Index of Economic Freedom

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

History

The Heritage Foundation and the Wall Street Journal created the "Index of Economic Freedom" in 1995 based on economic theories like Adam Smith's "The Wealth of Nations", explaining that "basic institutions that protect the liberty of individuals to pursue their own economic interests result in greater prosperity for the larger society." [cite news | author= |url = http://www.heritage.org/research/features/index/chapters/pdf/index2008_execsum.pdf | title = Executive Summary |publisher = Index of Economic Freedom |date= 2008-01-15 | accessdate = 2008-02-04 ] cite news | author=William Beach, Time Kane |url = http://www.heritage.org/research/features/index/chapters/pdf/Index2008_Chap4.pdf | title = Methodology; Measuring the 10 Economic Freedoms|publisher = Index of Economic Freedom |date= 2008-01-15 | accessdate = 2008-02-04 ] It was the first economic freedom index released, although the Fraser Institute released Economic Freedom of the World a year later after 10 years of research with the help of economist Milton Friedman, who set out to show that economic freedom does actually track with high levels of prosperity. [cite news | author= Fred McMahon |url = http://www.fraserinstitute.org/Commerce.Web/product_files/Sep06ffMcmahon.pdf | title = Ten Years of Economic Freedom |publisher = Frasier Forum |date= 2006-09-01 | accessdate = 2008-02-04 ]

Methodology

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." cite news | author= |url = http://www.heritage.org/research/features/index/faq.cfm | title = Frequently Asked Questions |publisher = Index of Economic Freedom |date= 2008-01-15 | accessdate = 2008-02-04 ]

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
*Freedom from Government
*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. 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. Another change is that the Index is overseen by an Academic Advisory Board.

Research

The Heritage Foundations studies have found 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%. [cite news | author= Mary Anastasia O'Grady |url = http://online.wsj.com/article/SB120036519907490279.html?mod=Letters | title = The Real Key to Development| work = Wall Street Journal |date= 2008-01-15 | accessdate = 2008-02-04 ] Carl Schramm, who wrote the first chapter of the 2008 Index, recounts how 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. [cite news | author= Carl J. Schramm |url = http://www.heritage.org/research/features/index/chapters/pdf/index2008_chap1.pdf | title = Chapter 1 Economic Fluidity: A Crucial Dimension of Economic Freedom| work = The Heritage Foundation |date= 2008-01-15 | accessdate = 2008-02-04 ]

Ratings

Since 1995, world Economic Freedom has increased 2.6 points using the 2008 index methodology. [cite news | author= Barry Wood |url = http://money.cnn.com/news/newsfeeds/articles/prnewswire/DC1147215012008-1.htm | title = Economic Freedom Holding Steady, 14th Index of Economic Freedom Shows |publisher = PR Newswire |date= 2008-01-15 | accessdate = 2008-02-04 ] There was a slight increase in economic freedom in 2008, with the largest positive change in Egypt, which jumped to 85th in the world. [cite news | author= Barry Wood |url = http://www.voanews.com/english/2008-01-16-voa1.cfm | title = Economic Freedom Index Shows Some Improvements| work = Voice of America |date= 2008-01-16 | accessdate = 2008-02-04 ] Since the Index was created in 1995, Hong Kong has been the top performing economy. [cite news | author= Ed Feulner |url = http://www.indystar.com/apps/pbcs.dll/article?AID=/20080122/OPINION/801220318/-1/LOCAL17 | title = Football and economic freedom| work = IndyStar |date= 2008-01-22 | accessdate = 2008-02-04 ]

Reception

An overview of research can be found here [http://www.ratioinstitutet.nu/pdf/wp/nb_efi.pdf] , including studies claiming to show that more economic freedom is the cause of beneficial effects. It also states that "Economic Freedom of 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.

The Millennium Challenge Account, a US government foreign aid program, has used the Trade freedom indicator in determining which countries will receive their performance-based compacts. [cite news | url = http://www.mcc.gov/documents/mcc-report-fy08-criteria%20and%20methodology.pdf | title = Report on the Criteria and Methodology for Determining the Eligibility of Candidate Countries for Millennium Challenge Account Assistance during Fiscal Year 2008| work = Millennium Challenge Corporation |date= 2007-09-01 | accessdate = 2008-02-04 ]

Critics, such as Jeffrey Sachs, have criticised its assumption that economic openness necessarily leads to better growth. Sachs, in his popular book The End of Poverty, 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. 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. [ Jeffrey Sachs, "The End of Poverty; How We Can Make It Happen In Our Lifetime" (Penguin Books, 2005), pp. 320-321.]

Some have also questioned its methodology, such as the country of Qatar which 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 noted that the methodology had changed twice in the last two years, rendering its report "unreliable". [cite news | url = http://www.bi-me.com/main.php?id=16985&t=1&c=33&cg=4 | title = UAE challenges its economic freedom ranking in paper by Heritage Foundation| work = Business Intelligence Middle East|date= 2008-01-31 | accessdate = 2008-01-31 ] Many Asian nations have expressed puzzlement at why China has grown so much with such a low rate of economic freedom. The foundation itself explained the inaccuracy of the Index in this regard: in the 1960's, China's rating would have been near zero, and as it is now 54, and has gone up by, on average, a point a year, there is massive growth being unleashed as they grow as much as their current level of freedom allows. [cite news | url = http://www.heritage.org/Research/TradeandForeignAid/wm1375.cfm | title = The Coming Chinese Slowdown: Resolving the Paradox of Freedom and Growth| work = The Heritage Foundation|date= 2007-02-28 | accessdate = 2008-02-05 ] They did not address the issue of why the Index has failed to match the rate of China's actual growth. Another article, from Ludwig von Mises Institute, explained some of the failings of the study to show just how free certain countries actually were. [cite news | url = http://www.mises.org/story/1724 | title = The Failings of the Economic Freedom Index| work = Ludwig von Mises Institute|date= 2005-01-21 | accessdate = 2008-04-18 ] The Index has been categorized as using inappropriately weighted indicators for economic freedom, leading 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. [ [http://www.dollarsandsense.org/archives/2005/0305miller.html John Miller, at Dollars & Sense] ] . The Index has only a 10% statistical correlation with a standard measure of economic growth, GDP per capita. [ [http://www.leftbusinessobserver.com/FreedomIndex.html Comparisons of Index of Economic Freedom with GDP/capita] ] Neither does the Index account for the actions of governments to nurture business [ [http://www.dollarsandsense.org/archives/2005/0305miller.html John Miller at Dollars & Sense] ] in the manner of the Japanese Zaibatsus during the late 20th C, that helped lead to the Japanese economic miracle.

ee also

*Index of Economic Freedom (Historical Rankings)
*List of indices of freedom
*List of countries by economic freedom

References

External links

* [http://www.heritage.org/research/features/index/ Index of Economic Freedom]
* [http://www.dollarsandsense.org/archives/2005/0305miller.html Critique of Index] by economist John Miller in Dollars & Sense, March/April 2005