Index of Economic Freedom

The Index of Economic Freedom is an annual index and ranking created in 1995 by The Heritage Foundation and The Wall Street Journal to measure the degree of economic freedom in the world's nations. The creators of the index assert that they take an approach inspired by Adam Smith's 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".

Purpose

The Heritage Foundation's Index of Economic Freedom states that, "Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself." By publishing the Index annually, the foundation attempts to highlight where such freedoms do and do not exist.

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 those of the mid-19th century Midwestern United States both flourished proportionate to their 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 (as measured by Democracy Score) in diminishing violent conflict.

Ratings

Between 1995, the first edition of the Index, and 2008, the score for world economic freedom has increased, rising 2.6 points, according to the Index.

Between 2008 and 2011, however, the score decreased 60.2 to 59.7, though the 2011 score represents an increase of 2.2 points since the first edition in 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. In 2011, 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.

Also in 2011, the United States dropped to 9th place in the Index, falling behind Denmark, Canada, and first-place Hong Kong, which ranked first in every issue of the Index from 1995 until 2019. The Heritage Foundation pointed to increases in government spending as a primary reason for the United States' decline in its ranking. 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 in 2011, the Heritage Foundation wrote that, "high levels of government spending in response to the global economic turmoil have not resulted in higher economic growth".

In 2012, results from the 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. The U.S. dropped to 10th place in the 2012 ranking, falling three places since 2008, when it was seventh. A report issued by the Heritage Foundation stated that government spending was the cause of many countries' declines, and that the spending 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.

Hong Kong

For 25 consecutive years, from 1995 to 2019, Hong Kong was ranked the most world's most free economy by the Index..

In 2019, however, after the Hong Kong national security law was implemented, the Heritage Foundation dropped Hong Kong and Macau as independent entities in the Index, writing that, "developments in recent years have demonstrated unambiguously that those policies are ultimately controlled from Beijing". The 2019 Index ranked the level of economic freedom in China low, 107th among the 178 ranked in the report.

Methodology

The Index evaluates 177 countries in four broad policy areas that affect the economic freedom, which are rule of law, government size, regulatory efficiency, and open markets. It also takes into consideration some specific categories like property rights, judicial effectiveness, government integrity and tax burden. The ranking scores aspects of economic freedom between 0 and 100, with 0 meaning "no economic freedom" and 100 meaning "total economic freedom". There are twelve aspects divided into four categories.

Reception

In 2001, Freedom House, a human rights group, wrote that, "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."

In his 2005 book The End of Poverty, Jeffrey Sachs graphed countries' ratings on the Index against per capita GDP growth between 1995 and 2003, claiming to demonstrate that there was no correlation between a country's rating and its rate of economic growth. As examples, Sachs cited countries with good ratings in the Index, such as Switzerland and Uruguay, which had sluggish economic performances while others, like China, with poorer ratings in the Index were experiencing strong economic growth.

In January 2005, 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.

In March 2005, John Miller criticized 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, growth in Index accounts for 10% of the variation in the growth of GDP.

In September 2007, the Millennium Challenge Account, a U.S. government foreign aid program, used the Index in determining which countries will receive their performance-based compacts.

In January 2008, United Arab Emirates questioned its rating in the Index, comparing its average rating with the high rating they had received from other economic freedom indexes, such as Transparency International and Moody's. UAE argued called the Index "unreliable", arguing that its methodology changed twice over the prior two years.

Rule of law

Property rights

Degree of a country's legal protection of private property rights and degree of enforcement of those laws. It is divided into the following sub-factors:

1. Physical property rights
2. Intellectual property rights
3. Strength of investor protection
4. Risk of expropriation
5. Quality of land administration

Judicial effectiveness

Degree of the judiciary's efficiency and fairness, especially dealing with property laws. It is divided into the following sub-factors:

1. Judicial independence
2. Quality of the judicial process

Government integrity

Analyzes how prevalent are forms of political corruption and practices such as bribery, extortion, nepotism, cronyism, patronage, embezzlement, and graft. It is divided into the following sub-factors:

1. Public trust in politicians
2. Irregular payments and bribes
3. transparency of government policymaking
4. Absence of corruption
5. perceptions of corruption
6. Governmental and civil service transparency

Government size

Tax burden

Analyzes marginal tax rates on personal and corporate income and the overall taxation level (including direct and indirect taxes imposed by all levels of government) as a percentage of the GDP. Its sub-factors are:

1. Top marginal tax rate on individual income
2. Top marginal tax rate on corporate income
3. Total tax burden as a percentage of GDP

Government spending

Quantifies the burden of government expenditures, including consumption by the state and all transfer payments related to various welfare programs. The ideal level varies from country to country, but zero expenditure is used as a benchmark.

