Economic Freedom of the World: 2023 Annual Report

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Economic Freedom of the World: 2023 Annual Report

The index published in Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to enter markets and compete, and security of the person and privately-owned property. Forty-five data points are used to construct a summary index, along with a Gender Legal Rights Adjustment to measure the extent to which women have the same level of economic freedom as men. The degree of economic freedom is measured in five broad areas.

Area 1: Size of Government—As government spending, taxation, and the size of government-controlled enterprises increase, government decision-making takes the place of individual choice and economic freedom is reduced.

Area 2: Legal System and Property Rights—Protection of persons and their rightfully acquired property is a central element of both economic freedom and civil society. Indeed, it is the most important function of government. If property is not secure, if individuals are not safe, if the judiciary is not impartial, or if the rule of law is undermined, then, again, economic freedom is reduced.

Area 3: Sound Money—Inflation erodes the value of rightfully earned wages and savings. Sound money is thus essential to protect property rights. When inflation is not only high but also volatile, it becomes difficult for individuals to plan for the future and thus use economic freedom effectively.

Area 4: Freedom to Trade Internationally—Freedom to exchange—in its broadest sense, buying, selling, making contracts, and so on—is the essence of economic freedom. And this freedom is reduced when government impediments to trade make it costly or even impossible to exchange with businesses and individuals in other nations.

Area 5: Regulation—Governments not only use a number of tools to limit the right to exchange internationally, they may also impose onerous regulations, domestically as well as on international trade, that limit the right to exchange, gain credit, hire or work for whomever one wishes, or freely operate one’s business. As these limits multiply, economic freedom decreases.

The total number of jurisdictions in the index is 165. The data are available annually from 2000 to 2021 and for years ending in zero or five back to 1970. This dataset makes it possible for scholars to analyze the impact of both cross-country differences in economic freedom and changes n that freedom across a time frame of several decades. Separate estimates are also provided at five-year intervals back to 1950 on the economic freedom website.

Related research
Since our first publication in 1996, over 700 studies have used the data published in Economic Freedom of the World to examine the impact of economic freedom on human well-being. The strong balance of the evidence suggests that those who live in jurisdictions with greater economic freedom experience higher levels of well-being as measured by factors such as greater productivity, more rapid economic growth, higher income levels, less poverty, less corruption, and fewer conflicts.

Top-rated countries in 2020
The most recent comprehensive data available are from 2021. For the first time in the history of the index, Hong Kong slipped from its top position. The Chinese government imposed new and significant barriers to entry, limits on the employment of foreign labor, and increases in the costs of doing business, which drove a 0.25-point decline in Hong Kong’s Area 5 (regulation) component. Meanwhile, increased military interference in the rule of law and eroding confidence in judicial independence and the impartiality of Hong Kong courts led to a 0.20-point decline in the jurisdiction’s Area 2 (legal system and property rights) component. As Hong Kong declined, Singapore’s scores improved. Driven by improvements in its size of government and regulation components, Singapore’s overall score rose 0.06 points to take the top ranking. The next highest scoring nations are Switzerland, New Zealand, United States, Ireland, Denmark, Australia, United Kingdom, and Canada.

Rankings of other major countries
Taiwan (11th), Japan (20th), Germany (23rd), Korea (42nd), France (47th), Italy (53rd), Mexico (68th), India (87th), Russia (104th), Brazil (90th), and China (111th).

The ten lowest-rated countries
Republic of Congo, Algeria, Argentina, Libya, Iran, Yemen, Sudan, Syria, Zimbabwe, and, lastly, Venezuela.

A decade of growth in economic freedom was erased in 2020
Between 2000 and 2019, the average economic freedom rating increased from 6.58 to 6.94 but in 2020 the average rating fell to 6.77, where it remained in 2021. The last time the average economic freedom rating was this low was 2009.

Chapter 1: Economic Freedom of the World in 2021
The authors of the report, James Gwartney, Robert Lawson, and Ryan Murphy, provide an overview of the report and discuss why economic freedom is important.

Chapter 2: Country Data Tables
The tables in chapter 2 provide detailed historical information for the 165 jurisdictions in the index. For each jurisdiction for which data were available, the tables show the overall EFW index rating and the rank of that country for the years 1980, 1990, 2000, 2010, 2015, 2019, 2020, and 2021.

Chapter 3: Populism, Majority Rule, and Economic Freedom
by Andrea Celico and Martin Rode
In this chapter, Andrea Celico and Martin Rode of the Universidad de Navarra investigate the relationship between populism and economic freedom. They also consider the potentially mediating roles of institutional constraints and government ideology. Controlling for other determinants, they find that populism in government is significantly associated with reductions in economic freedom for a large sample of democratic countries. They also find that in OECD countries, the negative association between populism and economic freedom seems to be mediated to a substantial degree by political constraints and political ideology. It is possible that institutional guardrails, which are often absent in many non-OECD countries, check the power of populist governments.

Chapter 4: The Rule of Law and Economic Freedom
by Matanda Abubaker
In this chapter, the Ugandan judge and law lecturer, Matanda Abubaker, discusses the relationship between economic freedom and the rule of law. He explores what is meant by the rule of law and he concludes that causality runs in both directions: while there cannot be economic freedom without the rule of law, economic freedom also enhances the rule of law. He also argues that when one of the two is threatened, the other is also threatened.

Chapter 5: Diamonds, Dynasties, or Decent Decisions?
by Alexander C.R. Hammond
In this chapter, Alexander Hammond of the Institute of Economic Affairs explores Botswana’s unique economic history. In a continent dogged by stagnant growth, Botswana prospers. For the last half century, the economy of this sparsely populated nation in southern Africa has grown faster than that of almost any other in the world. While economists generally agree that Botswana owes its relative prosperity to its long-standing commitment to decent levels of economic freedom, there is less agreement about what has permitted Botswana to maintain this commitment. Here, Hammond attributes the nation’s freedom to good decision-making, political and socio-economic stability, and certain internal and external constraints on policy makers’ decisions. Alarmingly, however, he concludes that some of these factors may be waning.

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