Indices of Economic Freedom - AbsoluteAstronomy.com

The annual survey Economic Freedom of the World is an indicator produced by the Fraser Institute

Fraser Institute

The Fraser Institute is a Canadian think tank. It has been described as politically conservative and right-wing libertarian and espouses free market principles...

, a Canadian think tank which attempts to measure the degree of economic freedom

Economic freedom

Economic freedom is a term used in economic and policy debates. As with freedom generally, there are various definitions, but no universally accepted concept of economic freedom...

in the world's nations. This indicator has been used in peer-reviewed studies some of which have found a range of beneficial effects of more economic freedom. Economic Freedom of the World index has been more widely used than any other measure of economic freedom, because of its coverage of a longer time period.

History

One of the earliest measures of economic freedom was developed by Freedom House

Freedom House

Freedom House is an international non-governmental organization based in Washington, D.C. that conducts research and advocacy on democracy, political freedom and human rights...

, which has done extensive work on the measurement of political and cultural freedom. This measure incorporated a range of indicators including freedom to establish a business and freedom of union organisation.

Partly in response to dissatisfaction with the Freedom House index from advocates of a libertarian

Libertarianism

Libertarianism, in the strictest sense, is the political philosophy that holds individual liberty as the basic moral principle of society. In the broadest sense, it is any political philosophy which approximates this view...

or market liberal viewpoint, Milton Friedman

Milton Friedman

Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

and Michael Walker

Michael Walker (economist)

Michael Walker, Ph.D is a Canadian economist. He is best known as the founder of The Fraser Institute....

of the Fraser Institute

Fraser Institute

The Fraser Institute is a Canadian think tank. It has been described as politically conservative and right-wing libertarian and espouses free market principles...

hosted a series of conferences on economic freedom. Eventually this resulted in a report on worldwide economic freedom, Economic Freedom of the World. Later the Heritage Foundation

Heritage Foundation

The Heritage Foundation is a conservative American think tank based in Washington, D.C. Heritage's stated mission is to "formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong...

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

.

Method

The participants in the conferences reached a consensus that the cornerstones of economic freedom are:

Personal choice rather than collective
Collective
A collective is a group of entities that share or are motivated by at least one common issue or interest, or work together on a specific project to achieve a common objective...

choice,
Voluntary exchange coordinated by markets rather than allocation via the political process,
Freedom to enter and compete in markets, and
Protection of persons and their property from aggression by others.

The 2005 report states "When the functions of the minimal state—protection of people and their property from the actions of aggressors, enforcement of contracts, and provision of the limited set of public goods like roads, flood control projects, and money of stable value—are performed well, but the government does little else, a country’s rating on the EFW summary index will be high. Correspondingly, as government expenditures increase and regulations expand, a country’s rating will decline."

In practice, the index measures:

Size of Government: Expenditures, Taxes, and Enterprises
Legal Structure and Security of Property Rights
Access to Sound Money
Freedom to Trade Internationally
Regulation of Credit, Labor, and Business

The report uses 42 distinct variables, from for example the World Bank

World Bank

The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

, to measure this. Some examples: tax rates, degree of juridical independence, inflation rates, costs of importing, and regulated prices. Each of the 5 areas above is given equal weight in the final score.

Research

Hundreds of peer-reviewed articles have used the index. It has 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

Life expectancy

Life expectancy is the expected number of years of life remaining at a given age. It is denoted by ex, which means the average number of subsequent years of life for someone now aged x, according to a particular mortality experience...

, higher literacy

Literacy

Literacy has traditionally been described as the ability to read for knowledge, write coherently and think critically about printed material.Literacy represents the lifelong, intellectual process of gaining meaning from print...

, lower infant mortality

Infant mortality

Infant mortality is defined as the number of infant deaths per 1000 live births. Traditionally, the most common cause worldwide was dehydration from diarrhea. However, the spreading information about Oral Re-hydration Solution to mothers around the world has decreased the rate of children dying...

