Economic freedom

Economic freedom is the ability of individuals to exercise control over their property. Though there is no single, accepted definition Steve Hanke and Stephen Walters found that economic freedom includes
• secure rights to property
• freedom to engage in voluntary transactions both domestically and internationally
• freedom from governmental control of the terms on which individuals transact
• freedom from governmental expropriation of property
Economic liberty is perceived as distinct from political liberty, when people are free to participate in the political process on an equitable basis; and civil liberty, which involves protection against unreasonable searches and the right to fair trials, free assembly, free speech, and the practice of religion. In the 1980s economists and political-interest groups became increasingly interested in measuring economic freedom and the relationship of economic freedom to ECONOMIC GROWTH. Part of the interest is ideologically based. Free-market advocates and critics of government scrutiny of business practices wanted to demonstrate a relationship between economic freedom and economic growth. Three organizations—Freedom House, Fraser Institute, and the Heritage Foundation—all developed measures of economic freedom by country. Each organization identified crucial elements of economic freedom, quantified measures of these elements, and weighted the elements in order to create an index or score of economic freedom. The first attempt to measure economic freedom was developed by Raymond Gastil and Lindsay Wright for Freedom House in 1983. Their efforts grew out of Freedom House’s annual assessment of political and civil liberties. Since 1972 Freedom House has published an ANNUAL REPORT categorizing countries as “free,” “partly free,” or “not free” based on an average of the political- and civilliberties ratings. Gastil and Wright supplemented this data with estimates of property rights, labor rights, businessoperation rights, investment freedom, international trade openness, and antidiscrimination, and absence of corruption. Since 1995 Freedom House has published a separate World Survey of Economic Freedom. In the 1995–96 survey, only 27 nations were rated as free, representing only 17 percent of the world’s population but over 80 percent of total world output. Fraser Institute publishes its Economic Freedom Index using five indices of economic liberty based on weighted averages of 21 components. In 2002 the Institute published Economic Freedom of the World: 2002 Annual Report. Their index uses measures of
• sound money
• size of government
• legal structure and security of property
• regulation of credit, labor, business
• freedom to exchange with foreigners.
Money supply growth, INFLATION rate, foreign currency accounts, and bank accounts abroad measure sound money. Size of government is measured by government spending as a share of total CONSUMPTION, transfers, subsidies as a share of GROSS DOMESTIC PRODUCT (GDP), private versus state-run enterprises, and marginal tax rates. Judicial independence, impartial courts, protection of INTELLECTUAL PROPERTY, and military interference with the rule of law measure legal structure. Regulation of credit, labor, and business is measured by credit, labor, and business market regulations. Level of TARIFFs, regulatory TRADE BARRIERS, absence or presence of black-market EXCHANGE RATEs, size of the trade sector, and absence of CAPITAL controls measure freedom to exchange with foreigners. Beginning in 1994, the Heritage Foundation started publishing its annual Index of Economic Freedom. The Heritage Foundation’s goal is to provide evidence on the impact of externally funded development assistance on facilitating economic growth. The foundation wants to discredit foreign-aid programs. The Heritage ranking of countries from mostly free to mostly unfree was then correlated with receipt of foreign aid and showing that many countries receiving foreign aid also lacked economic freedom and had not developed economically. While some variation exists depending on the emphasis given to size of government and monetary stability, economic freedom index rankings are fairly consistent. Ironically, in 1996 Hong Kong (then independent of China) was ranked as one of the most economically free countries. New Zealand, Switzerland, the Netherlands, and the United Kingdom were also ranked high on each scale, followed closely by the United States. Not surprisingly, North Korea, Cuba, and Myanmar (Burma) ranked among the least free countries. Part of the interest in economic freedom comes from the question “How does economic liberty contribute to economic growth?” After each economic-freedom index was developed, economists correlated economic freedom ratings with measures of prosperity, usually GDP per capita. As expected, economic freedom (as defined by each organization) and economic growth are positively related. As Hanke and Walters observed, “They [economic researchers] have focused on the nature of institutions and on the structure of rules and norms that constrain economic behavior as a way of understanding the development process. And they have rediscovered [Adam] Smith’s ancient insight that economic liberty is a crucial precondition for sustained, vigorous economic growth.”