Economic Freedom of the World: 2002 Annual Report James Gwartney Florida State University Robert Lawson Capital University

Economic Freedom of the World index F 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.) F published since 1996 by the Economic Freedom Network, now consisting of 55 institutes around the world led by Canadas Fraser Institute. The Cato Institute is the U.S. member. F 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 See Chapter 1, Exhibit 2, page 11 for complete list of countries.

Economic Freedom and Indicators of Human Progress F 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.) F Life expectancy is also much higher among more economically free nations. (See Chapter 1, Exhibit 6, page 20.) F Economic freedom also contributes to 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.

Has economic freedom throughout the world been increasing or decreasing during the last several decades? F In general, there has been a movement toward greater economic freedom around the world. F This is particularly true in the area of sound money and freedom to trade with foreigners.

Economic Freedom on the march. Based on Chapter 1, Exhibit 4, pages only for those countries with ratings in all periods since 1975.

Average Area Ratings, 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 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? F 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. F 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. See Chapter 1, Exhibit 3, pages

Why is economic freedom generally low in African, Latin American, and Islamic countries? Are there signs of improvement? F In most cases, the legal structure (property rights and rule of law) of these countries is a major shortcoming. F 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. F 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, See Chapter 1, Exhibit 3, pages

Has there been any improvement among African, Latin American, and Islamic countries? Yes, but only a little. See Chapter 1, Exhibit 3, pages

Are there any relatively free economies among the African, Latin American, and Islamic Countries? F In Africa, Botswana and South Africa have substantially higher ratings than other sub-Saharan African countries. F In Latin America, Chile, Panama and Costa Rica stand out. F Among Islamic nations, Jordan, Egypt, and Malaysia score much higher than the rest.

In Africa, Botswana and South Africa score the best. See Chapter 1, Exhibit 3, pages

In Latin America, Chile, Panama, and Costa Rica score the best. See Chapter 1, Exhibit 3, pages

Among Islamic nations, Jordan, Egypt and Malaysia score the best See Chapter 1, Exhibit 3, pages

How important is it to have a sound legal structure with security of property rights and rule of law? F 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. F 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. Top 20 CountriesBottom 20 Countries Notice that all the countries on this list are either African, Latin American or predominately Islamic.

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