 20 countries share liberal democratic values in their foreign and security policies, led by the United States.
Among the TOP 20 countries, 85% belong to one of three political-economic models: Nordic, Continental European, or Anglo-Saxon. In addition to this, two countries are East Asian democratic capitalisms. Moreover, 95% of them are members of the OECD, expect Taiwan.
Among the TOP 20 countries, 70% have a predominantly Protestant societal and historical background, in terms of main values and their influence on institutions. A part of them have predominantly Protestant demographics (Nordic countries), while the other part is mixed due to historical reasons (Netherlands, Switzerland, and Germany) or mixed due to subsequent immigration waves (Anglo-Saxon countries). Ireland, Luxembourg, and Austria stand as the most competitive predominantly Catholic countries with historically significant Protestant minorities. In addition, Taiwan is a country with a strong Protestant influence. If these countries were to be categorized according to their predominant cultural backgrounds, the Inglehart-Welzel [2] World Cultural Map (2020), created by two political scientists, would place (the majority of) them among countries with more rational values. Moreover, almost all have predominant Christian societal and historical backgrounds.
Furthermore, the TOP 20 best-performing democratic capitalist countries stand in contrast to their geographical neighborhoods. Borders between different countries represent different political-economic and societal models of governance, institutions, and policymaking, and have geopolitical relevance. For example, Taiwan, Japan, and South Korea are in stark contrast to authoritarian communist China. The Nordic countries (and Baltic countries) are in strong cross-border contrast to authoritarian ex-communist Russia. The United States is in stark contrast to Mexico and the rest of Latin America. Finally, within the European Union, German-speaking continental European countries (Germany, Switzerland, and Austria), like the Nordic countries, are in relative contrast to Southern and Southeast Europe, i.e., the Mediterranean and the Balkans, and to a lesser extent, toward Central and Eastern Europe.
Finally, a part of the TOP 20 countries, especially the Anglo-Saxon countries and certain Nordic and Continental European countries, have applied the New Public Management model, at least to some policy extent, to support market-driven institutional reforms (Hinšt, 2021).
6. Legacy and values behind best-ranked countries
The mentioned best-ranked countries have been comprehensively working on many factors that improve their living standards. Migrants and talented individuals have higher opportunities to succeed in open societies that encourage and reward hard work on self-improvement. Such societies have high levels of social trust, transparency, and individual freedom, as well as inclusive political and economic institutions (Hinšt, 2022). In addition, talent competitiveness has been directly and horizontally associated with migration and demographic policy since countries that continuously lead the global rankings have been working hard on many improvements to attract talented people (Hinšt, 2022).
Institutions forge the success or failure of nations and influence behavior, including individual talents in society. Furthermore, the political process determines the economic institutions, and different institutions, policies, and social arrangements affect economic incentives and behavior. Moreover, social norms support institutional differences. Hereby, inclusive political institutions support a market economy based on property rights, law and order, broad economic opportunities, a level playing field, low entry barriers, freedom of exchange, contract, and innovation. On the other hand, extractive institutions include the old tsarist Russia, the communist Soviet Union, and China (Acemoglu & Robinson, 2012).
Culture determines economic performance, in line with Max Weber’s link between Protestant ethic and the spirit of capitalism (Robinson et al., 2005). In that sense, pure economic laws cannot explain Weber’s idea (Dermange, 2015).
In this respect, institutional and religious factors have a strong structural influence on competitiveness and prosperity. In particular, the Reformation brought modern institutions, democracy, education, horizontal power relations, and a rational attitude toward authority (Portilla, 2019). In that context, it is important to consider how social capital influences institutions.
Social capital means a level of quality in personal and social relations, social norms, and social trust (World Economic Forum, 2018). There is a problem in particularistic societies, where levels of trust are low since progress depends on personal links rather than merit and law. Accordingly, lower social trust leads to reduced cooperation and increased corruption, which affect perceptions of institutional impartiality and undermine trust in democratic political institutions (Radin, 2018).
In addition, social trust reduces transaction costs in the economy, which are associated with fulfilling a certain agreement. In Nordic countries, social trust derives from cultural factors, such as well-functioning and fair institutions with respect for laws and low levels of corruption, and the breakdown of social hierarchies encouraged by Protestantism (Nordic Council of Ministers, 2017) and Lutheranism (Gehrmann, 2007; Makkola, 2011). For example, Denmark is the European leader in terms of interpersonal trust (Ortiz-Ospina & Roser, 2016) and has the lowest corruption perception index in the globe (Transparency International, 2022).
