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".[1][2][pageneeded]
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."[3] 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%.[4]
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.[5]
According to Will Wilkinson of the libertarianthink tankCato Institute, studies show that higher economic freedom correlates strongly with higher self-reported happiness.[6] 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."[7]
According to the Cato Institute, higher economic freedom promotes participation and collaboration.[8] 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.[9]
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.[10]
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.[11]
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.[11] 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.[12] 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".[11]
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.[13] The U.S. dropped to 10th place in the 2012 ranking, falling three places since 2008, when it was seventh.[14] 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".[15] 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.[13]
Hong Kong
For 25 consecutive years, from 1995 to 2019, Hong Kong was ranked the most world's most free economy by the Index..[11][16]
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.[17]
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.[18][19] It also takes into consideration some specific categories like property rights, judicial effectiveness, government integrity and tax burden.[20][21] 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.[22]
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."[23]
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.[24]
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.[25]
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."[26] According to Left Business Observer, growth in Index accounts for 10% of the variation in the growth of GDP.[27]
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.[28]
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.[29]
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:
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:
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:
Average deficits as a percentage of GDP for the most recent three years (80 percent of score)
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:
Starting a business - procedures (number)
Starting a business - time (days)
Starting a business - cost (% of income per capita)
Starting a business - minimum capital (% of income per capita)
Obtaining a license - procedures (number)
Obtaining a license - time (days)
Obtaining a license - cost (% of income per capita)
Closing a business - time (years)
Closing a business - cost (% of estate)
Closing a business - recovery rate (cents on the dollar)
Getting electricity - procedures (number)
Getting electricity - time (days) and
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:
Ratio of minimum wage to the average value added per worker
Hindrance to hiring additional workers
Rigidity of hours
Difficulty of firing redundant employees
Legally mandated notice period
Mandatory severance pay
Labor force participation rate
Monetary freedom
Analyzes how stable are prices and how much microeconomy intervenes. It is divided into the following sub-factors:
Weighted average inflation rate for the most recent three years
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:
Trade-weighted average tariff rate
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:
Extent of government regulation of financial services
Degree of state intervention in banks and other financial firms through direct and indirect ownership
Government influence on the allocation of credit
Extent of financial and capital market development
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."[30]
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.[30] 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] 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.
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.
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is more often used by the government of a single country to measure its economic health. Due to its complex and subjective nature, this measure is often revised before being considered a reliable indicator.
The economy of Hong Kong is a highly developed free-market economy. It is characterised by low taxation, almost free port trade and a well-established international financial market. Its currency, called the Hong Kong dollar, is legally issued by three major international commercial banks, and is pegged to the US dollar. Interest rates are determined by the individual banks in Hong Kong to ensure that they are market driven. There is no officially recognised central banking system, although the Hong Kong Monetary Authority functions as a financial regulatory authority.
The economy of Hungary is a high-income mixed economy, ranked as the 9th most complex economy according to the Economic Complexity Index. Hungary is a member of the Organisation for Economic Co-operation and Development (OECD) with a very high human development index and a skilled labour force, with the 22nd lowest income inequality by Gini index in the world. The Hungarian economy is the 53rd-largest economy in the world with $265.037 billion annual output, and ranks 41st in the world in terms of GDP per capita measured by purchasing power parity. Hungary has an export-oriented market economy with a heavy emphasis on foreign trade; thus the country is the 35th largest export economy in the world. The country had more than $100 billion of exports in 2015, with a high trade surplus of $9.003 billion, of which 79% went to the European Union (EU) and 21% was extra-EU trade. Hungary's productive capacity is more than 80% privately owned, with 39.1% overall taxation, which funds the country's welfare economy. On the expenditure side, household consumption is the main component of GDP and accounts for 50% of its total, followed by gross fixed capital formation with 22% and government expenditure with 20%.
The economy of Kazakhstan is the largest in Central Asia in both absolute and per capita terms. In 2021, Kazakhstan attracted more than US$370 billion of foreign investments since becoming an independent republic after the collapse of the former Soviet Union.
Reaganomics, or Reaganism, were the neoliberal economic policies promoted by U.S. President Ronald Reagan during the 1980s. These policies are characterized as supply-side economics, trickle-down economics, or "voodoo economics" by opponents, while Reagan and his advocates preferred to call it free-market economics.
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to collectively fund government spending, public expenditures, or as a way to regulate and reduce negative externalities. Tax compliance refers to policy actions and individual behaviour aimed at ensuring that taxpayers are paying the right amount of tax at the right time and securing the correct tax allowances and tax relief. The first known taxation took place in Ancient Egypt around 3000–2800 BC. Taxes consist of direct or indirect taxes and may be paid in money or as its labor equivalent.
