Economic Freedom of the World: 2009 Annual Report A Technical Overview of This Years Report By James Gwartney and Robert Lawson assisted by Joshua Hall

Measuring Economic Freedom Economic freedom is complex and multidimensional, but it can be measured: Personal choice Freedom to trade, domestically and abroad. Freedom to enter and compete in markets. Security of Property/Rule of Law

Methodology We collect data on 141 countries using 42 different components (grouped into five broad areas) ratings are constructed to measure the degree to which the country conforms to the free-market ideal. Third-Party data from World Bank, IMF, Global Competitiveness Report, IMD, etc. Objective data Survey data Transparency is a highly valued part of the project.

5 Areas of Economic Freedom of the World (EFW) Index 1. Size of Government: Expenditures, Taxes, and Enterprises 2. Legal Structure and Security of Property Rights 3. Access to Sound Money 4. Freedom to Trade Internationally 5. Regulation of Credit, Labor, and Business

Area 1: Size of Government A. Government Consumption (% of C) E.g., Frances G/(G+C) = 29.9% (Vmax-Vi)/(Vmax-Vmin)*10 ( )/(40-6)*10 = 3.0 B. Transfers & Subsidies (% of GDP) C. Government Investment (% of I) & Government Enterprises D. Marginal Tax Rates (top rate & threshold- 2 sub-components)

Area 2: Legal Structure and Security of Property Rights A. Judicial Independence (GCR) B. Impartial Courts (GCR) C. Protection of Intellectual Property (GCR) D. Military Interference (ICRG) E. Integrity of Legal System (ICRG)

Area 3: Access to Sound Money A. Money Growth (minus economic growth) B. Inflation Variability (st. dev. of inflation) C. Inflation Rate (recent annual rate) D. Freedom to Own Foreign Currency Bank Accounts Domestically and Abroad

Area 4: Freedom to Exchange with Foreigners A. Taxes on International Trade (3 sub- components) B. Regulatory Trade Barriers (2 sub- components) C. Trade Sector Size (actual compared with expected) D. Black Market Exchange Rates E. Capital Market Controls (2 sub- components)

Area 5: Regulation A. Credit Market Regulations (5 sub- components) B. Labor Market Regulations (5 sub- components) C. Business Regulations (5 sub-components)

Source: EFW 2009, Exhibit 1.2. Highest Economic Freedom Ratings, 2007

Economic Freedom Ratings of Selected Countries, 2007 Source: EFW 2009, Exhibit 1.2.

Average Economic Freedom Rating, * *Chain-linked index. Source: EFW 2009, Exhibit 1.4.

2009 Changes No Major Changes Two minor corrections 5B calculation was slightly off 5ciii was incorrectly coded Only affected 2006 data and have since been corrected.

Future Issues 5Biv - Mandated Cost of Hiring Based on World Banks Doing Business - measures the cost of all social security taxes, payroll taxes, and any mandated benefits, including vacations and holidays

Future Issue: Changing Components Problem Variable dropped from DB in 2010 Carried forward last years data for now Why? Harmonization with International Labour Organization (ILO) Conventions

From Doing Business: It is important that government actions focus on the needs of the labor force and lower income households as well as those designed to help businesses to survive and grow. Adjusting the scoring in the Doing Business 2010 report (to be launched in September 2009) regarding provisions for fixed term workers and standards for severance payment, mandatory days of rest and night work and holidays, and minimum wage levels, in order to accord favorable scores to worker protection policies that comply with the letter and spirit of the relevant ILO Conventions, recognizing that well-designed worker protections are of benefit to the society as a whole.

Data Stability We are about 3 rd party data and transparency The quality of the index is only as good as data available from other sources This move by DB raises concerns about the long-term stability of many of the data series we rely upon to construct the EFW

Data Stability Another example is 5Ciii – Bureaucracy Costs Based on Global Competiveness Report data on product standards and regulations Is going to be removed from GCR in the near future

Data Quality From a long-term perspective, the data used in the EFW is richer and of higher quality than it has ever been Prior to 2003, for example, no Doing Business report Contributing organizations do a great job in verifying changes in 3 rd party data

Data Quality From a long-term perspective, the data used in the EFW is richer and of higher quality than it has ever been Prior to 2003, for example, no Doing Business report Contributing organizations do a great job in verifying changes in 3 rd party data

Economic Freedom Research Trends More research is being done than ever before using the EFW Over a 1000 citations for all editions on Google Scholar Much of this research has focused on the relationship between economic freedom and economic growth Findings are pretty straightforward

What is True in the Raw Data… Source: EFW 2009, Exhibit 1.7.

Is True in the Scholarly Literature EF (and changes in EF) are highly correlated with economic growth. deHaan et al. (2006) survey the literature:Most studies analysing the relationship between economic growth and EF have employed cross-country (or panel) growth models...It is clear from these studies that EF seems to have a positive association with growth. None of the studies summarized reports that economic freedom is bad for growth.

Future Areas of Importance Economic Freedom and Macroeconomic Fluctuations (Lipford, JPEnt, 2007) (DeHaan et al., EFW, 2009) Case Studies in EF Change (Beaulier, Cato Journal, 2003) Zimbabwe?

Future Areas of Importance Long-term changes in EF components The move to volunteer armies around the world The decline in monetary inflation The Relationship between EF and Democracy (Lawson and Clark, 2009) Which comes first question

Economic Freedom and Political Rights/Civil Liberties Source: EFW 2009, Exhibit [Note: Lower numerical values indicate greater political rights and civil liberties.]

Also, Income Inequality Source: EFW 2009, Exhibit 1.10.

Personal Joshua Hall Beloit College 700 College St Beloit WI, United States