1. Economic Freedom of the World: 2008 Annual Report James Gwartney Florida State University Robert Lawson Auburn University

2. Motivation Historical evidence speaks with a single voice on the relation between political freedom and a free market. I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity. -Milton Friedman, Capitalism and Freedom

3. The Great Debate: Smith v. Marx Adam Smith (1723-1790)  Advocated a system of “natural liberty”: individual pursuit of self interest in markets (not selfishness), free trade and limited government involvement. Karl Marx (1818-1883)  Advocated socialism/communism: collective/govenment ownership/control of resources, central planning.

4. 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

5. Negative v. Positive Rights Negative “freedom from” rights. Individuals may all simultaneously enjoy such rights. No individual owes anyone else anything except the promise not to interfere with him/her. Friedman’s Capitalism and Freedom. Positive “freedom to do or have” rights. Individuals may not all simultaneously enjoy such rights as such rights imply a claim by one person on the time and talents of another. Sen’s Freedom as Development

6. Alternative Views of EF No country perfectly conforms to the free- market ideal—all economies are mixed economies. Rothbard  Friedman  Keynes  Marx “Institutional Quality” or “Social Capital” Barro, Hall and Jones.

7. Is Economic Freedom a good? We want to measure EF for the same reason we want to measure GDP: Freedom is a good. People appear to want more of it, ceteris paribus. However, like the production of all goods, there are tradeoffs. Achieving more EF may mean the sacrifice of other social goals (e.g., equality) The index is designed to measure EF. It does not, and cannot, determine the optimal level of freedom. This is a value judgment. Still, having the index will help us evaluate those tradeoffs.

8. Methodology We collect data on 141 countries using 42 different components (grouped into five broad areas). 0-10 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.

9. 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

10. Area 1: Size of Government A. Government Consumption (% of C) E.g., France’s G/(G+C) = 29.9% (Vmax-Vi)/(Vmax-Vmin)*10 (40-29.9)/(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)

11. 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)

12. 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

13. 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)

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

15. Source: EFW 2008, Exhibit 1.2. Highest Economic Freedom Ratings, 2006

16. Economic Freedom Ratings of Selected Countries, 2006 Source: EFW 2008, Exhibit 1.2.

18. Average Economic Freedom Rating, 1980-2006 * *Chain-linked index. Source: EFW 2008, Exhibit 1.4.

19. Average Economic Growth Source: World Development Indicators.

20. Economic Freedom and Income Source: EFW 2008, Exhibit 1.6.

21. Economic Freedom and Growth Source: EFW 2008, Exhibit 1.7.

22. Economic Freedom and Growth 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.

23. Economic Freedom and Income Share of Poorest 10% Source: EFW 2008, Exhibit 1.11.

24. Economic Freedom and Income Level of Poorest 10% Source: EFW 2008, Exhibit 1.12.

25. Economic Freedom and Life Expectancy Source: EFW 2008, Exhibit 1.13.

26. Economic Freedom and Political Rights/Civil Liberties Source: EFW 2008, Exhibit 1.15. [Note: Lower values indicate greater political rights and civil liberties.]

27. Economic Freedom and the Environment Source: EFW 2008, Exhibit 1.16. [Note: Higher values indicate greater environmental performance.]

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