The Fraser Institute recently released its annual “Economic Freedom of the World” report. While the US inched up one spot from its previous ranking to fifth-best, this ranking remains below its peak of third-best in 2000.

A first-time finding not seen in any of 27 prior years: Hong Kong fell from first place. Singapore nudged out Hong Kong for the top spot by 0.01 points. While that rating may seem minuscule, the implications of how both countries got here are not.

The report, which shows comprehensive data from 2021, assesses economic freedom among nations across five major areas: size of government, legal system and property rights, sound money, freedom to trade internationally, and regulations.

According to the Fraser Institute’s Matt Mitchell, “The most important component of economic freedom…is the rule of law section…you need to be able to trust that the contracts you form and the property you acquire will be protected. We found that regulatory barriers and the rule of law matter more than taxes [for economic freedom].”

Given these guidelines, Hong Kong’s fall isn’t surprising.

China’s special administrative region allowed to manage most of its own affairs under the “one country, two systems” precedent since 1997, Hong Kong’s independence has been seriously threatened since 2020 with the passage of China’s new security law.

Today, as a result, Hong Kong has one of the fastest-growing political prisoner populations worldwide. Although the protection of Hong Kong’s independence under the system was set to last until 2047, it seems unlikely that China will keep its promise.

Over the past two years, Hong Kong’s economic freedom ranking dropped by a substantial 0.40 points, a total decline of 0.64 points since its highest rating of 9.19 in 2010. This is much steeper than the average economic freedom drop worldwide following the pandemic, which is the lowest average score since 2009, pointing to China’s harsh policies as a primary factor.

China’s recent security law inhibits free speech and impartial justice, integral to the rule of law which is the foundation upon which individuals can construct their economic aspirations, with trust as the indispensable glue.

But trust isn’t just a legal concept. It’s deeply interwoven with a nation’s cultural fabric. Trust is the bedrock upon which economic prosperity thrives, allowing individuals and businesses to engage in voluntary exchanges with confidence.

Recent developments, including China imposing significant trade barriers, limits to foreign labor employment, increased business costs, and new attempts to restrict media,l tarnished Hong Kong’s overall score.

The lesson from the report rings loud and clear: A small government footprint in fiscal matters alone won’t guarantee economic freedom.

What’s needed is a symphony of elements: the rule of law, property rights, stable currency, open trade, and sensible regulation. High-income industrial economies like now top-ranking Singapore shine in areas related to legal systems, property rights, sound currency, and international trade while keeping their government size compact.

The report is a valuable tool for deciphering economic freedom’s complexities, and the factors underlying the success story of Singapore and Hong Kong’s decline drive home the point that tax rates don’t solely determine economic prosperity. It hinges on the quality of institutions, the rule of law, and the cultural values that champion trust and voluntary exchange.

As the US strives to enhance its economic freedom, the country would be wise to heed the lessons offered by Singapore’s rise and Hong Kong’s fall. In particular, this should include removing government barriers so that there are more ways for free people to prosper.