economic freedom of the world: 2002 annual report james gwartney florida state university robert...
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Economic Freedom of the World:
2002 Annual Report
James Gwartney Florida State University
Robert LawsonCapital University
Economic Freedom of the World index measures the amount of “economic freedom” present in a country. “The key
ingredients of economic freedom are personal choice, voluntary exchange, freedom to compete, and protection of person and property.” (Page 5.)
published since 1996 by the Economic Freedom Network, now consisting of 55 institutes around the world led by Canada’s Fraser Institute. The Cato Institute is the U.S. member.
based on 37 components; 123 countries rated in 2000 (most recent data); ratings available back to 1970 (in five year intervals); measures economic freedom on zero to ten scale in five broad areas:
– Size of Government
– Legal System and Security of Property
– Sound Money
– Freedom to Trade with Foreigners
– Regulation (Credit, Labor, Businesses)
See Chapter 1, Exhibit 1, pages 8-9 for a detailed list of the components.
2000 Ratings
Economic Freedom Index, 2000(Selected Countries)
8.6 8.5 8.4 8.1 8.0 7.5 7.5 7.3 7.06.3 6.1 5.8 5.3
4.7
8.8
2.0
4.0
6.0
8.0
10.0
See Chapter 1, Exhibit 2, page 11 for complete list of countries.
Economic Freedom and Indicators of Human Progress
It is now well known that economically free countries enjoy higher levels of income and faster rates of growth. (See Chapter 1, Exhibits 5 and 8, page 20.)
Life expectancy is also much higher among more economically free nations. (See Chapter 1, Exhibit 6, page 20.)
Economic freedom also contributes to political freedom.
Economic Freedom and Political Freedom
9.68
6.79
6.08
4.38
3.56
2
3
4
5
6
7
8
9
10
11
BottomQuintile
FourthQuintile
ThirdQuintile
SecondQuintile
TopQuintile
Index of Political
Rights and Civil Liberties
(lower numbers
mean more political freedom)
Source for Political Rights and Civil Liberty Index: Freedom House
More economic freedom means more political freedom
Economic Freedom and the Distribution of Income
The share of income going to the poorest 10% of the population is unrelated to economic freedom.
Chapter 1, Exhibit 9, page 20.
The poorest 10% earn much more income in economically free countries.
Chapter 1, Exhibit 7, page 20.
2.432.84
2.06
2.9 2.86
0
1
2
3
4
5
Bottom Quintile Fourth Quintile Third Quintile Second Quintile Top Quintile
Low
est
10%
sha
re o
f tot
al in
com
e
$728$1,250 $1,391
$4,108
$7,017
$0
$2,000
$4,000
$6,000
$8,000
BottomQuintile
FourthQuintile
Third Quintile SecondQuintile
Top Quintile
Bot
tom
10%
leve
l of
inco
me,
200
0
Has economic freedom throughout the world been increasing or decreasing during the last several
decades?
In general, there has been a movement toward greater economic freedom around the world.
This is particularly true in the area of sound money and freedom to trade with foreigners.
Economic Freedom on the march.
Economic Freedom of the WorldAverage Rating, 1975-2000
5.1 5.2 5.35.6
6.26.6
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
1975 1980 1985 1990 1995 2000
Based on Chapter 1, Exhibit 4, pages 17-19 only for those countries with ratings in all periods since 1975.
Average Area Ratings, 1980-2000
4.00
4.50
5.00
5.50
6.00
6.50
7.00
7.50
8.00
1. Size ofGovernment
2. Legal System &Property Rights
3. Sound Money 4. Freedom toTrade withforeigners
5. Regulation
1980
1990
2000
Based on data found in Chapter 4--Country Tables only for those countries with ratings in each area for all time periods.
10 countries with the largest increase in economic freedom rating since 1980.
10 countries with the largest absolute increase in EFW rating, 1980-2000
10 countries with largest increase in EFW rating (as a percentage of posssible gain), 1980-2000
Peru 3.77 United Kingdom 0.56Israel 3.39 Peru 0.55Ghana 3.30 Argentina 0.53Bolivia 3.22 Israel 0.52Jamaica 3.17 Jamaica 0.51Argentina 3.11 Iceland 0.51Jordan 2.67 Jordan 0.50Egypt 2.55 Bolivia 0.50Philippines 2.51 Ireland 0.48Trinidad & Tob. 2.47 Chile 0.48
Based on Chapter 1, Exhibit 4. Only countries with ratings in all areas in all years are included.
