Economic Freedom Index

The Economic Freedom Index is an annual index covering the economic effectiveness of different countries. It is curated and published by the Heritage Foundation. The index can be ranked globally or with respect to a specific region, such as the Asia-Pacific region. The list ranges from the most “free” countries to the most “repressed.”

The Economic Freedom Index ranks territories or countries based on various factors, including tax burden, judicial effectiveness, and freedom to trade. It also gauges a country's political-economic stability, and scores are awarded accordingly. In 2023's rankings, Singapore was ranked number 1, closely followed by Switzerland and Ireland, and the United States ranked 25th.

The economic freedom index assesses a country’s financial, social, economic, and political stability. It intends to gauge the freedom of different regions and countries. The Heritage Foundation, Wall Street Journal, The Fraser Institute, and a few others assess and publish the economic freedom index data.

The index's basis is that it is a fundamental human right of every citizen of every country to have control over their properties and labor. In countries with free economies, citizens can work, consume, produce, and invest as they wish. In these societies, the government encourages the free movement of capital, goods, and labor. Therefore, the index intends to find countries where the population feels free or repressed on those fronts.

The first such report was published in 1995. The world economic freedom index increased by 2.6 points between 1995-2008. However, in 2011, the index experienced a decrease from 60.2 to 59.7. In fact, the results in the next few years showed a decline in economic freedom globally. The 2012 report was the second-lowest in a decade.

The index has attracted criticism for its assumption that economic openness is non-negotiable for economic growth. For instance, Switzerland and Uruguay have high ratings according to the index. However, their economic development has been lukewarm at best. On the other hand, China has had commendable economic growth but ranks relatively low on the index.

Despite the criticism, the index is often viewed as a credible metric for observing the changes in an economy over a specific period. Moreover, it acts as a credible and significant source of information to analyze a region or country’s public policy, advocacy, enterprise, and science.

Political economics and economic developmental studies gave birth to the use of indexing. Economists such as Adam Smith developed theories on how private property rights and free trade were significant factors in general prosperity and economic development.

Later in the 20th century, Friedrich Hayek and Milton Friedman proposed that entrepreneurship and exchange were critical binding agents that made the modern-day standards of living possible.

Expressing something that might seem subjective, such as economic freedom, needs to be quantified. Therefore, categories like tax burden, trade freedom, and business freedom are used as a measure of economic freedom within a country or region.

Economists like Ryo Takashima and Tomi Ovaska believe that people deeply care about the level of freedom and opportunity provided by their society. Therefore, it is essential to measure it. The first Economic Freedom of the World index commenced in 1970. However, the first Heritage Foundation index was published in 1995.

The Heritage Foundation is one of the most followed and accredited entities in terms of economic freedom data. They highlight the correlations that nudge nations towards improving their overall scores.

They categorize countries as Free, mostly free, moderately free, mostly unfree, and repressed.

One of the most common findings in these reports has been that the countries with free or primarily free tags have the most population and have higher income in comparison to vice versa. A direct correlation between GDP growth, economic freedom, and higher standard of living also has been found.

The Heritage Foundation gauges countries based on twelve factors. They are:

• Judicial Effectiveness
• Monetary Freedom
• Tax Burden
• Labor Freedom
• Property Rights
• Investment Freedom
• Fiscal Health
• Business Freedom
• Government Integrity
• Financial Freedom
• Government Spending
• Trade Freedom

The top 10 countries according to the economic freedom index ranking as of October 2023 are:

1. Singapore
2. Switzerland
3. Ireland
4. Taiwan
5. Luxemburg
6. New Zealand
7. Estonia
8. Denmark
9. Sweden
10. Norway

Now that the theoretical aspects of the world economic freedom index are out of the way, it is time to discuss the practical aspects and real-life situations related to the concept through the examples below.

Example #1

In 2023, Singapore was declared the most economically free country. Hong Kong slipped from its first position for the first time in 53 years. Hong Kong’s slip is a classic example of how political stability and civil freedom are integral parts of economic freedom.

According to the Fraser Institute, increasing curbs and restrictions from Mainland China on different liberties in the country have led to Hong Kong slipping to 46th position globally. In fact, they also rate China as the most repressed country, ranking 149th out of 165 countries. In fact, some foundations did not include Hong Kong and Macau as independent entities after the Hong Kong National Security Law was incorporated.

Example #2

It is a well-established fact that the United States is one of the most influential countries in terms of defense, trade, warfare, financial aid, and other such matters. However, the findings of the last 19 years of data relating to economic freedom show the importance of multiple factors for a country or region to experience economic freedom.

In 2003, the index scored the United States 8.23 out of 10. Till 2008, the index hovered around the same figure. However, the index saw a significant dip as it scored the US 7.73 in 2010 and 2014 and as low as 7.66 in 2013.

From 2015 to 2019, the index reclaimed a score above eight before seeing a dip again during and after the pandemic. These rises and dips can be connected to multiple political and business-related events.

Despite the various advantages, there are a few criticisms that could go down better with economic experts. A few of the most prominent limitations are:

• The assumption that economic openness as a metric is vital for economic development has attracted widespread criticism. For instance, China has experienced one of the most significant economic growth in the last few decades. However, their economic freedom index remains “repressed.”
• The absence of common and binding minimum wage laws leads to the limitation of the freedom of laborers and other workers.
• The subjectivity of tagging a particular institution or policy as contributing to economic freedom or the opposite is complicated.