The ''Index of Economic Freedom'' is an annual index and ranking created in 1995 by

The Heritage Foundation The Heritage Foundation (abbreviated to Heritage) is an American conservative think tank based in Washington, D.C. that is primarily geared toward public policy. The foundation took a leading role in the conservative movement during the presiden ...

and ''

The Wall Street Journal ''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...

'' to measure the degree of

economic freedom Economic freedom, or economic liberty, is the ability of people of a society to take economic actions. This is a term used in economic and policy debates as well as in the philosophy of economics. One approach to economic freedom comes from the l ...

in the world's nations. The creators of the index claim to take an approach inspired by that of Adam Smith in ''

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. First published in ...

'', that "basic institutions that protect the liberty of individuals to pursue their own economic interests result in greater prosperity for the larger society".

Purpose

The Heritage Foundation website states that "Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself." By publishing yearly reports the foundation attempts to highlight where such freedoms do and don't exist. 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 Will Wilkinson (born 1973) is an American writer. He was born in Independence, Missouri, and grew up in Marshalltown, Iowa. He graduated from the University of Northern Iowa in 1995, received an M.A. in philosophy from Northern Illinois Univers ...

of the libertarian

think tank A think tank, or policy institute, is a research institute that performs research and advocacy concerning topics such as social policy, political strategy, economics, military, technology, and culture. Most think tanks are non-governmenta ...

Cato Institute The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of Koch Industries.Koch Ind ...

, studies show that higher economic freedom correlates strongly with higher self-reported happiness. According to economists 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 creation of the index 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 and

emerging market An emerging market (or an emerging country or an emerging economy) is a market that has some characteristics of a developed market, but does not fully meet its standards. This includes markets that may become developed markets in the future or wer ...

economies. With the exception of

Europe Europe is a large peninsula conventionally considered a continent in its own right because of its great physical size and the weight of its history and traditions. Europe is also considered a subcontinent of Eurasia and it is located entirel ...

and North America, there were increased levels of freedom recorded in all regions, with the greatest improvement shown in Sub-Saharan Africa. The top five "free" economies identified by the 2011 index were

Hong Kong Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China (abbr. Hong Kong SAR or HKSAR), is a city and special administrative region of China on the eastern Pearl River Delta i ...

Singapore Singapore (), officially the Republic of Singapore, is a sovereign island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, bor ...

, Australia,

New Zealand New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island count ...

, and Switzerland, each scoring over 80 on the economic freedom grading scale. Since the Index was created in 1995, Hong Kong has been the top performing economy. In 2011, the United States dropped to 9th place behind such countries as 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". The results from the 2012 index showed an overall decline in global economic freedom; according to The Heritage Foundation, the average score in its ranking was the second lowest of the last ten years. In particular, the U.S. dropped to 10th place in the ranking, and has now fallen three places since 2008, when it was 7th. A report issued by the Foundation stated that government spending was the cause of the decline, and had "not only failed to arrest the economic crisis, but also - in many countries - seems to be prolonging it". According to the report, activity in the private sector is threatened by the greater government spending, which has increased public debt and led to more bureaucracy. Countries that shared the same rank received a tie score.

Reception

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." The

Millennium Challenge Account The Millennium Challenge Corporation (MCC) is a bilateral United States foreign aid agency established by the U.S. Congress in 2004. It is an independent agency separate from the State Department and USAID. It provides grants to countries that ...

, 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 David Sachs () (born 5 November 1954) is an American economist, academic, public policy analyst, and former director of The Earth Institute at Columbia University, where he holds the title of University Professor. He is known for his work ...

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: Economic Possibilities for Our Time'' () is a 2005 book by American economist Jeffrey Sachs. It was a ''New York Times'' bestseller. In the book, Sachs argues that extreme poverty—defined by the World Bank as incomes of ...

'', 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 had sluggish economic performances, others, like China, with poorer rating had very strong economic growth. The

UAE The United Arab Emirates (UAE; ar, اَلْإِمَارَات الْعَرَبِيَة الْمُتَحِدَة ), or simply the Emirates ( ar, الِْإمَارَات ), is a country in Western Asia (The Middle East). It is located at th ...

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 e.V. (TI) is a German registered association founded in 1993 by former employees of the World Bank. Based in Berlin, its nonprofit and non-governmental purpose is to take action to combat global corruption with civil ...

and

Moody's Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internationa ...

. 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 for Austrian Economics, or Mises Institute, is a libertarian nonprofit think tank headquartered in Auburn, Alabama, United States. It is named after the Austrian School economist Ludwig von Mises (1881–1973). It ...

challenged the usefulness of the index due to the fuzziness of many of the categories used to determine freedom. John Miller roundly criticizes the "Index", writing in ''

Dollars & Sense ''Dollars & Sense'' is a magazine focusing on economics from a progressive perspective, published by Dollars & Sense, Inc, which also publishes textbooks in the same genre. ''Dollars & Sense'' describes itself as publishing "economic news and ana ...

