The Index of Economic Freedom is an annual index and ranking created by The
Heritage Foundation and The Wall Street Journal in 1995 to measure the degree of
economic freedom in the world's nations. The creators of the index took an
approach similar to Adam Smith's in The Wealth of Nations, that "basic
institutions that protect the liberty of individuals to pursue their own economic
interests result in greater prosperity for the larger society".
2015 Key: ██ Free, ██ Mostly Free, ██
Moderately Free, ██ Mostly Unfree, ██ Repressed.
2014 Key: ██ Free, ██ Mostly Free, ██
Moderately Free, ██ Mostly Unfree, ██ Repressed.
2014 ranking with more attributes The following table contains more
attributes. The whole table is available in XLS format at the Heritage Foundation
web site. 2012 and 2013 rankings
Key: ██ Free, ██ Mostly Free, ██ Moderately Free, ██ Mostly Unfree, ██
Repressed. Historical rankings
Method The Index's 2008 definition of economic
freedom is "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." The index scores nations on 10 broad
factors of economic freedom using statistics from organizations like the
World Bank, the International Monetary Fund and the Economist Intelligence
Unit: Business Freedom: Business freedom is a
quantitative measure of the ability to start, operate, and close a business
that represents the overall burden of regulation as well as the efficiency of
government in the regulatory process. Trade Freedom: Trade freedom is a
composite measure of the absence of tariff and non-tariff barriers that
affect imports and exports of goods and services. Different imports entering a
country can, and often do, face different tariffs.
Monetary Freedom: Monetary freedom combines a measure of price stability
with an assessment of price controls. Both inflation and price controls
distort market activity. Price stability without microeconomic intervention is
the ideal state for the free market. Government Size/Spending: This component
considers the level of government expenditures as a percentage of GDP.
Government expenditures, including consumption and transfers, account for
the entire score. Fiscal Freedom: Fiscal freedom is a
measure of the tax burden imposed by government.
Property Rights: The property rights component is an assessment of the
ability of individuals to accumulate private property, secured by clear laws
that are fully enforced by the state. Investment Freedom: In an economically
free country, there would be no constraints on the flow of investment
capital. Individuals and firms would be allowed to move their resources into and
out of specific activities internally and across the country’s borders without
restriction. Financial Freedom: Financial freedom is
a measure of banking efficiency as well as a measure of independence from
government control and interference in the financial sector.
Freedom from Corruption: Corruption erodes economic freedom by introducing
insecurity and uncertainty into economic relationships. The higher the level of
corruption, the lower the level of overall economic freedom and the lower a
country’s score. Labor Freedom: The labor freedom
component is a quantitative measure that looks into aspects of the legal and
regulatory framework of a country’s labor market.
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. The methodology has shifted and
changed as new data and measurements have become available, especially in the
area of Labor freedom, which was given its own indicator spot in 2007.
Meaning The Heritage Foundation reports that the
top 20% on the index have twice the per capita income of those in the second
quintile, and five times that of the bottom 20%. Carl Schramm, who wrote the
first chapter of the 2008 Index, states that cities of Medieval Italy and
mid-19th century Midwestern American cities all flourished to the degree they
possessed economic fluidity and institutional adaptiveness created by
economic freedom. According to Will Wilkinson of the
libertarian think tank Cato Institute, studies show that higher economic
freedom correlates strongly with higher self-reported happiness. According to
economists Tomi Ovaska and Ryo Takashima, economic freedom research
suggests "that people unmistakably care about the degree to which the society
where they live provides them opportunities and the freedom to
undertake new projects, strongly with and make choices based on one's personal
preferences." According to the Cato Institute, higher
economic freedom promotes participation and collaboration. Also claimed is that
higher economic freedom is extremely significant in preventing wars;
according to their calculations, freedom is around 54 times more effective than
democracy in diminishing violent conﬂict.
