Index of Economic Freedom

The 2008 Heritage Foundation Index of Economic Freedom. Blue is Free, Green is Mostly Free, Yellow is Moderately Free, Orange is Mostly Not Free, Red is Not Free, Grey is ungraded

The Index of Economic Freedom is a series of 10 economic measurements created by the Wall Street Journal and The Heritage Foundation to measure the degree of economic freedom in the world's nations.

History

The Heritage Foundation and the Wall Street Journal created the Index of Economic Freedom. Both the Wall Street Journal and Heritage Foundation are known for their support of market liberalism.

Methodology

"The highest form of economic freedom provides an absolute right of property ownership, fully realized freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself. In other words, individuals are free to work, produce, consume, and invest in any way they please, and that freedom is both protected by the state and unconstrained by the state.". However, the labour freedom calculation does not take into account the freedom to migrate across countries.

The index scores nations on 10 broad factors of economic freedom using statistics from organizations like the World Bank, the IMF and the Economist Intelligence Unit:

• Business Freedom
• Trade Freedom
• Monetary Freedom
• Freedom from Government
• Fiscal Freedom
• Property Rights
• Investment Freedom
• Financial Freedom
• Freedom from Corruption
• Labor Freedom

The 10 factors are averaged equally into a total score. Each one of the 10 freedoms is graded using a scale from 0 to 100, where 100 represents the maximum freedom. A score of 100 signifies an economic environment or set of policies that is most conducive to economic freedom.

Research

Hundreds of peer-reviewed articles have used these indices. They have been used in, for example, economic research, political science, and environmental research.

Economic freedom has been shown to correlate strongly with higher average income per person, higher income of the poorest 10%, higher life expectancy, higher literacy, lower infant mortality, higher access to water sources and less corruption. The share of income in percent going to the poorest 10% is the same for both more and less economically free countries.

The people living in the top one-fifth of the most free countries enjoy an average income of $23,450 and a growth rate in the 1990s of 2.56 percent per year; in contrast, the bottom one-fifth in the rankings had an average income of just $2,556 and a -0.85 percent growth rate in the 1990s. The poorest 10 percent of the population have an average income of just $728 in the least free countries compared with over $7,000 in the most free countries. The life expectancy of people living in the most free nations is 20 years longer than for people in the least free countries.

Regarding environmental health, studies have found no or a positive effect. More important may be the Kuznets curve. Many, but not all, environmental health indicators, such as water and air pollution, show an inverted U-shape: in the beginning of economic development, little weight is given to environmental concerns, raising pollution along with industrialization. After a threshold, when basic physical needs are met and there are funds available, interest in a clean environment rises, reversing the trend.

One question has been what sub-components are responsible for economic growth. Functioning property rights, low corruption, and low inflation may be particularly important. Regarding the size of government and free trade there is much conflicting evidence.

An overview of research can be found here, including studies showing that more economic freedom is the cause of beneficial effects. It also states that Economic Freedom of the World has been used in most of the academic research, partly because Index of Economic Freedom only goes back to 1995 and because it uses more subjective variables.

Influence and trends

The above has had "at least some indirect effects" on economic policy in some nations. In Russia it influenced President Vladimir Putin, after he won the 2000 election, to adopt a flat tax and restructure the very high marginal payroll taxes that were causing massive tax evasion. Supporters argue that this has contributed to the strong economic growth in Russia in recent years. On the other hand, Russia still scores very low in both indices and the high oil prices have helped Russia's economy. Flat taxes have also been instituted in Latvia, Estonia, and Slovakia, and are discussed in several other nations. Iceland has cut several of its taxes, with advocates for this using the economic freedom model. A related index for Chinese provinces is followed by both Chinese scholars and policy makers. There is also a network of institutions in 59 different nations that use the index to promote free market ideas.

Criticical reaction

An investment advisory group has created the "World Freedom ETFfolio" which bases its investments on the Index by favoring countries with higher levels of freedom.

After the release of the 2008 report, the country of Qatar questioned the rating of their countries economic freedom, comparing its middling rating with the high rating they had received from other indicators such as Transparency International and Moody's. They also noted that the methodology had changed twice in the last two years, rendering its report "unreliable".

Current ratings

The Heritage Foundation changed the methodology in 2007 and again in 2008. There was a slight increase in economic freedom in 2008, with the largest positive change in Egypt, which jumped to 85th.

See Also

• Index of Economic Freedom 2003-2006
• List of indices of freedom

External links

• Index of Economic Freedom