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The Index of Economic Freedom is an influential index published annually by the Heritage Foundation, a conservative think tank, and the Wall Street Journal.
Methodology
Economic freedom is defined as "the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself"which is in turn related to the principles of laissez-faire capitalism[http://www.m-w.com/dictionary/laissez-faire It is the opinion of the creators that the index measures this.
What the Index actually measures are how countries score on a list of 50 variables. They include:
- Corruption in the judiciary, customs service, and government bureaucracy;
- Non-tariff barriers to trade, such as import bans and quotas as well as strict labeling and licensing requirements;
- The fiscal burden of government, which encompasses income tax rates, corporate tax rates, and trends in government expenditures as a percent of output;
- The rule of law, efficiency within the judiciary, and the ability to enforce contracts;
- Regulatory burdens on business, including health, safety, and environmental regulation;
- Restrictions on banks regarding financial services, such as selling securities and insurance;
- Labor market regulations, such as established work weeks and mandatory separation pay; and
- Informal market activities, including corruption, smuggling, piracy of intellectual property rights, and the underground provision of labor and other services.
These are divided into 10 broad factors of economic freedom:
- Trade policy,
- Fiscal burden of government,
- Government intervention in the economy,
- Monetary policy,
- Capital flows and foreign investment,
- Banking and finance,
- Wages and prices,
- Property rights,
- Regulation, and
- Informal market activity
The higher a country's score on a factor the less economic freedom there is. The 10 factors are given equal weight in determining the final score. Depending on their score, countries are then separated into four categories: Free, Mostly Free, Mostly Unfree, and Repressed.
Similar Indices
- The Fraser Institute: the "Economic Freedom of the World Annual Report"; and
- the World Economic Forum: the "Global Competitiveness Report."
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, as defined by the Index, 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 enviornmental 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 a 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 subcomponents are responsible for economic growth. Fucntioning 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.
Influence
The Index has had a strong impact on both economic research and on economic policy in many nations*.
Criticism
Some critics have asked, for instance, if Canada's slightly higher income tax rates make it a less economically free country than the United States. Critics of the index's methodology take issue with its equation of low tax rates and weak labor regulations with economic freedom. Some critics go further, saying that the index judges countries against a specious list of 'ideal' economic and fiscal policies, which reflect the Heritage Foundation and Wall Street Journal 's own laissez-faire economic and fiscal policy ideas more than they do a substantive concept of economic freedom. For such critics, the list is simply a promotional tool for laissez-faire policy, rather than a meaningful index of economically free countries.
In response, proponents point out that most of the research using the indices have been done by independent researchers with no connection to creators of the indices. The research have been published in numerous peer-reviewed papers. Such peer-review includes the methodology used in creating the indices. That the creators of the indices may support laissez-faire capitalism does not invalidate the empirical research. Such criticism can be seen as ad hominem.
However, this independent research does not necessarily support 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, lack of corruption and functioning property rights. Some of the highest ranking countries in the Index, for example Iceland (# 5), Denmark (# 8), Finland (# 12) and Sweden (# 19) are widely recognized as having some of the world's most extensive welfare states, which are strongly opposed by advocates of laissez-faire.
The World Bank is a strong supporter of the importance of economic growth for reducing poverty. 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 inequality seems to predict lower future growth rates.*
Current ratings
The most current ratings are for 2006. Note: countries sharing the same rank received a tie score. For example, Iceland and the United Kingdom are tied for the rank of 5th most economically free country. Also note that a detailed description of the conditions in each country can be found on: http://www.heritage.org/research/features/index/countries.cfm.
Note: Due to economic or political instability, the Democratic Republic of the Congo, Iraq, Papua New Guinea, Samoa, Serbia and Montenegro, Somalia and Sudan were not ranked. There is also no data for countries with very small populations including Andorra, Antigua and Barbuda, Bhutan, Dominica, East Timor, Grenada, Liechtenstein, Micronesia, Monaco, San Marino, Saint Lucia, São Tomé and Príncipe, Saint Vincent and the Grenadines, Saint Kitts and Nevis, Vatican City, Tonga, Tuvalu, and Seychelles.
Developments
- Overall, 99 countries worldwide are freer than they were last year and 51 are less free. Five countries remained in the same degree of freedom.
- The 10 most-improved countries this year were: Pakistan, Romania, Kyrgyzstan, Suriname, Armenia, Turkmenistan, Georgia, Turkey, Tajikistan and Kazakhstan.
- The 10 worst-improved countries this year were: Iran, Italy, Guinea, Bolivia, United Arab Emirates, Oman, Sri Lanka, Equatorial Guinea, Egypt and Nicaragua.
External links
- Index of Economic Freedom.
- The Wall Street Journal.
- Heritage Foundation.
- Free, Free at Last (a critique from Dollars and Sense)
- Laissez-Faire Olympics (critique by Doug Henwood).
See also
"Index of Economic Freedom"