Transcript What is Index of Economic Freedom(IEF)?

INDEX OF ECONOMIC
FREEDOM(IEF)
VS.
UNEMPLOYMENT RATE
06010938 TAM Shui Lik
06016295 TSANG Ho Fung
06017819 YAU Suet Man
06018548 CHAN Kit Ying
06019641 SUEN Lok Man
WHAT IS INDEX OF ECONOMIC
FREEDOM (IEF)?
a
series of 10 economic measurements
created by the Wall Street Journal and The
Heritage Foundation to measure the degree
of economic freedom in the world's nations
 theoretical analysis of the factors that most
influence the institutional setting of economic
growth.
 to develop a systematic, empirical
measurement of economic freedom in
countries throughout the world
HISTORY OF THE IEF
Created by the Heritage Foundation and the Wall
Street Journal in 1995
 based on economic theories like Adam Smith's The

Wealth of Nations

explaining that "basic institutions that protect the
liberty of individuals to pursue their own economic
interests result in greater prosperity for the larger
society
INDEX OF ECONOMIC FREEDOM
(2008)

The 2008 Index of Economic
Freedom covers 162
countries across 10 specific
freedoms. View scores and
rankings for any country,
along with detailed data and
background analysis.
METHODOLOGY:
MEASURING THE 10 ECONOMIC
FREEDOMS
Overall economic freedom, defined by multiple rights
and liberties, can be quantified as an index of less
abstract components.
 The index we conceive uses 10 specific freedoms,
some as composites of even further detailed and
quantifiable components.

WEIGHING
All factors are weighted equally
 Each factor is graded according to an unique
scale
 The scale run from 0 to 100
 Overall score base on the simple average of the
10 individual factor scores

5 BROAD CATEGORIES OF
ECONOMIC FREEDOM
Categories
Average
overall score
Free
Mostly
free
80-100 70-79.9
Moderately
Free
Mostly
Unfree
Repressed
60-69.9
50-50.9
0-49.9
10 BROAD FACTORS OF
ECONOMIC FREEDOM
 Business
Freedom
 Trade Freedom
 Fiscal Freedom
 Government Size
 Monetary Freedom
 Investment Freedom
 Financial Freedom
 Property Rights
 Freedom from Corruption
 Labor Freedom
1. BUSINESS FREEDOM
 It
is a quantitative measure of the ability to
start, operate, and close a business that
represented the overall burden as well as the
efficiency of government regulations.
 The
score is based on 10 components, all
weighted equally, based on objective data from
the World Bank’s Doing Business study. Each
component is converted to a 100 percent scale
using the above equation
2.TRADE FREEDOM
 Trade
restrictions can take the form of taxes
on imports and exports (known as tariffs),
quotas or outright bans on trade, and
regulatory barriers. The degree to which
government hinders access to and the free
flow of foreign commerce can have a direct
bearing on the ability of individuals to pursue
their economic goals.
 Methodology.
The trade freedom score is based two inputs:
1.The trade-weighted average tariff rate
2. Non-tariff barriers (NTBs)
3.FISCAL FREEDOM
 Fiscal
freedom is a quantitative measure of these
burdens in which lower taxation translates as a
higher level of fiscal freedom. The Index
methodology includes the top marginal tax rates
on individual and corporate income, as well as a
measure of total tax revenue as a portion of gross
domestic product (GDP).
 Methodology.
Fiscal freedom is composed of
three quantitative components in equal measure:
1.The top tax rate on individual income,
2.The top tax rate on corporate income
3.Total tax revenue as a percentage of GDP
4.GOVERNMENT SIZE
 The
burden of excessive government is a central
issue in economic freedom, both in terms of
generating revenue and in terms of expenditure.
 The government’s appetite for private resources
affects both economic freedom and economic
growth.
 Methodology.
Scoring of the freedom from
government factor is based on two components:
1.Government expenditures as a percentage of
GDP
2.Revenues generated by state-owned
enterprises (SOEs) and property as a
percentage of total government revenue.
5.MONETARY FREEDOM
 It
is to market economics what free
speech to democracy. Free people need a
steady and reliable currency as a medium
of exchange and store of value
 Methodology
The score for the
monetary freedom factor is based on two
components:
1.The weighted average inflation
rate for the most recent three
years
2.Price controls
6. INVESTMENT FREEDOM
 Restrictions
on foreign investment limit the
inflow of capital and thus limit economic
freedom. By contrast, little or no restriction
of foreign investment enhances economic
freedom because foreign in-vestment
provides funds for economic expansion
 Methodology.
This factor scrutinizes each
country’s policies toward foreign
investment, as well as its policies toward
capital flows internally, in order to
determine its overall investment climate.
 Rank
from 100% (the most) without trade
restriction to 0%(the least) with heavy
government intervention
7. FINANCIAL FREEDOM
 Heavy
bank regulation reduces opportunities
and restricts economic freedom; therefore,
the more a government restricts its banking
sector, the lower its economic freedom score
will be.
 Methodology
The financial freedom factor
measures the relative openness of each
country’s banking and financial system.
description of the country’s financial climate
and assign it an overall score between
0%(Negligible government influence) and 100
%(Repressive)
8. PROPERTY RIGHTS
 Secure
property rights give citizens the
confidence to undertake commercial activities,
save their income, and make long-term plans
because they know that their income and savings
are safe from expropriation, so as to have a fully
functioning free-market economy.
Methodology
1. the degree to which a country’s laws protect private
property rights
2. assesses the likelihood that private property will be
expropriated within the judiciary