Why are the economic freedom ratings of France, Germany, Italy and Spain lower than the comparable
figures for the U.S. and United Kingdom?
There are several reasons why the ratings of the four large continental European nations are lower than those of the U.S. and U.K.: large size of government, weaker legal systems, and more restrictive regulations especially in credit and labor markets.
The ratings of these countries are quite similar in the sound money and freedom to trade with foreigners areas.
Comparing Continental Europe with U.S. and U.K.
Countries
1. Size of Government,
2000
2. Legal System & Property Rights, 2000
3. Sound Money, 2000
4. Freedom to Trade with foreigners,
2000
5. Regulation,
2000
5A. Credit Market
Regulation, 2000
5B. Labor Market
Regulations, 2000
5C. Business
Regulations, 2000
SUMMARY INDEX, 2000
France 2.5 8.1 9.5 8.1 7.0 8.7 5.0 7.3 7.0Germany 4.3 9.1 9.6 8.6 6.1 7.5 2.9 7.8 7.5
Italy 4.6 7.7 9.4 8.1 5.6 7.1 3.5 6.3 7.1Spain 4.6 7.5 9.3 8.3 6.8 8.1 5.3 6.9 7.3
Average 4.0 8.1 9.5 8.3 6.4 7.9 4.2 7.1 7.2
United Kingdom 6.2 9.3 9.7 8.5 8.1 9.3 6.9 8.1 8.4United States 7.6 9.2 9.7 8.0 8.2 9.3 7.2 8.3 8.5
Average 6.9 9.3 9.7 8.2 8.2 9.3 7.0 8.2 8.5
See Chapter 1, Exhibit 3, pages 13-15.
Why is economic freedom generally low in African, Latin American, and Islamic countries? Are there
signs of improvement?
In most cases, the legal structure (property rights and rule of law) of these countries is a major shortcoming.
In addition, African, Latin American, and Islamic countries generally rated low in freedom of international exchange, sound money, and regulation relative to the top 20 or the U.S.
With the exception of the sound money area among Latin American countries, the improvements among these nations have been modest at best.
Economic freedom ratings for African, Latin American and Islamic Countries by area, 2000.
Countries
SUMMARY INDEX,
2000
1. S ize of Government,
2000
2. Legal System & Property Rights,
2000
3. Sound Money,
2000
4. Freedom to Trade
with foreigners,
20005. Regulation,
2000
United States 8.5 7.6 9.2 9.7 8.0 8.2Top 20 7.8 5.9 8.5 9.4 8.3 7.1Latin 6.6 7.2 4.9 7.7 6.8 6.2
African 5.6 5.6 4.7 6.3 6.1 5.2Islamic 5.8 5.8 5.1 6.9 6.0 5.0
See Chapter 1, Exhibit 3, pages 13-15.
Has there been any improvement among African, Latin American, and Islamic countries?
Yes, but only a little.
Countries
Change in SUMMARY INDEX, 1990-
2000
2. Change in Legal
System & Property
Rights, 1990-2000
3. Change in Sound Money,
1990-2000
4.Change in
Freedom to Trade with foreigners, 1990-2000
5. Change in Regulation, 1990-2000
United States 0.6 0.9 0.1 0.2 1.4Top 20 0.8 1.0 0.8 0.6 1.1Latin 1.1 0.3 2.8 1.5 0.8Africa 0.8 0.5 1.3 1.0 0.4Islamic 0.8 1.4 0.1 1.2 0.2
See Chapter 1, Exhibit 3, pages 13-15.
Are there any relatively free economies among the African, Latin American, and Islamic Countries?
In Africa, Botswana and South Africa have substantially higher ratings than other sub-Saharan African countries.
In Latin America, Chile, Panama and Costa Rica stand out.
Among Islamic nations, Jordan, Egypt, and Malaysia score much higher than the rest.
In Africa, Botswana and South Africa score the best.
