The axis of economic freedom has shifted from the Western world to southeast Asia and Oceania, according to a new report from the Heritage Foundation. The economies of Hong Kong, Singapore, Australia and New Zealand ranked highest in the think tank's annual Index of Economic Freedom.

But what is economic freedom exactly, and how should we measure it? I spoke with Heritage fellow and co-author Anthony B. Kim about the foundation's surprising and controversial report. Our conversation appears below the gallery:

Why did the U.S. fall in this year's ranking?

There are two reasons why the U.S. is falling behind. First, a lot of other countries are doing good reforms while we're standing still. Second, we have lingering government interventionist policies and spending is growing. We need to cut spending to make our fiscal future more reasonable, more viable.

Did financial regulation and health care reform hurt the United States?

Financial regulation was not factored into our analysis. The law was passed in July, and our data cycle ended in June 2010. But health care reform has price controls and invites more government spending, so those hurt our ranking in the categories of government spending and monetary freedom.

What were the major movers on the list?

Ireland's overall rating slipped a bit, since government spending had to step in and bail out big banks [with huge debt obligations].

It seems to me that Ireland might be an example of a country that was too economically free. Their low corporate tax rate and liberal monetary policy arguably invited a real estate bubble that has consumed the country.

A lower corporate tax rate attracted a lot of foreign investment. But [their ranking fell because] repeated government attempts to fix the financial market resulted in unnecessary government spending.

To push back a little: A lot of people would say that lax economic policy, which Heritage celebrates, created the crisis; whereas the government bailout, which Heritage criticizes, was the proper response.

You raise a fair point. But we have to separate the tax rate from unnecessary government spending. Look at Switzerland. They did their bailout swiftly. Ireland has prolonged its crisis and uncertainty. That's why I think we see this decline of economic freedom in Ireland.

The United States ranks in the top three in only one category: labor freedom. Why labor freedom?

Compared to other developed countries, we have flexible labor laws. In Europe, minimum wages are high, the hiring and firing process is cumbersome, and benefits like paid vacations are very generous. We don't have that in the U.S. We have more reasonable benefits. We don't argue that there shouldn't be benefits. But once you cross a certain point, you lose your competitive edge.

Why is Canada ranked higher than the U.S. if they have expensive social services like universal health care?

Canada does have different government intervention, for example with universal health care. But their tax rates are more competitive. That makes them dynamic and increases their score in other areas like business freedom, trade freedom, investment and financial freedom.

In the category of government spending, you give the highest rating to Burma and Turkmenistan. Is the implication that the less a government spends, the more free it is?

That's the tricky part. These countries are outliers, and their economic structure is not like the United States or the Western world. Even though they spend less, their government efficiency is poor.

There are some studies that say [government spending at] 25 percent [of GDP] is just about optimal, but we cannot say for sure that 25 percent is optimal.  So we say the less government spending you have, the better.

This seems to give broken and dysfunctional governments like Burma much more credit than they deserve.

But it's only one of ten categories. Even though countries like Burma and Turkmenistan get high ratings in government spending, they get low scores categories like investment freedom, and their overall score is much lower.

I think this gets at a fundamental controversy in the report. Do you think government has a role is creating the conditions for business success?

We recognize the presence of government is necessary to uphold an efficient economic system. We need limited government to maintain civil society and national defense. But we also support a laissez faire attitude toward investment and trade. So we have ten economic freedoms that are equally weighted. We treat government spending equal to property rights. Ultimately, we are trying to reward the minimal intervention of government.

Bahrain, which cracked the top ten this year, has no corporate tax rate. Does Heritage consider zero the best corporate tax rate?

In this specific component of the study, yes. If a country doesn't take any money away from the private sector, that is positive in our standing. But that's just one component. Bahrain rose three spots on top of its competitive tax rate and [other factors like] more flexible labor market policies.

What should the United States learn from the top-ranked countries, Hong Kong and Singapore?

Hong Kong and Singapore are not perfect. But they do have a commitment to maintaining greater economic freedom. Their tax rates are more competitive than the United States. Their government interventions are lower than the US. If I had to pick one or two categories [where we could learn from Hong Kong and Singapore], it might be more competitive tax rates and efficiency of regulatory system. U.S. business freedom is quite high. But regulatory changes created by financial reform and health care reform are the kind of ongoing regulatory uncertainties that affect [business decisions].

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