Economic Freedom of the World: Difference between revisions
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The annual surveys '''Economic Freedom of the World''' and '''Index of Economic Freedom''' are two indices which attempt to measure the degree of economic freedom, using a definition for this similar to [[laissez-faire]] [[capitalism]], in the world's nations. These indices have in turn been used in many peer-reviewed studies which have found many beneficial effects of more economic freedom.[http://www.ratioinstitutet.nu/pdf/wp/nb_efi.pdf][http://www.freetheworld.com/papers.html] There are various criticisms, for example that the important part of economic freedom may be efficient [[rule of law]] and functioning [[property right]]s, rather than low taxes and a small state. |
The annual surveys '''Economic Freedom of the World''' and '''Index of Economic Freedom''' are two indices which attempt to measure the degree of economic freedom, using a definition for this similar to [[laissez-faire]] [[capitalism]], in the world's nations. These indices have in turn been used in many peer-reviewed studies which have found many beneficial effects of more economic freedom.[http://www.ratioinstitutet.nu/pdf/wp/nb_efi.pdf][http://www.freetheworld.com/papers.html] There are various criticisms, for example that the important part of economic freedom may be efficient [[rule of law]] and functioning [[property right]]s, rather than low taxes and a small state. However, high taxes can remove value to private property rights such that there is no longer a rational claim to having those rights. However, high taxes can remove value to private property rights such that there is no longer a rational claim to having those rights. (Economic Behavior and Institutions, John Pencavel, Cambridge University Press, page 39, 1990) |
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== History == |
== History == |
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Revision as of 17:21, 15 May 2007
The annual surveys Economic Freedom of the World and Index of Economic Freedom are two indices which attempt to measure the degree of economic freedom, using a definition for this similar to laissez-faire capitalism, in the world's nations. These indices have in turn been used in many peer-reviewed studies which have found many beneficial effects of more economic freedom.[1][2] There are various criticisms, for example that the important part of economic freedom may be efficient rule of law and functioning property rights, rather than low taxes and a small state. However, high taxes can remove value to private property rights such that there is no longer a rational claim to having those rights. However, high taxes can remove value to private property rights such that there is no longer a rational claim to having those rights. (Economic Behavior and Institutions, John Pencavel, Cambridge University Press, page 39, 1990)
History
Nobel Laureate Milton Friedman and Michael Walker of the Fraser Institute hosted a series of conferences from 1986 to 1994. The goal was to create a clear definition of economic freedom and a method for measuring it. Eventually this resulted in the first report on worldwide economic freedom, Economic Freedom of the World. Later the Heritage Foundation and the Wall Street Journal created another, the Index of Economic Freedom".
Methodology
Economic Freedom of the World
The participants in the conferences reached a consensus that the cornerstones of economic freedom are:
- Personal choice rather than collective 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 38 distinct variables, from for example the World Bank, 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 are given equal weight in the final score.
Index of Economic Freedom
"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. In other words, individuals are free to work, produce, consume, and invest in any way they please, and that freedom is both protected by the state and unconstrained by the state."[3]
The index scores nations on 10 broad factors of economic freedom using statistics from organizations like the World Bank, the IMF and the Economist Intelligence Unit:
- Business Freedom
- Trade Freedom
- Monetary Freedom
- Freedom from Government
- Fiscal Freedom
- Property Rights
- Investment Freedom
- Financial Freedom
- Freedom from Corruption
- Labor Freedom
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.
There are detailed description of the conditions in each country at: http://www.heritage.org/research/features/index/countries.cfm.
Research
Hundreds of peer-reviewed articles have used these indices.[4][5] They have 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, 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.[6]
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[7].
Regarding environmental 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 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.[8]
One question has been what sub-components are responsible for economic growth. Functioning 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 [9], 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.
Influence and trends
The above has had "at least some indirect effects" on economic policy in some nations. In Russia it influenced President Vladimir Putin to, after he won the 2000 election, adopt a flat tax and restructure the very high marginal payroll taxes that were causing massive tax evasion. Supporters argue that this have contributed to the strong economic growth in Russia in recent years. On the other hand, Russia still scores very low in both indices and the high oil prices have helped Russia's economy. Flat taxes have also been instituted in Latvia, Estonia, and Slovakia, and are discussed in several other nations. Iceland have cut several of its taxes, with advocates for this using the economic freedom model. 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.[10].
Economic Freedom of the World 2005 states that the 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.
Criticism
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, 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. 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.[11]
Some critics have asked, for instance, that 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 creators' 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 has been done by independent researchers with no connection to creators of the indices. The research has 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 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, lack of political corruption, low inflation, 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.
Research using the Ease of Doing Business Index suggests that the effect of business regulations is more important than government consumption.[12] The Global Competitiveness Report looks at several other factors that also affect economic growth such as infrastructure, health, and education.
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.[13]
Current ratings
Index of Economic Freedom
 | This article needs to be updated. |
Currently, the ratings for 2007 are available.
Countries sharing the same rank received a tie score. For example, in 2006 Iceland and the United Kingdom tied for the rank of 5th most economically free country.
- Overall, 99 countries worldwide were freer in 2006 than they were the previous year and 51 are less free. Five countries remained in the same degree of freedom.
- The 10 most-improved countries in 2006 were: Pakistan, Romania, Kyrgyzstan, Suriname, Armenia, Turkmenistan, Georgia, Turkey, Tajikistan and Kazakhstan.
- The 10 worst-improved countries in 2006 were: Iran, Italy, Guinea, Bolivia, United Arab Emirates, Oman, Sri Lanka, Equatorial Guinea, Egypt and Nicaragua.
Template:Index of Economic Freedom/Ranking 2006
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.
Economic Freedom of the World
A summary of the current index (2003), published in 2005. A full dataset is available for researchers at 2005 Dataset / Free the World
External links
- Free the World
- Index of Economic Freedom
- Free, Free at Last (a critique from Dollars and Sense)
- Laissez-Faire Olympics (critique by Doug Henwood).