Countries
1. Size of Government,
2000
2. Legal System & Property Rights, 2000
3. Sound Money, 2000
4. Freedom to Trade with foreigners,
2000
5. Regulation,
2000
SUMMARY INDEX, 2000
Botswana 5.3 7.1 8.6 7.7 6.5 7.0South Africa 5.4 6.5 7.5 7.3 7.0 6.8Average 5.4 6.8 8.0 7.5 6.7 6.9
Namibia 3.9 8.3 7.1 6.9 6.6 6.6Kenya 6.6 4.1 8.9 7.1 6.2 6.6Uganda 6.2 4.7 9.2 6.8 5.6 6.5Zambia 6.6 6.5 5.9 8.1 5.6 6.5Tanzania 5.5 6.5 8.4 5.6 3.7 6.0Cote d'Ivoire 7.7 3.5 6.8 6.2 5.4 5.9Benin 6.5 6.5 5.3 5.1 5.8Ghana 6.8 4.1 5.2 6.5 5.9 5.7Senegal 6.7 4.1 7.0 6.0 4.6 5.7Burundi 6.5 6.0 4.5 5.5 5.6Chad 6.5 6.3 5.8 3.9 5.6Mali 5.7 5.3 6.6 5.9 4.6 5.6Niger 5.9 4.7 6.7 5.4 4.6 5.5Cameroon 5.5 4.7 6.4 5.8 5.0 5.5Nigeria 5.5 3.6 5.5 5.8 6.1 5.3Rwanda 5.5 5.8 4.6 5.2 5.3Madagascar 6.5 4.7 4.5 6.0 4.4 5.2Gabon 3.7 4.1 6.9 5.9 5.5 5.2Sierra Leone 6.2 2.9 7.0 4.1 4.8 5.0Central Afr. Rep. 4.3 6.8 5.1 3.9 5.0Congo, Rep. Of 3.5 2.3 6.8 7.0 4.8 4.9Zimbabwe 4.7 5.0 2.8 6.3 5.4 4.8Togo 4.4 3.5 6.5 4.4 4.7Malawi 4.2 5.9 2.1 6.0 5.1 4.7Guinea-Bissau 4.6 2.9 2.6 5.1 3.8Congo, Dem. R. 4.4 1.7 2.5 4.0 3.2Average 5.5 4.5 6.0 5.9 5.0 5.4
See Chapter 1, Exhibit 3, pages 13-15.
Countries
1. Size of Government,
2000
2. Legal System & Property Rights, 2000
3. Sound Money, 2000
4. Freedom to Trade
with foreigners,
2000
5. Regulation,
2000
SUMMARY INDEX, 2000
Chile 7.1 6.5 9.3 7.4 7.0 7.5Panama 7.4 5.8 9.7 7.2 6.6 7.4Costa Rica 7.1 6.9 7.6 8.1 6.8 7.3Average 7.2 6.4 8.9 7.6 6.8 7.4
Argentina 8.0 5.4 9.5 6.4 6.6 7.2El Salvador 8.4 4.5 9.4 7.4 6.4 7.2Trinidad & Tob. 5.9 6.8 9.5 6.6 7.2 7.2Bahamas 7.7 7.1 6.8 6.8 7.1Jamaica 7.5 5.8 8.2 7.0 6.5 7.0Peru 8.7 3.9 8.5 7.1 6.4 6.9Uruguay 6.7 6.3 7.6 7.3 6.2 6.8Bolivia 7.5 3.4 9.3 7.3 6.1 6.7Dominican Rep. 8.6 4.3 7.5 6.5 6.7 6.7Guyana 4.8 7.1 7.8 6.7 6.6Haiti 8.0 4.1 8.1 6.0 6.5Nicaragua 6.8 4.0 8.1 7.3 6.3 6.5Guatemala 9.1 3.0 7.5 6.4 5.6 6.3Honduras 7.5 3.5 7.9 6.9 5.9 6.3Mexico 7.6 4.2 6.2 7.8 5.4 6.3Paraguay 7.6 3.5 9.0 6.6 5.0 6.3Belize 6.0 6.8 5.3 6.8 6.2Barbados 5.2 6.5 5.3 6.4 5.8Brazil 6.7 5.4 5.1 5.6 6.1 5.8Venezuela 7.1 3.7 5.7 7.1 5.2 5.8Colombia 5.4 3.5 7.1 6.3 5.7 5.6Ecuador 8.7 3.3 3.3 7.0 4.4 5.3Average 7.2 4.7 7.5 6.7 6.1 6.5
In Latin America, Chile, Panama, and Costa Rica score
the best.