Ratings Since the index was created in 1995, the
score for world economic freedom has increased, rising 2.6 points up to 2008.
In 2011 the score had decreased from the 2008 score of 60.2 to 59.7, which
represents an increase of 2.2 points since 1995. The Economic Freedom score
improved for 117 countries, the majority of countries included in the index,
which were mainly developing and emerging market economies. With the
exception of Europe and North America, there were increased levels of freedom
recorded in all regions, with the greatest improvement shown in
Sub-Saharan Africa. The top five "free" economies identified by the 2011 index
were Hong Kong, Singapore, Australia, New Zealand, and Switzerland, each
scoring over 80 on the economic freedom grading scale. Since the Index was
created in 1995, Hong Kong has been the top performing economy.
In 2011, the United States dropped to 9th place behind such countries as
Denmark, Canada, and first-place Hong Kong. The Heritage Foundation has
pointed to increases in government spending as the reason for the United
States' decline, and according to data from the 2011 index, the growth rates of
countries with the highest levels of government spending were 4.5 points
lower, on average, than countries where government spending was under control.
In their "Executive Highlights" of index results, the Heritage Foundation stated
that "high levels of government spending in response to the global economic
turmoil have not resulted in higher economic growth".
The results from the 2012 index showed an overall decline in global economic
freedom; according to The Heritage Foundation, the average score in its
ranking was the second lowest of the last ten years. In particular, the U.S.
dropped to 10th place in the ranking, and has now fallen three places since
2008, when it was 7th. A report issued by the Foundation stated that government
spending was the cause of the decline, and had "not only failed to arrest the
economic crisis, but also—in many countries—seems to be prolonging it".
According to the report, activity in the private sector is threatened by the
greater government spending, which has increased public debt and led to more
bureaucracy. Countries that shared the same rank
received a tie score. Reception
According to the Freedom House, "there is a high and statistically significant
correlation between the level of political freedom as measured by Freedom
House and economic freedom as measured by the Wall Street Journal/Heritage
Foundation survey." The Millennium Challenge Account, a U.S. government
foreign aid program, has used the Trade freedom indicator in determining which
countries will receive their performance-based compacts.
Critics such as Jeffrey Sachs have contested the Index's assumption that
economic openness necessarily leads to better growth. In his book The End of
Poverty, Sachs graphed countries' ratings on the index against GDP per
capita growth between 1995 and 2003, claiming to demonstrate no correlation
between a country's rating and its rate of economic growth. Sachs pointed out,
as examples, that countries with good ratings such as Switzerland and Uruguay
had sluggish economic performances, others, like China, with poorer rating
had very strong economic growth. The UAE questioned the rating of their
country's economic freedom in 2008, comparing its middling rating with the
high rating they had received from other indicators such as Transparency
International and Moody's. They also argued that the report is "unreliable",
because its methodology had changed twice in the last two years.
Stefan Karlsson of the Ludwig von Mises Institute, challenged the usefulness of
the index due to the fuzziness of many of the categories used to determine
freedom. John Miller roundly criticizes the "Index", writing in Dollars & Sense,
"In the hands of the Wall Street Journal and the Heritage Foundation,
Washington's foremost right-wing think tank, however, an economic freedom index
merely measures corporate and entrepreneurial freedom from
accountability. Upon examination, the index turns out to be a poor barometer
of either freedom more broadly construed or of prosperity." According to Left
Business Observer, the Index has only a 33% statistical correlation with a
standard measure of economic growth, GDP per capita.
See also List of countries by economic freedom
List of freedom indices Mary O'Grady, an editor of the Wall
Street Journal and co-editor of the Index of Economic Freedom
Gross National Happiness Bhutan GNH Index
Happiness economics References
External links 2014 Index of Economic Freedom 2014
Index of Economic Freedom Index of Economic Freedom from the
Heritage Foundation Index of Economic Freedom in the 50
States from the Mercatus Center List of Global Development Indexes and
Rankings