Economic Freedom - Free Market Viewpoint - Indices of Economic Freedom

Indices of Economic Freedom

The annual surveys Economic Freedom of the World (EFW) and Index of Economic Freedom (IEF) are two indices which attempt to measure the degree of economic freedom in the world's nations. The EFW index, originally developed by Gwartney, Lawson and Block at the Fraser Institute was likely the most used in empirical studies as of 2000. The other major index, which was developed by The Heritage Foundation and The Wall Street Journal appears superior for data work, although as it only goes back to 1995, it is less useful for historical comparisons.

According to the creators of the indices, these rankings 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 people living in the top one-fifth of 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 lowest ranked countries compared with over $7,000 in the highest ranked countries. The life expectancy of people living in the highest ranked nations is 20 years longer than for people in the lowest ranked countries.

Higher economic freedom, as measured by both the Heritage and the Fraser indices, correlates strongly with higher self-reported happiness.

Erik Gartzke of the Fraser Institute estimates that countries with a high EFW are significantly less likely to be involved in wars, while his measure of democracy had little or no impact.

The Economic Freedom of the World score for the entire world has grown considerably in recent decades. The average score has increased from 5.17 in 1985 to 6.4 in 2005. Of the nations in 1985, 95 nations increased their score, seven saw a decline, and six were unchanged. Using the 2008 Index of Economic Freedom methodology world economic freedom has increased 2.6 points since 1995.

Members of the World Bank Group also use Index of Economic Freedom as the indicator of investment climate, because it covers more aspects relevant to the private sector in wide number of countries.

The nature of economic freedom is often in dispute. Robert Lawson, the co-author of EFW, even acknowledges the potential shortcomings of freedom indices: "The purpose of the EFW index is to measure, no doubt imprecisely, the degree of economic freedom that exists." He likens the recent attempts of economists to measure economic freedom to the initial attempts of economists to measure GDP: "They were scientists who sat down to design, as best they could with the tools at hand, a measure of the current economic activity of the nation. Economic activity exists and their job was to measure it. Likewise economic freedom exists. It is a thing. We can define and measure it." Thus, it follows that some economists, socialists and anarchists contend that the existing indicators of economic freedom are too narrowly defined and should take into account a broader conception of economic freedoms.

Critics of the indices (e.g. Thom Hartmann) also oppose the inclusion of business-related measures like corporate charters and intellectual property protection. John Miller in Dollars & Sense has stated that the indices are "a poor barometer of either freedom more broadly construed or of prosperity." He argues that the high correlation between living standards and economic freedom as measured by IEF is the result of choices made in the construction of the index that guarantee this result. For example, the treatment of a large informal sector (common in poor countries) as an indicator of restrictive government policy, and the use of the change in the ratio of government spending to national income, rather than the level of this ratio. Hartmann argues that these choices cause the social democratic European countries to rank higher than countries where the government share of the economy is small but growing.

Economists Dani Rodrik and Jeffrey Sachs have separately noted that there appears to be little correlation between measured economic freedom and economic growth when the least free countries are disregarded, as indicated by the strong growth of the Chinese economy in recent years. Morris Altman found that there is a relatively large correlation between economic freedom and both per capita income and per capita growth. He argues that this is especially true when it comes to sub-indices relating to property rights and sound money, while he calls into question the importance of sub-indices relating to labor regulation and government size once certain threshold values are passed. John Miller further observes that Hong Kong and Singapore, both only "partially free" according to Freedom House, are leading countries on both economic freedom indices and casts doubt on the claim that measured economic freedom is associated with political freedom. However, 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."

Read more about this topic:  Economic Freedom, Free Market Viewpoint

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Indices Of Economic Freedom - Methodology
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