Fiscal health

Analyzes how well a country manages its budget by quantifying the growing debt and deficit. It is divided into the following sub-factors:

1. Average deficits as a percentage of GDP for the most recent three years (80 percent of score)
2. Debt as a percentage of GDP (20 percent of score)

Regulatory efficiency

Business freedom

Analyzes the cost, time and freedom to open, operate and close a business, taking into consideration factors like electricity. It is divided into thirteen sub-factors:

1. Starting a business - procedures (number)
2. Starting a business - time (days)
3. Starting a business - cost (% of income per capita)
4. Starting a business - minimum capital (% of income per capita)
5. Obtaining a license - procedures (number)
6. Obtaining a license - time (days)
7. Obtaining a license - cost (% of income per capita)
8. Closing a business - time (years)
9. Closing a business - cost (% of estate)
10. Closing a business - recovery rate (cents on the dollar)
11. Getting electricity - procedures (number)
12. Getting electricity - time (days) and
13. Getting electricity - cost (% of income per capita)

Labor freedom

Quantifies the intrusiveness of labor rights such as minimum wage, laws inhibiting layoffs, severance requirements, and measurable regulatory restraints on hiring and hours worked, plus the labor force participation rate as an indicative measure of employment opportunities in the labor market. It is divided into the following sub-factors:

1. Ratio of minimum wage to the average value added per worker
2. Hindrance to hiring additional workers
3. Rigidity of hours
4. Difficulty of firing redundant employees
5. Legally mandated notice period
6. Mandatory severance pay
7. Labor force participation rate

Monetary freedom

Analyzes how stable are prices and how much microeconomy intervenes. It is divided into the following sub-factors:

1. Weighted average inflation rate for the most recent three years
2. Price controls

Market openness

Trade freedom

Quantifies the extent to which tariff and nontariff barriers affect imports and exports of goods and services into and out of the country. Its sub-factors are:

1. Trade-weighted average tariff rate
2. Non-tariff barriers (NTBs)

Investment freedom

Analyzes how free or constrained is the flow of investment capital of individuals and firms.

Financial freedom

Indicates banking efficiency as well as how independent the government is from the financial sector. This aspect looks at five broad areas:

1. Extent of government regulation of financial services
2. Degree of state intervention in banks and other financial firms through direct and indirect ownership
3. Government influence on the allocation of credit
4. Extent of financial and capital market development
5. Openness to foreign competition

Previous methodology

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 ten factors of economic freedom, separated into four categories, using statistics from organizations like the World Bank, the International Monetary Fund, Economist Intelligence Unit and Transparency International. In each factor, countries are scored 0 to 100, with 0 being the least free and 100 the most free. 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. The following list explains what each factor currently assesses and groups them according to their respective category:

Rule of law

• Property Rights: Degree of a country's legal protection of private property rights, degree of enforcement of those laws, independence of and corruption within the judiciary, and likelihood of expropriation.
• Freedom from corruption: The non-prevalence of political corruption within a country, according to the Corruption Perceptions Index.

Limited government

• Fiscal freedom: How free is a country from tax burden. It comprises three quantitative measures: top marginal tax rate of both individual (1) and corporate (2) income, and total tax burden as a percentage of GDP (3).
• Government size and spending: Governments' expenditures as a percentage of GDP, including consumption and transfers. The higher the percental spending, the lower the score.

Regulatory efficiency

• Business freedom: A country's freedom from the burden of regulations on starting, operating, and closing business, given factors such as time, cost and number of procedures, as well as the efficiency of government in the regulatory process.
• Labor freedom: How free is a country from legal regulation on the labor market, including those relating to minimum wages, hiring and firing, hours of work and severance requirements.
• Monetary freedom: How free from microeconomic intervention and price instability is a country, basing on an equation considering the weighted average inflation rate in the last three years and price controls.

Open markets

• Trade freedom: Freedom from sizeable numbers and burdens of tariffs and non-tariff barriers to imports and exports of a country.
• Investment freedom: Freedom from restrictions on the movement and use of investment capital, regardless of activity, within and across the country's borders.
• Financial freedom: A country's independence from government control and interference in the financial sector, including banks. It considers government ownership of financial firms, extent of financial and capital market development, government influence on the allocation of credit and openness to foreign competition.

Rankings and scores

2024

Key: ██ Free (80–100) ██ Mostly Free (70–79.9) ██ Moderately Free (60–69.9) ██ Mostly Unfree (50–59.9) ██ Repressed (0–49.9)

Not ranked

•  Afghanistan
•  Andorra
•  Antigua and Barbuda
•  Grenada
•  Hong Kong (Since 2021, counted in China)
•  Iraq
•  Libya
•  Liechtenstein
•  Macau (Since 2021, counted in China)
•  Marshall Islands
•  Monaco
•  Nauru
•  Palau
•  Saint Kitts and Nevis
•  San Marino
•  Somalia
•  South Sudan
•  Syria
•  Tuvalu
•  Ukraine (Since 2022 due to Russian invasion of Ukraine)
•  Vatican City
•  Yemen

2013–2020

Key: ██ Free (80–100) ██ Mostly Free (70.0–79.9) ██ Moderately Free (60.0–69.9) ██ Mostly Unfree (50.0–59.9) ██ Repressed (0–49.9)

2020 scores by aspects of economic freedom

Key: ██ Free (80–100) ██ Mostly Free (70.0–79.9) ██ Moderately Free (60.0–69.9) ██ Mostly Unfree (50.0–59.9) ██ Repressed (0–49.9)

1995–2008 rankings

See also

• Corruption Perceptions Index
• Ease of doing business index
• Gross National Happiness
• Happiness economics
• List of countries by economic freedom
• List of freedom indices

References

External links

• Official website