'', "In the hands of the Wall Street Journal and the Heritage Foundation, Washington's foremost right-wing think tank, however, an economic freedom index merely measures corporate and entrepreneurial freedom from accountability. Upon examination, the index turns out to be a poor barometer of either freedom more broadly construed or of prosperity." According to Left Business Observer, growth in Index accounts for 10% of the variation in the growth of GDP.

Methodology

The index evaluates 177 countries in four broad policy areas that affect the economic freedom, which are rule of law, government size, regulatory efficiency and open markets. It also takes into consideration some specific categories like property rights, judicial effectiveness, government integrity and tax burden. The ranking scores aspects of economic freedom between 0 and 100, with 0 meaning "no economic freedom" and 100 meaning "total economic freedom". There are twelve aspects divided into four categories.

Rule of law

Property rights

Degree of a country's legal protection of private property rights and degree of enforcement of those laws. It is divided into the following sub-factors: # physical property rights #

intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...

rights # strength of investor protection # risk of

expropriation Nationalization (nationalisation in British English) is the process of transforming privately-owned assets into public assets by bringing them under the public ownership of a national government or state. Nationalization usually refers to pri ...

# quality of land administration

Judicial effectiveness

Degree of the

judiciary The judiciary (also known as the judicial system, judicature, judicial branch, judiciative branch, and court or judiciary system) is the system of courts that adjudicates legal disputes/disagreements and interprets, defends, and applies the law ...

's efficiency and fairness, especially dealing with property laws. It is divided into the following sub-factors: # judicial independence # quality of the judicial process

Government integrity

Analyzes how prevalent are forms of political corruption and practices such as bribery,

extortion Extortion is the practice of obtaining benefit through coercion. In most jurisdictions it is likely to constitute a criminal offence; the bulk of this article deals with such cases. Robbery is the simplest and most common form of extortion, ...

, nepotism,

cronyism Cronyism is the spoils system practice of Impartiality, partiality in awarding jobs and other advantages to friends or trusted colleagues, especially in politics and between politicians and supportive organizations. For example, cronyism occurs ...

, patronage, embezzlement, and

graft Graft or grafting may refer to: *Graft (politics), a form of political corruption * Graft, Netherlands, a village in the municipality of Graft-De Rijp Science and technology *Graft (surgery), a surgical procedure *Grafting, the joining of plant t ...

. It is divided into the following sub-factors: #

public trust The concept of public trust relates back to the origins of democratic government and its seminal idea that within the public lies the true power and future of a society; therefore, whatever ''trust'' citizens place in its officials must be respect ...

in politicians # irregular payments and bribes # transparency of government policymaking # absence of corruption # perceptions of corruption # governmental and civil service transparency

Government size

Tax burden

Analyzes

marginal tax In a tax system, the tax rate is the ratio (usually expressed as a percentage) at which a business or person is taxed. There are several methods used to present a tax rate: statutory, average, marginal, and effective. These rates can also be ...

rates on personal and corporate income and the overall taxation level (including direct and indirect taxes imposed by all levels of government) as a percentage of the

GDP Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...

. Its sub-factors are: # top marginal tax rate on individual income # top marginal tax rate on corporate income # total tax burden as a percentage of GDP

Government spending

Quantifies the burden of

government expenditure Public expenditure is spending made by the government of a country on collective needs and wants, such as pension, provisions, security, infrastructure, etc. Until the 19th century, public expenditure was limited as laissez faire philosophies b ...

s, including consumption by the state and all transfer payments related to various

welfare Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...

programs. The ideal level varies from country to country, but zero expenditure is used as a benchmark.

Fiscal health

Analyzes how well a country manages its budget by quantifying the growing

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

and deficit. It is divided into the following sub-factors: # average deficits as a percentage of GDP for the most recent three years (80 percent of score) # debt as a percentage of GDP (20 percent of score)

Regulatory efficiency

Business freedom

Analyzes the cost, time and freedom to open, operate and close a business, taking into consideration factors like electricity. It is divided into thirteen sub-factors: # starting a business - procedures (number) # starting a business - time (days) # starting a business - cost (% of income per capita) # starting a business - minimum capital (% of income per capita) # obtaining a license - procedures (number) # obtaining a license - time (days) # obtaining a license - cost (% of income per capita) # closing a business - time (years) # closing a business - cost (% of estate) # closing a business - recovery rate (cents on the dollar) # getting electricity - procedures (number) # getting electricity - time (days) and # getting electricity - cost (% of income per capita)

Labor freedom

Quantifies the intrusiveness of labor rights such as minimum wage, laws inhibiting layoffs, severance requirements, and measurable regulatory restraints on hiring and hours worked, plus the labor force participation rate as an indicative measure of employment opportunities in the labor market. It is divided into the following sub-factors: # ratio of minimum wage to the average value added per worker # hindrance to hiring additional workers # rigidity of hours # difficulty of firing redundant employees # legally mandated notice period # mandatory severance pay # labor force participation rate

