Index of Economic Freedom - AbsoluteAstronomy.com

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

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
Country	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

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

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.

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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