Index of Economic Freedom
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".
2012 and 2013 rankings
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).
Historical rankings (1995–2008)
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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."
- 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.
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 (as measured by Democracy Score) in diminishing violent conﬂict.
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.
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.
- 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
- "Executive Summary". Index of Economic Freedom. 15 January 2008. Retrieved 4 February 2008.
- William Beach, Time Kane (15 January 2008). "Methodology; Measuring the 10 Economic Freedoms". Index of Economic Freedom. Retrieved 4 February 2008.
- "2013 Index of Economic Freedom Country Ranking", Highlights of the 2013 Index of Economic Freedom, Terry Miller, Kim R. Holmes, Edwin J. Feulner, The Heritage Foundation in partnership with The Wall Street Journal, 24 January 2013
- "Ranking the World by Economic Freedom", Highlights of the 2012 Index of Economic Freedom, Terry Miller, Kim R. Holmes, Edwin J. Feulner, The Heritage Foundation in partnership with The Wall Street Journal, 6 January 2012
- "Frequently Asked Questions". Index of Economic Freedom. 15 January 2008. Retrieved 4 February 2008.
- Mary Anastasia O'Grady (15 January 2008). "The Real Key to Development". Wall Street Journal. Retrieved 4 February 2008.
- Carl J. Schramm (15 January 2008). "Chapter 1 Economic Fluidity: A Crucial Dimension of Economic Freedom". The Heritage Foundation. Retrieved 4 February 2008.
- "In Pursuit of Happiness Research: Is It Reliable? What Does It Imply for Policy?", Will Wilkinson, The Cato institute, Policy Analysis No. 590, 11 April 2007
- "Economic Policy and the Level of Self-Perceived Well-Being: An International Comparison", Tomi Ovaska and Ryo Takashima, Journal of Socio-Economics, Vol. 35, No. 2 (April 2006), pp. 308–325
- More Freedom = More Happiness, Public Issues, Libertad Desarrollo, No. 750, 23 January 2006, ISSN: 0717-1528
- "Chapter2: Economic Freedom and Peace", Erik Gartzke, in Economic Freedom of the World: 2005 Annual Report, James Gwartney and Robert Lawson, Fraser Institute, 30 August 2005
- Barry Wood (15 January 2008). "Economic Freedom Holding Steady, 14th Index of Economic Freedom Shows". PR Newswire. Archived from the original on 18 January 2008. Retrieved 4 February 2008.
- "Executive Highlights" (PDF). Heritage.org. The Heritage Foundation. 2011. Retrieved 20 February 2011.
- Ed Feulner (22 January 2008). "Football and economic freedom". IndyStar. Retrieved 4 February 2008.[dead link]
- Miller, Terry (2011). "The Limits of Government" (PDF). Heritage.org. The Heritage Foundation. p. 13. Retrieved 20 February 2011.
- "Global economic freedom dipped last year, annual survey says; Hong Kong remains world’s freest". Washington Post. Associated Press. 12 January 2012. Retrieved 24 January 2012.
- Edwin Feulner (17 January 2012). "Still in top 10, but falling fast". The Washington Times. Retrieved 24 January 2012.
- Edwin J. Feulner (12 January 2012). "A Step Backward for Economic Freedom in 2012". The Wall Street Journal. Retrieved 24 January 2012.
- Adrian Karatnycky. Freedom in the World: The Annual Survey of Political Rights and Civil Liberties. Transaction Publishers. 2001. ISBN 978-0-7658-0101-2. p. 11
- "Report on the Criteria and Methodology for Determining the Eligibility of Candidate Countries for Millennium Challenge Account Assistance during Fiscal Year 2008". Millennium Challenge Corporation. 1 September 2007. Archived from the original on 27 February 2008. Retrieved 4 February 2008.
- The End of Poverty: Economic Possibilities for our Time, Jeffrey Sachs, Penguin Books, 2005, ISBN 1-59420-045-9, pp. 320–321.
- "UAE challenges its economic freedom ranking in paper by Heritage Foundation". Business Intelligence Middle East. 31 January 2008. Retrieved 31 January 2008.
- Stefan Karlsson (21 January 2005). "The Failings of the Economic Freedom Index". Mises Daily (Ludwig von Mises Institute). Retrieved 18 April 2008.
- "Free, Free at Last", John Miller, Dollars and Sense, No. 258, March/April 2005
- "Laissez-faire Olympics, an LBO special report", Left Business Observer, 26 March 2005
- Index of Economic Freedom from the Heritage Foundation
- Index of Economic Freedom in the 50 States from the Mercatus Center