The United States is a highly developed/advanced mixed economy. It is the world's largest economy by nominal GDP; it is also the second largest by purchasing power parity (PPP), behind China. It has the world's seventh highest per capita GDP (nominal) and the eighth highest per capita GDP (PPP) as of 2022. The U.S. accounted for 26% of the global economy in 2023 in nominal terms, and about 15.5% in PPP terms. The U.S. dollar is the currency of record most used in international transactions and is the world's reserve currency, backed by a large U.S. treasuries market, its role as the reference standard for the petrodollar system, and its linked eurodollar. Several countries use it as their official currency and in others it is the de facto currency. Since the end of World War II, the economy has achieved relatively steady growth, low unemployment and inflation, and rapid advances in technology.
Economic freedom, or economic liberty, refers to the agency of people to make economic decisions. This is a term used in economic and policy debates as well as in the philosophy of economics. One approach to economic freedom comes from the liberal tradition emphasizing free markets, free trade, and private property. Another approach to economic freedom extends the welfare economics study of individual choice, with greater economic freedom coming from a larger set of possible choices. Other conceptions of economic freedom include freedom from want and the freedom to engage in collective bargaining.
In economics, income distribution covers how a country's total GDP is distributed amongst its population. Economic theory and economic policy have long seen income and its distribution as a central concern. Unequal distribution of income causes economic inequality which is a concern in almost all countries around the world.
In economics, tax incidence or tax burden is the effect of a particular tax on the distribution of economic welfare. Economists distinguish between the entities who ultimately bear the tax burden and those on whom the tax is initially imposed. The tax burden measures the true economic effect of the tax, measured by the difference between real incomes or utilities before and after imposing the tax, and taking into account how the tax causes prices to change. For example, if a 10% tax is imposed on sellers of butter, but the market price rises 8% as a result, most of the tax burden is on buyers, not sellers. The concept of tax incidence was initially brought to economists' attention by the French Physiocrats, in particular François Quesnay, who argued that the incidence of all taxation falls ultimately on landowners and is at the expense of land rent. Tax incidence is said to "fall" upon the group that ultimately bears the burden of, or ultimately suffers a loss from, the tax. The key concept of tax incidence is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply. As a general policy matter, the tax incidence should not violate the principles of a desirable tax system, especially fairness and transparency. The concept of tax incidence is used in political science and sociology to analyze the level of resources extracted from each income social stratum in order to describe how the tax burden is distributed among social classes. That allows one to derive some inferences about the progressive nature of the tax system, according to principles of vertical equity.
Arnold Carl Harberger is an American economist. His approach to the teaching and practice of economics is to emphasize the use of analytical tools that are directly applicable to real-world issues. His influence on academic economics is reflected in part by the widespread use of the term "Harberger triangle" to refer to the standard graphical depiction of the efficiency cost of distortions of competitive equilibrium. His influence on the practice of economic policy is manifested by the high positions attained by his followers in national agencies such as central banks and ministries of finance, and in international agencies such as the World Bank.
Economic Freedom of the World is an annual survey published by the Fraser Institute, a Canadian think tank. The survey attempts to measure the degree of economic freedom in the world's nations. It has been used in peer-reviewed studies, some of which have found a range of beneficial effects of more economic freedom.
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References
↑ "Executive Summary"(PDF). Index of Economic Freedom. January 15, 2008. Archived from the original(PDF) on February 27, 2008. Retrieved February 4, 2008.
↑ Ovaska Tomi, Takashima Ryo (2006). "Economic policy and the level of self-perceived well-being: An international comparison". The Journal of Socio-Economics. 35 (2): 308–325. doi:10.1016/j.socec.2005.11.054.
↑ Miller, Terry (2011). "The Limits of Government"(PDF). Heritage.org. The Heritage Foundation. p.13. Archived from the original(PDF) on February 20, 2011. Retrieved February 20, 2011.
↑ Colton, Emma (February 13, 2022). "Biden's economy drags US to all-time low in Heritage freedom index rating". FOXBusiness. Retrieved September 5, 2022. The index, launched in 1995, evaluates countries on rule of law, government size, regulatory efficiency and open markets, while also examining specific categories such as property rights, judicial effectiveness, government integrity and tax burden.
↑ Adrian Karatnycky. Freedom in the World: The Annual Survey of Political Rights and Civil Liberties. Transaction Publishers. 2001. ISBN978-0-7658-0101-2. p. 11
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