Economic Freedom of the World 2012 Annual Report

The latest edition of this annual report, published in association with the Institute of Economic Affairs

 

Executive summary:

The index published in Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, free- dom to compete, and security of privately owned property. Forty-two variables are used to construct a summary index and to measure the degree of economic freedom in five broad areas:

1  Size of Government;

2  Legal System and Property Rights;

3  Sound Money;

4  Freedom to Trade Internationally;

5  Regulation. 


An important anniversary

This year is the 100th anniversary of Milton Friedman’s birth. Milton Friedman was the godfather of Economic Freedom of the World. He believed that, if economic freedom could be measured with greater accuracy, it would be possible to isolate its impact on the performance of economies and other factors of interest. This led to the Economic Freedom of the World project, headed by Milton and Rose Friedman and Michael Walker, then executive director of the Fraser Institute. 
Since our first publication in 1996, numerous studies have used data from Economic Freedom of the World to examine the impact of economic freedom on investment, economic growth, income levels, and poverty rates. Virtually without exception, these studies have found that countries with institutions and policies more consistent with economic freedom have higher investment rates, more rapid economic growth, higher income levels, and more rapid reductions in poverty rates. 


Economic freedom from around the world

  •  In the chain-linked index, average economic freedom rose from 5.30 (out of 10) in 1980 to 6.88 in 2007. It then fell for two consecutive years, resulting in a score of 6.79 in 2009 but has risen slightly to 6.83 in 2010, the most recent year available. It appears that responses to the economic crisis have reduced economic freedom in the short term and perhaps prosperity over the long term, but the upward movement this year is encouraging.
  • In this year’s index, Hong Kong retains the highest rating for economic freedom, 8.90 out of 10. The other top 10 nations are: Singapore, 8.69; New Zealand, 8.36; Switzerland, 8.24; Australia, 7.97; Canada, 7.97; Bahrain, 7.94; Mauritius, 7.90; Finland, 7.88; and Chile, 7.84.
  • The rankings (and scores) of other large economies in this year’s index are the United Kingdom, 12th (7.75); the United States, 18th (7.69); Japan, 20th (7.64); Germany, 31st (7.52); France, 47th (7.32); Italy, 83rd (6.77); Mexico, 91st, (6.66); Russia, 95th (6.56); Brazil, 105th (6.37); China, 107th (6.35); and India, 111th (6.26).
  • The scores of the bottom ten nations in this year’s index are: Venezuela, 4.07; Myanmar, 4.29; Zimbabwe, 4.35; Republic of the Congo, 4.86; Angola, 5.12; Democratic Republic of the Congo, 5.18; Guinea-Bissau, 5.23; Algeria, 5.34; Chad, 5.41; and, tied for 10th worst, Mozambique and Burundi, 5.45.
  • The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a substantial decline in economic freedom during the past decade. From 1980 to 2000, the United States was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. After increasing steadily during the period from 1980 to 2000, the chain- linked EFW rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 
7.70 in 2010. The chain-linked ranking of the United States has fallen precipitously from second in 2000 to eighth in 2005 and 19th in 2010 (unadjusted ranking of 18th).

Nations that are economically free out-perform non-free nations in indicators of well-being

  • Nations in the top quartile of economic freedom had an average per-capita GDP of $37,691 in 2010, compared to $5,188 for bottom quartile nations in 2010 current international dollars (Exhibit 1.7).
  • In the top quartile, the average income of the poorest 10% was $11,382, com- pared to $1,209 in the bottom in 2010 current international dollars (Exhibit 1.10). Interestingly, the average income of the poorest 10% in the most economically free nations is more than twice the overall average income in the least free nations.
  • Life expectancy is 79