100%—Private property is guaranteed by the
government.
0%—Private property is outlawed, and all property
belongs to the state.
9. FREEDOM FROM
CORRUPTION
 Corruption
infects all parts of an economy unless
the market is allowed to develop transparency and
effective policing. a higher level of corruption
equates to a greater corrosion of economic
freedom
 Methodology.
This factor relies on Transparency
International’s Corruption Perceptions Index
(CPI), to determine the freedom from corruption
scores of countries that are also listed in the
Index of Economic Freedom.
 The CPI is based on a 10-point scale:
 10 indicates very little corruption & 1 indicates
a very corrupt government.
10. LABOR FREEDOM
 Labor
IEF
policy has been a key variable in the
 Methodology.
A composite measure of the
ability of workers and businesses to
interact without restriction by the state
The following components are weighted equally:
1. Minimum wage,
2. Rigidity of hours,
3. Difficulty of firing redundant employees
4. Cost of firing redundant employees.
THE CHANGE OF
METHODOLOGY



The Index methodology is consistent with the
revisions made in 2007,measuring the same 10
economic freedoms in each economy and using exactly
the same underlying data
Rescaling the business freedom scores from
1995–2005 in order to make them comparable
as a time series with the new methodology in
place for 2006–2008;
Revising last year’s business freedom and
labor freedom scores to reflect revisions to the
World Bank Doing Business data;



Enhancing the detail and process used to
measure non-tariff barriers (NTBs) and extending
that approach back to 1995;
Updating the coefficients used in the equations
for two factors—government size and
fiscal freedom—to align them with each other and
with the other eight freedoms; and
Adding new data from Transparency International
for earlier years back to 1997.
RANKING IN 2008
Top 10 countries in 2008
UNEMPLOYMENT
What is Unemployment :

people aged 16 and over are unemployed if
they are:
out
of work, want a job, have actively sought
work in the last four weeks and are available to
start work in the next two weeks
out
of work, have found a job and are waiting to
start it in the next two weeks.

