Hope Springs Eternal

Every year for the past 12 years, the Heritage Foundation and The Wall Street Journal come up with their "Index of Economic Freedom." I watch this index carefully. Using the most current data available on taxes, tariffs, regulations, monetary policies, the rule of law, and other key information, they rank 161 countries by degrees of economic freedom.Based on 10 indexes of economic freedom, the Economic Freedom Index divides countries into four categories, shown on the world map below:

Free: Blue
Mostly free: Green
Mostly unfree: Orange
Repressed: Red






What are their latest findings?

1. Economic freedom is gradually increasing around the world! (This will come as quite a surprise to doomsayers and those who think the world is headed toward imminent disaster.) For the first time, the world's average level of economic freedom has tipped from "mostly unfree" to "mostly free." Free markets are expanding!

2. There is a strong correlation between economic freedom and prosperity. Countries with the highest level of economic freedom have the highest level of per capita income. And vice versa. Nations with severe restrictions on investors, businesses and consumers struggle financially. See the chart below. Note that the more economic freedom a nation enjoys, the higher average per capita income goes up.

3. The greatest growth recently in economic freedom has been in emerging markets, especially in Europe (the Baltic States and other new members of the European Union), and Asia, where economic freedom improved in 10 countries. Even China and India, both still in the "mostly unfree" category, have improved in their economic freedom ratings. Latin America has also seen marginal improvement.

4. Beware the Middle East: Look at the World Map of Economic Freedom, and you'll see that there's still a lot of "red" (repressed) in this unstable region of the world. Closed societies are breeding grounds for intolerance, fanaticism and terrorism.

Heritage is planning to come out shortly with a report on how investors can profit from the Economic Freedom Index. Generally, it is believed that stock indexes tend to rise sharply in countries where economic freedom is improving. That has clearly been the trend in emerging markets recently.

What would I do? Buy the iShares Emerging Markets Fund (EEM). It's a basket of the best stocks from these markets picked by professional international investors. The diversification will protect you from any backtracking as we saw last year when Russia took over Yukos and threw the President of Yukos in jail.