Monetary freedom

Analyzes how stable are prices and how much microeconomy intervenes. It is divided into the following sub-factors: # weighted average

inflation rate In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...

for the most recent three years # price controls

Market openness

Trade freedom

Quantifies the extent to which

tariff A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and pol ...

and nontariff barriers affect

imports An import is the receiving country in an export from the sending country. Importation and exportation are the defining financial transactions of international trade. In international trade, the importation and exportation of goods are limited ...

and

exports An export in international trade is a good produced in one country that is sold into another country or a service provided in one country for a national or resident of another country. The seller of such goods or the service provider is an ...

of goods and services into and out of the country. Its sub-factors are: # trade-weighted average tariff rate # nontariff barriers (NTBs)

Investment freedom

Analyzes how free or constrained is the flow of

investment capital In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. At the macroeconomic level, "the nation's capital stock includes buildings, e ...

of individuals and firms.

Financial freedom

Indicates

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

ing efficiency as well as how independent the government is from the financial sector. This aspect looks at five broad areas: # extent of government regulation of financial services # degree of state intervention in banks and other financial firms through direct and indirect ownership # government influence on the allocation of credit # extent of financial and capital market development # openness to foreign competition

Previous methodology

The Index's 2008 definition of economic freedom is "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 ten factors of economic freedom, separated into four categories, using statistics from organizations like the

World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...

, the

International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...

Economist Intelligence Unit The Economist Intelligence Unit (EIU) is the research and analysis division of the Economist Group, providing forecasting and advisory services through research and analysis, such as monthly country reports, five-year country economic forecasts, ...

and

. In each factor, countries are scored 0 to 100, with 0 being the least free and 100 the most free. 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. The following list explains what each factor currently assesses and groups them according to their respective category: ;Rule of Law *'
Property Rights
'': Degree of a country's legal protection of private property rights, degree of enforcement of those laws, independence of and corruption within the

, and likelihood of

. *'
Freedom from Corruption
'': The non-prevalence of political corruption within a country, according to the Corruption Perceptions Index. ;Limited Government *'
Fiscal Freedom
'': How free is a country from tax burden. It comprises three quantitative measures: top marginal tax rate of both individual (1) and corporate (2) income, and total tax burden as a percentage of GDP (3). *'
Government Size/Spending
'': Governments' expenditures as a percentage of GDP, including consumption and transfers. The higher the percentual spending, the lower the score. ;Regulatory Efficiency *'
Business Freedom
'': A country's freedom from the burden of regulations on starting, operating, and closing business, given factors such as time, cost and number of procedures, as well as the efficiency of government in the regulatory process. *'
Labor Freedom
'': How free is a country from legal regulation on the labor market, including those relating to minimum wages, hiring and firing, hours of work and severance requirements. *'
Monetary Freedom
'': How free from microeconomic intervention and price instability is a country, basing on an equation considering the weighted average inflation rate in the last three years and price controls. ;Open Markets *'
Trade Freedom
'': Freedom from sizeable numbers and burdens of

s and

non-tariff barriers Non-tariff barriers to trade (NTBs; also called non-tariff measures, NTMs) are trade barriers that restrict imports or exports of goods or services through mechanisms other than the simple imposition of tariffs. The Southern African Development ...

to imports and exports of a country. *'
Investment Freedom
'': Freedom from restrictions on the movement and use of investment capital, regardless of activity, within and across the country's borders. *'
Financial Freedom
'': A country's independence from government control and interference in the financial sector, including banks. It considers government ownership of financial firms, extent of financial and capital market development, government influence on the allocation of credit and openness to foreign competition.

Rankings and scores

2022

''Key: ██ Free (80–100)'' ''██ Mostly Free (70–79.9)'' ''██ Moderately Free (60–69.9)'' ''██ Mostly Unfree (50–59.9)'' ''██ Repressed (0–49.9)'' Not ranked * * * * * (Since 2021, counted in PRC China) * * * * (Since 2021, counted in PRC China) * * * * * * * * * * * *

2013–2020

''Key: ██ Free (80–100)'' ''██ Mostly Free (70.0–79.9)'' ''██ Moderately Free (60.0–69.9)'' ''██ Mostly Unfree (50.0–59.9)'' ''██ Repressed (0–49.9)''

2020 scores by aspects of economic freedom

Key: Free (80–100) Mostly Free (70.0–79.9) Moderately Free (60.0–69.9) Mostly Unfree (50.0–59.9) Repressed (0–49.9)

1995–2008 rankings

References

External links

*
Index of Economic Freedom in the 50 States
from the

Mercatus Center The Mercatus Center is an American libertarian, free-market-oriented non-profit think tank. Located at George Mason University and directed by the American economist Tyler Cowen, the Mercatus Center works with policy experts, lobbyists, and gov ...

List of Global Development Indexes and Rankings
{{DEFAULTSORT:Index of Economic Freedom Economic indicators The Heritage Foundation International rankings Comparative economic systems Social statistics indicators