Transcript The Economic Freedom of the World Annual Reports: Introduction

Economic
Freedom of the
World: 2004
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
July 15, 2004
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 SubComponents
 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?
8.8
8.7
8.6
8.6
8.4
8.2
8.2
8.2
8.2
8.2
8.0
7.9
7.9
7.8
7.8
7.8
7.6
7.4
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Ch
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31
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(5
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14
zu
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ela
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(1
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18
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bw
e(
12
2)
Es
to
Economic Freedom Ratings of
Selected Countries
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
7.7
7.3
7.3
7.3
7.1
7.0
6.8
6.5
5.7
5.0
4.6
3.4
Economic Freedom Is Increasing
(Mean Summary Rating, 1980-2002*)
7.0
6.5
6.5
6.5
2000
2002
6.2
6.0
5.6
5.5
5.1
5.2
1980
1985
5.0
4.5
4.0
Source: Exhibit 1.5
*chain-linked index
1990
1995
A look at selected components…

Monetary policy is more stable.
– In 2002, only 15 of the 104 countries with complete
data since 1980 had inflation rates greater than 10%. In
1980, 76 did.

Marginal tax rates are lower.
– In 2002, no country imposed a top rate greater than
60%. In 1980, 49 did.

Exchange rate controls have been lifted.
– In 2002, only 4 countries had significant black markets
in foreign exchange compared with 36 in 1980.

Tariffs are lower.
– The average tariff rate has fallen to 10.4% in 2002 from
26.1% in 1980
A look at selected countries…

Botswana

– Up to 7.4 in 2002 from
5.1 in 1985.

Chile
– Up to 6.3 in 2002 from
4.9 in 1990.

– Up to 7.3 in 2002 from
3.6 in 1975.

China
– Up to 5.7 in 2002 from
3.8 in 1980.
India
Ireland
– Up to 7.8 in 2002 from
6.2 in 1985.

New Zealand
– Up to 8.2 from 5.9 in
1985.
A look at selected countries (cont.)

Estonia

– Up to 7.7 in 2002 from
5.3 in 1995.

United Kingdom
– Down to 3.4 in 2002
from 6.0 in 1995.

– Up to 8.2 in 2002 from
6.1 in 1980.

Uganda
– Up to 6.6 in 2002 from
2.6 in 1990.
Zimbabwe
Argentina
– Down to 5.8 in 2002
from 6.7 in 1995.

Venezuela
– Down to 4.6 in 2002
from 6.7 in 1980.
Economic Freedom and Per Capita Income
$30,000
$26,106
$25,000
$20,000
GDP per Capita (PPP
US$)
$14,461
$15,000
$10,000
$5,285
$5,000
$6,551
$2,828
$0
Bottom Fourth Third Second
EFW Quintiles, 2002
Top
Economic Freedom and Economic Growth
3.0
2.4
2.5
1.9
2.0
2.1
2.0
1.5
Growth Rate of GDP
per Capita, 1993-2002
1.0
0.5
0.0
-0.5
Bottom Fourth
Third
Second
-0.5
-1.0
EFW Quintiles, 2002
Top
Economic Freedom and the Income Level of
the Poorest 10% of Population
$8,000
$6,877
$7,000
$6,000
$5,000
$4,000
Income of Poorest
10%, 2002
$3,407
$3,000
$2,000
$1,000
$1,591
$1,032
$823
$0
Bottom Fourth
Third
EFW Quintiles, 2002
Second
Top
Economic Freedom and Infant Mortality
90
81.4
80
70
60
50
Infant Mortality Rate
(per 1000 live births),
2002
45.0
39.5
40
30
20
14.2
9.0
10
0
Bottom Fourth
Third
Second
EFW Quintiles, 2002
Top
Economic Freedom and Political Rights and
Civil Liberties
Note: Political Rights
5
5
4
4
3
3
2
2
1
1
0
4.6
and Civil Liberties are
measured on 1-7 scale:
1 is highest degree of
freedom; 7 lowest.
Source: Freedom
House
4.3
3.7 3.6
2.6
2.8
2.1
1.6
Bottom Fourth
Third
Second
EFW Quintiles, 2002
1.8 1.8
Top
Political Rights Index
Civil Liberties Index
Chapter 2
 Study
of the empirical relationship between
Economic Freedom and Investment and
Growth.
Economic
Growth
EFW
EFW
I/GDP
Economic Freedom and Investment Per
Worker, 1980-2000
$12,000
$10,871
$10,000
Investment per
worker, 1980-2000
(US$)
$8,000
Foreign direct
investment per
worker, 1980-2000
(US$)
$6,000
$4,000
$2,000
$3,319
$845
$68
$3,117
$444
$0
EFW < 5
5 < EFW < 7
EFW > 7
Economic Freedom and Total and Private
Investment as a Share of GDP, 1980-2000
25
22.8
21.3
20
18.6
14.2
15
10
18.0
Total investment,
1980-2000 (% of
GDP)
9.6
5
0
EFW < 5
Private investment,
1980-2000 (% of
GDP)
5 < EFW < 7
EFW > 7
Economic Freedom and the Productivity of
Investment, 1980-2000
0.5
0.4
0.33
0.3
0.2
Change in economic
growth (1980-2000) per
unit difference in Private
I/GDP
0.35
0.27 0.27
0.19
0.21
0.17 0.17
0.1
0.0
EFW < 5
5 < EFW < 7
EFW > 7
Public Investment
Change in economic
growth (1980-2000) per
unit difference in Private
I/GDP (LDCs only)
Economic Freedom and Changes in
Economic Freedom and Economic Growth,
1980-2000
2.2
Estimated impact of a one-unit
difference in the 1980 EFW
rating on growth of GDP per
capita, 1980-2000.
1.90
1.7
1.52
1.28
1.2
Estimated impact of a one-unit
change in EFW in the 1980s on
growth of GDP per capita,
1980-2000.
1.00
0.82
0.7
Estimated impact of a one-unit
change in EFW in the 1990s on
growth of GDP per capita,
1980-2000.
0.58
0.2
Direct Impact
Total Impact