Economic Freedom of the World: 2005 Annual Report James Gwartney Professor of Economics & Gus A. Stavros Eminent Scholar Chair Florida State University Robert Lawson Professor of Economics & George H. Moor Chair Capital University Cato Institute September 8, 2005

What is Economic Freedom? Personal Choice Individuals are permitted to choose for themselves in economic life (as opposed to having such decisions made for them by others). Voluntary Exchange People are permitted to exchange goods at mutually agreeable prices. Protection of Persons and Property People are secure from intrusion by others. Freedom to Enter and Compete in Markets

Methodology uses quantitative/objective and third party data (WB, IMF, GCR, ICRG, PWC) large number of countries long time period Zero to 10 ratings (10 means more free/less intrusion). 5 Areas, 38 Components and/or Sub- Components 60+ institutes around the world

5 Areas of EFW Index 1. Size of Government: Expenditures, Taxes, and Enterprises (4 Components) 2. Legal Structure and Security of Property Rights (5 Components) 3. Access to Sound Money (4 Components) 4. Freedom to Exchange with Foreigners (5 Components) 5. Regulation of Credit, Labor, and Business (3 Components)

Which are the freest economies in the world?

Economic Freedom Ratings of Selected Countries

Countries with Big Increases (> +2.5) in Economic Freedom, Source: Exhibit 1.4

Countries with Decreases (< -0.5) in Economic Freedom, Source: Exhibit 1.4

Economic Freedom and Per Capita Income EFW Quintiles, 2003

Economic Freedom and Economic Growth EFW Quintiles, 2003

Economic Freedom and Investment EFW Quintiles, 2003

Economic Freedom and Infant Mortality EFW Quintiles, 2003

Economic Freedom and Political Rights and Civil Liberties EFW Quintiles, 2003 Note: Political Rights and Civil Liberties are measured on 1-7 scale: 1 is highest degree of freedom; 7 lowest. Source: Freedom House

New research: Economic Freedom and Peace by Erik Gartzke Associate Professor of Political Science Columbia University

The Democratic Peace? Does the concept of a democratic peace hold up to scrutiny? Democracies tend not to go to war with each other but go to war about as often in general as non- democracies. Developing democracies are as prone as non- democracies to violent conflict. Thus, democratic peace fails close study.

The Capitalist Peace? Stable democracies typically have high levels of economic freedom – which promotes peace. When both are included in a statistical test, economic freedom is 50 times more potent in reducing conflict than democracy. Nations which score below 2 in the EF index are 14 times more prone to conflict than top scoring nations. Economically free nations fight each other less and go to war against other nations less as well.

Causes of the Capitalist Peace Wealth and power are created by markets and the efficient production that arises from them, not by conquest of land or raw materials. Wealth created by market economies through efficient production, unlike wealth derived from land or resources, is difficult for nations to steal by violent action. Efficient production requires property rights and free decisions by market participants that cannot be effectively coordinated to the victors advantage. Markets provide new methods for signaling among nations and create areas in which states can compete without having to go to war.

Source: EFW 2005

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