See Chapter 1, Exhibit 3, pages 13-15.
Countries
1. S ize of Government,
2000
2. Legal System & Property Rights, 2000
3. Sound Money,
2000
4. Freedom to Trade
with foreigners,
20005. Regulation,
2000SUMMARY INDEX, 2000
Jordan 5.6 7.2 9.6 7.7 6.4 7.3Egypt 6.5 5.9 9.4 6.3 5.4 6.7Malaysia 6.7 5.6 7.2 7.5 6.5 6.7Average 6.3 6.2 8.7 7.2 6.1 6.9
Morocco 5.9 7.1 6.7 5.5 5.1 6.1Tunisia 5.3 6.5 6.9 6.1 5.6 6.1Indonesia 7.8 3.4 6.5 7.6 4.7 6.0Turkey 6.9 5.4 3.6 7.3 5.6 5.8Bangladesh 5.2 2.9 6.9 4.9 5.7 5.1Pakistan 6.7 2.9 6.4 4.3 5.2 5.1Syria 3.7 5.3 7.1 6.2 2.7 5.0Iran 4.5 6.5 7.2 2.8 3.9 5.0Algeria 4.0 2.3 5.8 5.4 3.1 4.1Average 5.6 4.7 6.3 5.6 4.6 5.4
Among Islamic nations, Jordan, Egypt and Malaysia score the best
See Chapter 1, Exhibit 3, pages 13-15.
How important is it to have a sound legal structure with security of property rights and rule of law?
Our analysis indicates that a legal structure that provides for evenhanded enforcement of contracts and security of property rights is vitally important. When it is absent, gains from trade will go unrealized and both entrepreneurship and investment will flow elsewhere.
A comparison between the highest 20 and lowest 20 countries in the legal area illustrates this point. The average per capita GDP of the 20 highest rated countries in the legal area was $26,367 compared to an average of $2,629 for the 20 lowest rated countries. Similarly, the growth rate in the 1990s of the top 20 was 2.26% per year compared to -0.26% per year among the bottom 20.
Legal structure ratings and economic performance.
Countries
2. Legal System & Property Rights, 2000
Gross National Income
per capita, ppp US$,
2000
GDP per capita % growth, 1990-2000
Netherlands 9.62 $26,170 2.3Denmark 9.54 $27,120 2.0Australia 9.49 $25,370 2.9Finland 9.49 $24,610 2.4Austria 9.34 $26,310 1.5United Kingdom 9.29 $23,550 2.1Switzerland 9.27 $30,350 0.0Canada 9.27 $27,330 1.9United States 9.23 $34,260 2.2Germany 9.14 $25,010 1.2New Zealand 9.10 $18,780 1.9Iceland 9.03 $28,770Sweden 9.02 $23,770 1.4Ireland 8.97 $25,470 6.5Norway 8.85 $29,760 3.0Singapore 8.53 $24,970 5.0Luxembourg 8.35 $45,410Namibia 8.35 $6,440 1.6Belgium 8.29 $27,500 1.7Japan 8.18 $26,400 1.0Average 9.02 $26,368 2.26
Countries
2. Legal System & Property Rights, 2000
Gross National Income
per capita, ppp US$,
2000
GDP per capita % growth, 1990-2000
Peru 3.94 $4,720 3.0Venezuela 3.75 $5,750 -0.5Nigeria 3.62 $790 -0.4Cote d'Ivoire 3.55 $1,520 0.5Togo 3.55 $1,450 -0.2Honduras 3.54 $2,390 0.4Paraguay 3.53 $4,460 -0.4Colombia 3.53 $5,890 1.1Bolivia 3.43 $2,380 1.7Indonesia 3.36 $2,840 2.5Ecuador 3.30 $2,920 -0.3Guatemala 2.95 $3,770 1.5Guinea-Bissau 2.95 $700Myanmar 2.95Pakistan 2.95 $1,960 1.2Sierra Leone 2.95 $460 -6.8Bangladesh 2.89 $1,650 3.2Algeria 2.35 $5,040 0.2Congo, Rep. Of 2.35 $590 -3.0Congo, Dem. R. 1.75 $682 -8.3Average 3.16 $2,630 -0.26
Top 20 Countries Bottom 20 Countries
Notice that all the countries on this list are either African, Latin American or predominately Islamic.
The end.