, 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.

Higher economic freedom, as measured by both the Heritage and the Fraser indices, correlates strongly with higher self-reported happiness.

Higher economic freedom is extremely significant in preventing wars. Economic freedom is around 54 times more effective than democracy

Democracy

Democracy is generally defined as a form of government in which all adult citizens have an equal say in the decisions that affect their lives. Ideally, this includes equal participation in the proposal, development and passage of legislation into law...

(as measured by Democracy Score) in diminishing violent conﬂict.

Regarding environmental health, studies have found no or a positive effect. More important may be the Kuznets curve

Kuznets curve

A Kuznets curve is the graphical representation of Simon Kuznets' hypothesis that economic inequality increases over time while a country is developing, and then after a certain average income is attained, inequality begins to decrease....

. Many, but not all, environmental health indicators, such as water

Water pollution

Water pollution is the contamination of water bodies . Water pollution occurs when pollutants are discharged directly or indirectly into water bodies without adequate treatment to remove harmful compounds....

and air pollution

Air pollution

Air pollution is the introduction of chemicals, particulate matter, or biological materials that cause harm or discomfort to humans or other living organisms, or cause damage to the natural environment or built environment, into the atmosphere....

, 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.

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.

Recent research have found that countries with higher economic freedom and more liberal credit market regulation suffered more during the international financial crisis and global recession.

Influence and trends

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.

Economic Freedom of the World 2005 states that the world economic freedom score has grown considerably in recent decades. The average score has increased from 5.17 in 1985 to 6.4 in the most recent available year. Of the nations in 1985, 95 nations increased their score, seven saw a decline, and six were unchanged.

Criticisms

The claimed correlation between economic freedom and growth has been critically analysed by a number of studies. De Hann and Siermann (Further Evidence on the Relationship Between Economic Freedom and Economic Growth, Public Choice. 95: 363–380.) find that the relationship is not robust. Heckelman and Stroup (Jac C. Heckelman, Michael D. Stroup (2000), ‘Which Economic Freedoms Contribute to Growth?’, Kyklos, 53(4), 527-44.) argue that the weighting procedure used in the construction of the index is arbitrary. They examine the components of the index individually and find that many (including a low top marginal tax rate) are negatively, rather than positively correlated with economic growth.

One criticism may be that this is simply a list of wealthy nations. However, economic wealth or high living standards are not used when scoring the nations. As noted above, proponents argue that there is evidence that one important explanation for the high wealth and living standards in these nations are that they have had high economic freedom in the past. Thus, while today Japan is much more wealthy than Estonia, since Estonia has a higher economic freedom, it may well be that in the future Estonia's economic wealth and living standards will grow faster than Japan's.

Another criticism is that for example China

China

Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...

, and more generally several other developing nations, have high growth rates but relatively low economic freedom. However, developing nations should generally have higher growth rates than developed nations, since, for example, they are catching up and do not need to research new technologies initially, as they can import investments, technology, organizatorial skills etc. from the rich countries. China started with very high poverty and very low economic freedom. "To be sure, China's economic freedom measures just 54 percent in 2007. But 30 years ago in 1977, the measure would have been near zero. By quietly setting aside Maoist dogma in 1978, the introduction of property rights for small farmers by Deng Xiaopeng initiated a revolution in economic freedom. As Milton Friedman anticipated, this small infusion had dramatic and positive effects. Within a few years, the Communist Party was promoting the slogan 'It is glorious to be rich.' Looking back, China's economic freedom has grown by 1 or 2 percentage points every year for 30 years, and the economy grew along with it: a growth-growth relationship." Chinese growth may slow if the reforms do not continue.

