Index of Economic Freedom
Encyclopedia
The Index of Economic Freedom is a series of 10 economic measurements created by The Heritage Foundation
The 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
The Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....

. Its stated objective is 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.

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 the Index of Economic Freedom in 1995. According to Heritage, the creators of the Index took an approach similar to Adam Smith's
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

 The Wealth of Nations
The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...

that "basic institutions that protect the liberty of individuals to pursue their own economic interests result in greater prosperity for the larger society." The authors of the 2009 Index of Economic Freedom are Kim Holmes
Kim Holmes
Kim R. Holmes, Ph.D., is a foreign and defense policy experts in the United States.A former assistant secretary of state, he currently serves as the Vice President of Foreign and Defense Policy Studies at the Heritage Foundation and as director of its Kathryn and Shelby Cullom Davis Institute for...

 and Ambassador Terry Miller.

2011 rankings

2011 rankings:
Rank Country Score
1  Hong Kong 89.7
2  Singapore 87.2
3  Australia 82.5
4  New Zealand 82.3
5  Switzerland 81.9
6  Canada 80.8
7  Republic of Ireland 78.7
8  Denmark 78.6
9  United States 77.8
10  Bahrain 77.7
11  Chile 77.4
12  Mauritius 76.2
13  Luxembourg 76.2
14  Estonia 75.2
15  Netherlands 74.7
16  United Kingdom 74.5
17  Finland 74.0
18  Cyprus 73.3
19  Macau 73.1
20  Japan 72.8
21  Austria 71.9
22  Sweden 71.9
23  Germany 71.8
24  Lithuania 71.3
25  Republic of China 70.8
26  Saint Lucia 70.8
27  Qatar 70.5
28  Czech Republic 70.4
29  Georgia (country) 70.4
30  Norway 70.3

Historical rankings

Country Rank
2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
 Hong Kong 1 1 1 1 1 1 1 1 1 1 1 1 1 1
 Singapore 2 2 2 2 2 2 2 2 2 2 2 2 2 2
 Republic of Ireland 3 3 3 4 4 4 4 3 10 11 11 13 27 20
 Australia 4 4 7 9 8 10 11 8 5 5 7 9 10 8
 United States 5 6 5 5 7 7 8 6 8 7 8 8 5 4
 New Zealand 6 5 4 3 3 3 3 4 3 3 3 3 3 NR
 Canada 7 10 10 12 12 13 14 21 20 25 27 26 20 18
 Chile 8 8 8 8 11 12 9 12 12 12 9 7 13 14
 Switzerland 9 9 9 6 5 6 6 10 6 4 4 4 4 NR
 United Kingdom 10 7 6 7 9 9 7 7 4 6 5 5 7 3
 Denmark 11 12 13 13 17 20 23 33 33 32 34 30 31 NR
 Estonia 12 11 15 14 10 8 10 9 24 13 15 24 38 26
 Netherlands 13 15 16 18 14 14 14 16 21 57 24 20 23 NR
 Iceland 14 13 11 10 19 16 19 15 15 19 18 19 NR NR
 Luxembourg 15 14 12 11 6 5 5 5 7 15 13 12 15 NR
 Finland 16 16 17 21 16 15 16 27 50 54 55 39 47 NR
 Japan 17 18 18 36 50 34 39 23 19 27 21 21 14 6
 Mauritius 18 32 35 35 51 52 33 45 36 20 NR NR NR NR
 Bahrain 19 24 23 22 13 11 12 11 11 8 6 6 6 5
 Belgium 20 17 24 30 30 33 34 57 55 60 48 44 36 NR
 Barbados 21 27 20 24 28 23 17 20 27 37 33 46 53 NR
 Cyprus 22 20 21 20 15 19 20 22 35 33 29 27 30 NR
 Germany 23 22 25 28 27 26 25 29 43 40 52 29 25 17
 The Bahamas 24 19 19 15 20 17 15 14 16 10 10 10 11 11
 Republic of China (Taiwan) 25 25 29 19 26 21 22 18 17 18 20 22 9 7
 Lithuania 26 21 22 23 18 27 43 53 67 67 74 78 104 NR
 Sweden 27 33 27 27 24 24 24 43 47 51 53 53 55 41
 Armenia 28 30 14 25 23 37 32 46 62 96 117 123 125 NR
 Trinidad and Tobago 29 23 26 17 21 29 26 19 13 16 17 16 24 NR
 Austria 30 26 30 34 32 35 36 37 31 53 43 40 26 16
 Spain 31 28 32 31 29 28 29 36 41 45 62 68 65 34
 Georgia (country) 32 31 54 93 78 84 104 87 107 114 122 125 123 NR
 El Salvador 33 29 28 16 22 22 21 17 9 9 22 18 21 19
 Norway 34 37 34 45 42 39 37 41 22 29 31 41 39 NR
 Slovakia 35 36 33 42 48 77 76 85 108 105 85 85 75 46
 Botswana 36 35 31 26 25 30 42 42 42 59 60 72 56 57
 Czech Republic 37 39 40 47 35 36 40 26 30 23 28 54 29 23
 Latvia 38 38 37 39 33 44 52 44 57 50 56 57 86 NR
 Kuwait 39 41 41 48 55 43 46 35 25 24 38 42 35 NR
 Uruguay 40 34 43 33 37 25 30 24 28 30 26 31 46 37

Method

The Index's 2008 definition of economic freedom is the following; "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 10 broad factors of economic freedom using statistics from organizations like 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...