Many values, institutions, and policies provided important inputs for the prosperity and competitiveness of Western civilization and the results of the best-ranked countries in terms of competitiveness as well as economic freedom and democracy.
Among them are publishing, religious toleration and freedom, the Protestant work ethic, devotion to work as the purpose of life and accumulation of capital, rational organization, the Enlightenment versus superstition, and the Eurocentric Scientific Revolution. In addition, European colonization of America was important for individual freedom, property rights, democracy, representative constitutional government, taxation approved by the parliament, independent courts, and upward mobility (Ferguson, 2012).
More specifically, the printing revolution that led to the Reformation had consequences in terms of greater economic dynamism. Networks of merchants and settlers created by transatlantic trade. Also, there was a big role for Enlightenment networks of intellectuals, freethinkers, and Freemasonry (Ferguson, 2017), which represent an integral part of democratic capitalist nation-states (Dickey, 2020).
In that enlightened context, individualism is the “central distinguishing mark of the West” (Huntington, 1996: 95). In particular, western values emphasize the dignity of individual liberty and inherent rights. Hereby, primarily American policymakers, think tanks, and intellectuals support the legacy of liberal democracy (Srinivasan et al., 2019). In addition, career professionals, including the CIA, support American foreign policy based on their belief in democratic capitalism, open trade, and human rights (Antholis, 2019).
Such a policy is based on the political ideas of protecting the natural rights to life, liberty, and property, and the rule of law. In particular, the Founding Fathers emphasized the necessity of civic virtues to protect liberty. Accordingly, the Founding Fathers saw the need for rational and moral education to support good governance and certain civic virtues, such as liberality, temperance, frugality, moderation, prudence, courage, and justice (West, 2017).
7. Conclusion
The best-ranked countries in terms of economic freedom, competitiveness, and liberal democracy have a strong geopolitical background, which drives their foreign and security policies. Therefore, it would be insufficient to analyze their developmental outcomes from their economic perspectives only, which is often the case with superficial approaches to complex and less-known problems. The analysis confirms strong connections between political, economic, societal, and personal freedoms, as well as the broader geopolitical relevance of freedom.
In particular, two-thirds of the TOP 45 countries in terms of economic freedom, competitiveness, and liberal democracy belong to all three categories of public policy. Also, more than two-thirds of the TOP 20 globally are from Europe and belong to or at least benefit from the EU single market, while the rest are Anglo-Saxon countries or two East-Asian countries. In addition, more than three-quarters are officially members of the NATO alliance or closely associated with NATO, while all the remaining countries are NATO allies.
Accordingly, all TOP 20 countries share liberal democratic values in their foreign and security policies. More than three-quarters of the TOP 20 countries belong to one of three political-economic models of democratic capitalism; Nordic, Continental European, or Anglo-Saxon, while two countries are from East Asia. Moreover, 95% of them are members of the OECD. Finally, more than two-thirds of the TOP 20 countries have predominantly Protestant societal and historical backgrounds.
The main question is which countries are willing to learn from the best performers. Accordingly, the challenge for the most competitive and free countries is to provide policy exports of their best practices to countries that are lagging and are ready for policy imports to learn about the quality of organizational management, political institutions, public policies, and social capital. That way, countries that lag behind the best-ranked ones can work on their policy improvements.
Commitment to freedom is essential for a country’s improvement. Essentially, such a commitment starts with free and morally responsible individuals who work hard on themselves to improve the political and economic institutions of democratic capitalism.
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Endnotes
[1] In 2022, Sweden and Finland applied to join NATO. They are practically a part of the NATO cluster since they participate in NATO policies and share geopolitical values. Similarly, Switzerland, Austria, and Ireland are also closely associated with NATO and share Western values, although they remain neutral countries.
[2] https://www.wikiwand.com/en/Inglehart%E2%80%93Welzel_cultural_map_of_the_world This scatter plot was created by political scientists Ronald Inglehart and Christian Welzel, while the data is based on the World Values Survey and European Values Survey.
Institutions Behind Competitive Global Rankings, 2nd edition
