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Index of Economic Freedom

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Index of Economic Freedom

Summary: The Index of Economic Freedom (IEF) is a country ranking measure created by The Heritage Foundation and The Wall Street Journal in 1995. It measures the degree of economic freedom in the world's nations based on Smith's theories about liberty, prosperity and economic freedom.

Main Points: The IEF consists of 10 main components of economic freedom, assigning a grade in each using a scale from 0 to 100, where 100 represents the maximum freedom. The 10 economic freedoms are grouped into four broad categories or pillars of economic freedom (see Graph 1). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country's overall economic freedom score is a simple average of its scores on the 10 individual freedoms.

Description of the main components

1. Rule of Law:

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. It measures the degree to which a country’s laws protect private property rights and the degree to which its government enforces those laws. It also assesses the likelihood that private property will be expropriated and analyzes the independence of the judiciary, the existence of corruption within the judiciary, and the ability of individuals and businesses to enforce contracts.

Freedom from Corruption. Corruption erodes economic freedom by introducing insecurity and uncertainty into economic relationships. The score for this component is derived primarily from Transparency International’s Corruption Perceptions Index (CPI) for 2010, which measures the level of corruption in 178 countries.

2. Limited Government:

Fiscal freedom is a measure of the tax burden imposed by government. It includes both the direct tax burden in terms of the top tax rates on individual and corporate incomes and the overall amount of tax revenue as a percentage of GDP.

Government 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.

3. Regulatory Efficiency:

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. The business freedom score for each country is a number between 0 and 100, with 100 equaling the freest business environment.

Labor Freedom is a quantitative measure that looks into various aspects of the legal and regulatory framework of a country’s labor market. It provides cross-country data on regulations concerning minimum wages; laws inhibiting layoffs; severance requirements; and measurable regulatory burdens on hiring, hours, and so on.

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.

4. Open  Markets

Trade Freedom is a composite measure of the absence of tariff and non-tariff barriers that affect imports and exports of goods and services.

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. Such an ideal country would receive a score of 100 on the investment freedom component of the Index of Economic 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. State ownership of banks and other financial institutions such as insurers and capital markets reduces competition and generally lowers the level of available services. In an ideal banking and financing environment where a minimum level of government interference exists, independent central bank supervision and regulation of financial institutions are limited to enforcing contractual obligations and preventing fraud. Credit is allocated on market terms, and the government does not own financial institutions. Financial institutions provide various types of financial services to individuals and companies. Banks are free to extend credit, accept deposits, and conduct operations in foreign currencies. Foreign financial institutions operate freely and are treated the same as domestic institutions.

The IEF covers 185 countries

Access to database: http://www.heritage.org/index/

Source: Internet Portal of Heritage Foundation. http://www.heritage.org/index/about

Page Created By:  Madina Junussova. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.


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