, the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

 and the Economist Intelligence Unit
Economist Intelligence Unit
The Economist Intelligence Unit is part of the Economist Group.It is a research and advisory company providing country, industry and management analysis worldwide and incorporates the former Business International Corporation, a U.S. company acquired by the parent organization in 1986...

:
  • 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 both 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 various 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.

Meaning

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
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...

 Cato Institute
Cato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...

, studies show that higher economic freedom correlates strongly with higher self-reported happiness. According to 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

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
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...

 and emerging market
Emerging markets
Emerging markets are nations with social or business activity in the process of rapid growth and industrialization. Based on data from 2006, there are around 28 emerging markets in the world . The economies of China and India are considered to be the largest...

 economies. With the exception of Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...

 and North America
North America
North America is a continent wholly within the Northern Hemisphere and almost wholly within the Western Hemisphere. It is also considered a northern subcontinent of the Americas...

, there were increased levels of freedom recorded in all regions, with the greatest improvement shown in Sub-Saharan Africa
Sub-Saharan Africa
Sub-Saharan Africa as a geographical term refers to the area of the African continent which lies south of the Sahara. A political definition of Sub-Saharan Africa, instead, covers all African countries which are fully or partially located south of the Sahara...

. The top six "free" economies identified by the 2011 index were Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...

, Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...

, Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...

, New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...

, Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....

, and Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...

, each scoring over 80 on the economic freedom grading scale. Since the Index was created in 1995, Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...

 has been the top performing economy.

The United States dropped to 9th place behind such countries as 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...

, 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."

Reception

According to the 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...

, "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
Jeffrey Sachs
Jeffrey David Sachs is an American economist and Director of The Earth Institute at Columbia University. One of the youngest economics professors in the history of Harvard University, Sachs became known for his role as an adviser to Eastern European and developing country governments in the...

 have contested the Index's assumption that economic openness necessarily leads to better growth. In his book The End of Poverty
The End of Poverty
The End of Poverty: Economic Possibilities for Our Time is a 2005 book by American economist Jeffrey Sachs. It was a New York Times bestseller....

, 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
Uruguay
Uruguay ,officially the Oriental Republic of Uruguay,sometimes the Eastern Republic of Uruguay; ) is a country in the southeastern part of South America. It is home to some 3.5 million people, of whom 1.8 million live in the capital Montevideo and its metropolitan area...

 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
Transparency International
Transparency International is a non-governmental organization that monitors and publicizes corporate and political corruption in international development. It publishes an annual Corruption Perceptions Index, a comparative listing of corruption worldwide...

 and Moody's
Moody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...

. 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
Ludwig von Mises Institute
The Ludwig von Mises Institute , based in Auburn, Alabama, is a libertarian academic organization engaged in research and scholarship in the fields of economics, philosophy and political economy. Its scholarship is inspired by the work of Austrian School economist Ludwig von Mises...

, challenged the usefulness of the index due to the fuzziness of many of the categories used to determine freedom. John Miller, writing in Dollars & Sense
Dollars & Sense
Dollars & Sense is a magazine dedicated to providing left-wing perspectives on economics.Published six times a year since 1974, it is edited by a collective of economists, journalists, and activists committed to the ideals of social justice and economic democracy.It was initially sponsored by the...

, criticizes the Index for inappropriately weighted indicators for economic freedom and not taking into account the actions of governments to nurture business. According to him this leads to wealthy and/or conservative countries with barriers to trade placing high on the list, while poor and/or socialist countries with fewer restrictions on trade place low. According to Left Business Observer, the Index has only a 33% statistical correlation with a standard measure of economic growth, GDP per capita.

See also

  • List of indices of freedom
  • Mary O'Grady
    Mary O'Grady
    Mary O'Grady — also frequently published as Mary Anastasia O'Grady — is an editor of the Wall Street Journal and member of the Wall Street Journal Editorial Board since 2005. She writes predominantly on Latin America and is a co-editor of the Index of Economic Freedom.- Biography :O'Grady joined...

  • List of countries by economic freedom

External links

  • Index of Economic Freedom from 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...

  • The Failings of the Economic Freedom Index by Stefan Karlsson from the Ludwig von Mises Institute
    Ludwig von Mises Institute
    The Ludwig von Mises Institute , based in Auburn, Alabama, is a libertarian academic organization engaged in research and scholarship in the fields of economics, philosophy and political economy. Its scholarship is inspired by the work of Austrian School economist Ludwig von Mises...

  • Free Free At Last by John Miller in Dollars & Sense
    Dollars & Sense
    Dollars & Sense is a magazine dedicated to providing left-wing perspectives on economics.Published six times a year since 1974, it is edited by a collective of economists, journalists, and activists committed to the ideals of social justice and economic democracy.It was initially sponsored by the...

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