Index of Economic Freedom

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The Index of Economic Freedom is a series of 10 economic measurements created by the Heritage Foundation and Wall Street Journal. Its stated objective is to measure the degree of economic freedom in the world's nations.

[edit] History

Heritage and the 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 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."^[1][2]

[edit] 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." ^[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
• Government Size
• 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.^[3] 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.^[2]

[edit] Claims

Blue, Green, Yellow, Orange, Red and Gray correspond to Free, Mostly Free, Moderately Free, Mostly Not Free, Not Free and Ungraded

The Heritage Foundation reports that the top 20% on the index have twice the per capita income of this in the second quintile, and five times that of the bottom 20%.^[4] 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.^[5]

According to Will Wilkinson of the libertarian Cato Institute, studies show that higher economic freedom correlates strongly with higher self-reported happiness.^[6] 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.^[7] 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.^[8]

[edit] Ratings

Since 1995, world Economic Freedom has increased 2.6 points using the 2008 index methodology.^[9] There was a slight increase in economic freedom in 2008, with the largest positive change in Egypt, which jumped to 85th in the world.^[10] Since the Index was created in 1995, Hong Kong has been the top performing economy.^[11]

[edit] Reception

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."^[12]

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.^[13]

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 countries' 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.^[14]

Qatar 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 report is "unreliable", because its methodology had changed twice in the last two years.^[15]

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.^[16] John Miller, writing in Dollars & Sense, 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.^[17]. According to Left Business Observer, the Index has only a 10% statistical correlation with a standard measure of economic growth, GDP per capita.^[18]

[edit] See also

• Index of Economic Freedom historical rankings
• List of indices of freedom
• List of countries by economic freedom

[edit] References

[edit] External links

• Index of Economic Freedom from the Heritage Foundation
• The Failings of the Economic Freedom Index by Stefan Karlssonf from the Ludwig von Mises Institute
• Free Free At Last by John Miller in Dollars & Sense