Index of Economic Freedom - Method

Method

The Index's 2008 definition of economic freedom is "The highest form of economic freedom provides an absolute right of property ownership, fully realized freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself."

The index scores nations on 10 broad factors of economic freedom using statistics from organizations like the World Bank, the International Monetary Fund and the Economist Intelligence Unit:

• Business Freedom: Business freedom is a quantitative measure of the ability to start, operate, and close a business that represents the overall burden of regulation as well as the efficiency of government in the regulatory process.
• Trade Freedom: Trade freedom is a composite measure of the absence of tariff and non-tariff barriers that affect imports and exports of goods and services. Different imports entering a country can, and often do, face different tariffs.
• Monetary Freedom: Monetary freedom combines a measure of price stability with an assessment of price controls. Both inflation and price controls distort market activity. Price stability without microeconomic intervention is the ideal state for the free market.
• Government Size/Spending: This component considers the level of government expenditures as a percentage of GDP. Government expenditures, including consumption and transfers, account for the entire score.
• Fiscal Freedom: Fiscal freedom is a measure of the tax burden imposed by government.
• Property Rights: The property rights component is an assessment of the ability of individuals to accumulate private property, secured by clear laws that are fully enforced by the state.
• Investment Freedom: In an economically free country, there would be no constraints on the flow of investment capital. Individuals and firms would be allowed to move their resources into and out of specific activities internally and across the country’s borders without restriction.
• Financial Freedom: Financial freedom is a measure of banking efficiency as well as a measure of independence from government control and interference in the financial sector.
• Freedom from Corruption: Corruption erodes economic freedom by introducing insecurity and uncertainty into economic relationships. The higher the level of corruption, the lower the level of overall economic freedom and the lower a country’s score.
• Labor Freedom: The labor freedom component is a quantitative measure that looks into aspects of the legal and regulatory framework of a country’s labor market.

The 10 factors are averaged equally into a total score. Each one of the 10 freedoms is graded using a scale from 0 to 100, where 100 represents the maximum freedom. A score of 100 signifies an economic environment or set of policies that is most conducive to economic freedom. The methodology has shifted and changed as new data and measurements have become available, especially in the area of Labor freedom, which was given its own indicator spot in 2007.