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The annual surveys Economic Freedom in 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. There are various criticisms, for example that the important part of economic freedom may be efficient rule of law and functioning property rights and not low taxes and a small state.
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 in the World. Later the Heritage Foundation and the Wall Street Journal created another, the Index of Economic Freedom. Economic Freedom in the World The participants in the conferences reached a consensus that the cornerstones of economic freedom are: 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: The report uses 38 distinct variables, from for example the World Bank, to measure this. Some example: 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 Economic freedom is defined as "the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself"*, which is in turn related to the principles of laissez-faire capitalism* What the index actually measures are how countries score on a list of 50 variables. They include: The higher a country's score on a factor the less economic freedom there is. The 10 factors are given equal weight in determining the final score. Depending on their score, countries are then separated into four categories: Free, Mostly Free, Mostly Unfree, and Repressed. 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.** 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.* 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*. 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.* 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 *, including studies showing that more economic freedom is the cause of beneficial effects. It also states that Economic Freedom in 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.*. Economic Freedom in 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. Some critics have asked, for instance, if 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 ( Research using the Ease of Doing Business Index suggests that the effect of business regulations is more important than government consumption.* 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: Index of Economic Freedom The most current ratings are for 2006. Note: countries sharing the same rank received a tie score. For example, Iceland and the United Kingdom are tied for the rank of 5th most economically free country. Also note that a detailed description of the conditions in each country can be found on: http://www.heritage.org/research/features/index/countries.cfm. 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 in 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 See also | ||||||||
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