The independent research does not necessarily support all of the ideals of laissez-faire. For example, when examining the effects of subcomponents of the index, any positive effect that a low level of taxes might have is much more disputed than the importance of rule of law

Rule of law

The rule of law, sometimes called supremacy of law, is a legal maxim that says that governmental decisions should be made by applying known principles or laws with minimal discretion in their application...

, lack of political corruption

Political corruption

Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...

, low inflation

Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

, and functioning property rights. Some of the highest ranking countries in the Index, for example Iceland

Iceland

Iceland , described as the Republic of Iceland, is a Nordic and European island country in the North Atlantic Ocean, on the Mid-Atlantic Ridge. Iceland also refers to the main island of the country, which contains almost all the population and almost all the land area. The country has a population...

(# 5), Denmark

Denmark

Denmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark...

(# 8), Finland

Finland

Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...

(# 12) and Sweden

Sweden

Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....

(# 19) are widely recognized as having some of the world's most extensive welfare state

Welfare state

A welfare state is a "concept of government in which the state plays a key role in the protection and promotion of the economic and social well-being of its citizens. It is based on the principles of equality of opportunity, equitable distribution of wealth, and public responsibility for those...

s, which are strongly opposed by advocates of laissez-faire. However, those countries have less regulation than most others, which explains their rankings.

Research using the Ease of Doing Business Index

Ease of Doing Business Index

The Ease of Doing Business Index is an index created by the World Bank. Higher rankings indicate better, usually simpler, regulations for businesses and stronger protections of property rights...

suggests that the effect of business regulations is more important than government consumption. The Global Competitiveness Report

Global Competitiveness Report

The Global Competitiveness Report is a yearly report published by the World Economic Forum. The first report was released in 1979. The 2011–2012 report covers 142 major and emerging economies....

looks at several other factors that also affect economic growth such as infrastructure

Infrastructure

Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...

, health

Health

Health is the level of functional or metabolic efficiency of a living being. In humans, it is the general condition of a person's mind, body and spirit, usually meaning to be free from illness, injury or pain...

, and education

Education

Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...

.

The World Bank

World Bank

The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

is a strong supporter of the importance of economic growth

Economic growth

In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...

for reducing poverty

Poverty

Poverty is the lack of a certain amount of material possessions or money. Absolute poverty or destitution is inability to afford basic human needs, which commonly includes clean and fresh water, nutrition, health care, education, clothing and shelter. About 1.7 billion people are estimated to live...

. However, the World Bank does not believe that laissez-faire policies, if they allow large inequalities of wealth to develop, are an effective way to achieve this goal. It argues that an overview of many studies shows that:

Growth is fundamental for poverty reduction, and in principle growth as such does not seem to affect inequality.
Growth accompanied by a more egalitarian distribution of wealth is better than growth alone.
High initial income inequality is a brake on poverty reduction.
Poverty itself is also likely to be a barrier for poverty reduction; and wealth
Wealth
Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...

inequality seems to predict lower future growth rates.

Economic Freedom of the World: 2011 Annual Report

Summary Economic Freedom Ratings, 2009

Rank	Country	Summary index
1	Hong Kong	9.01
2	Singapore	8.68
3	New Zealand	8.20
4	Switzerland	8.03
5	Australia	7.98
6	Canada	7.81
7	Chile	7.77
8	United Kingdom	7.71
9	Mauritius	7.67
10	United States	7.60
11	Bahrain	7.59
11	Finland	7.59
13	Slovakia	7.56
14	United Arab Emirates	7.54
15	Denmark	7.52
15	Estonia	7.52
15	Hungary	7.52
18	Cyprus	7.51
19	Austria	7.50
20	Luxembourg	7.49
21	Germany	7.45
22	Japan	7.44
23	Panama	7.41
24	Lithuania	7.40
25	Republic of Ireland	7.38
26	Republic of China	7.37
27	Georgia (country)	7.36
28	Kingdom of Bulgaria	7.34
28	Oman	7.34
30	Albania	7.32
30	Netherlands	7.32
30	South Korea	7.32