Science Fair Project Encyclopedia
Index of Economic Freedom
The index measures how countries score on a list of 50 independent variables divided into 10 broad factors of economic freedom. The higher a country's score on a factor, the greater the level of government intervention in the economy and the less economic freedom there is. The Heritage Foundation's view is that countries with the most economic freedom also have higher rates of long-term economic growth and are more prosperous than are those with less economic freedom.
These 50 variables are grouped into the following categories:
- Trade policy
- Fiscal burden of government
- Government intervention in the economy
- Monetary policy
- Capital flows and foreign investment
- Banking and finance
- Wages and prices
- Property rights
- Informal Market Activity (Black market)
Depending on their score, countries are then separated into four categories: Free, Mostly Free, Mostly Unfree, and Repressed.
The most current ratings are for 2005. Note: countries sharing the same rank received a tie score. For example, Ireland and New Zealand are tied for the rank of 5th most economically free country.
- Overall, 86 countries worldwide are freer than they were last year and 57 are less free.
- The 10 most-improved countries this year were Madagascar, Ukraine, Poland, Bulgaria, Iceland, Indonesia, Hungary, Malaysia, Mongolia and Uzbekistan.
- the Fraser Institute: the "Economic Freedom of the World Annual Report"; and
- the World Economic Forum: the "Global Competitiveness Report."
Many peer-reviewed articles have used these indices.   One question has been what subcomponents are responsible for economic growth. Strong property rights and low inflation may be particularly important. Regarding the size of government and free trade there is much conflicting evidence.
Some economists and commentators have criticized the Index on several grounds—asking, for instance, if Canada's slightly higher income tax rates make it a less economically free country than the United States. Critics of the index's methodology most commonly take issue with its equation of regressive taxation, low tax rates generally, and weak worker protection regulations with economic freedom. Some critics go further, saying that the index judges countries against a specious list of 'ideal' economic and fiscal policies, which reflect the Heritage Foundation and Wall Street Journal 's own laissez-faire economic and fiscal policy ideas more than they do a substantive concept of economic freedom. For such critics, the list is simply a promotional tool for laissez-faire policy, rather than a meaningful index of economically free countries.
In response, proponents point out that the indexes and their subcomponents have been used in much independent research published in numerous peer-reviewed papers. That the creators of the indexes support laissez-faire capitalism does not invalidate the empirical research.
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