This definition is used by EU and OECD
Source: The Office for National Statistics (ONS)
Types of Unemployment
:
1.Frictional unemployment:
 those searching for jobs or waiting to take
jobs soon;
 indicates that there is mobility as people
change or seek jobs.
2. Cyclical unemployment :

recession phase of the business cycle
3. Structural unemployment :

changes in the structure of demand for labor
 Glass blowers were replaced by bottle-making
machines.
 Oil-field workers were displaced when oil demand fell
in 1980s.
 Airline mergers displaced many airline workers in
1980s.
The unemployment rate :

Determined by dividing the number of
unemployed workers by the total civilian labor
force.
UNEMPLOYMENT VS.
ECONOMIC FREEDOM
•
Unemployment rate of the top 10 IEF Countries
or Regions 2008
RELATIONSHIP BETWEEN
IEF AND UNEMPLOYMENT

Negatively related
Higher IEF
 Lower unemployment rate
• Lower IEF
Higher unemployment rate
•
RELATIONSHIP BETWEEN
UNEMPLOYMENT RATE AND IEF
A.) Size of Government and Fiscal Freedom :
1) Large government sector crowds out the private sector
 reduces international competitiveness
unemployment rate (women and young people)
RELATIONSHIP BETWEEN
UNEMPLOYMENT RATE AND IEF
2)Large proportion of transfer payment
high taxation
reduce the profitability of private investment
discourage investment
more unemployment welfare
lazier workers
unemployment rate 
Bigger size of gov’t and lower Fiscal Freedom
 lower IEF
higher unemployment rate
RELATIONSHIP BETWEEN
UNEMPLOYMENT RATE AND IEF
B.) Property rights
Good property rights
 reduce uncertainty
 encourage investment
 strong incentive to be employed
 income they earn is legally secured
 unemployment rate 
Better Property rights  higher IEF
 lower Unemployment rate
RELATIONSHIP BETWEEN
UNEMPLOYMENT RATE AND IEF
C.) Business ,Monetary, Investment, Financial and
Labor Freedom
Higher the freedom
 higher the IEF
 More the investment
lower unemployment rate
RELATIONSHIP BETWEEN
UNEMPLOYMENT RATE AND IEF
D.) Trade Freedom
High degree of freedom to trade
 well development of export sector
 well development of domestic production
 low unemployment rate

Higher trade freedom
higher IEF
lower Unemployment rate
EXAMPLES - ARGENTINA
Overall Rank
Year
Overall score
Unemployment rate
108
2007
55.11
8.9(Est.)
109
2006
55.02
10.18
112
2005
54.57
11.58
120
2004
52.85
13.63
EXAMPLES - TURKEY
Overall Rank
Year
Overall Score
Unemployment rate
74
2008
60.76
9.7(Est.)
87
2007
58.24
9.9
90
2006
57.8
10.2
132
2005
51.56
10.3
Exceptional
case:
Under the central planning system, there is no
unemployment
EVALUATION OF THE
INDEX

Criticism

Contribution
CRITICISM


Economic Freedom of the World has been used
in most of the academic research
Reasons:
 Index of Economic Freedom only goes back to

1995
it uses more subjective variables
 Questioned
about its methodology
1. Qatar: questioned the rating of their
country's economic freedom in 2008.
comparing its middling rating with the high
rating they had received from other
indicators such as Transparency
International and Moody’s.
 the methodology had changed twice in the
last two years, rendering its report
“unreliable”

Reference: http://www.bi-me.com/main.php?id=16985&t=1&c=33&cg=4
2. China:
 Not only is a higher level of economic
freedom clearly associated with a higher
level of per capita gross domestic product
(GDP), but GDP growth rates also increase
as a country’s economic freedom score
improves.
 the freedom-to-prosperity relationship is
strong.
 However, China has grown so much with such
a low rate of economic freedom
Reference: http://www.heritage.org/Research/TradeandForeignAid/wm1375.cfm

3. Outdated information
 the most up-to-date sources are often behind
by years.
 The policy changes may not reflected in
official data, and sometimes the changes are
proposed but not made law, or are made law
but not enforced.
THE FREEDOM-TO-PROSPERITY
RELATIONSHIP
CONTRIBUTION
1. Allocating funding


The Millennium Challenge Corporation (MCC),
which was supposed to be the major Bush
administration anti-global poverty innovation by
statute selects recipient countries in large part
based on measures of their "economic
freedom.“
The MCC actually relies on the Heritage
Foundation's Index of Economic Freedom for
determining a component (countries' trade
openness) of the MCC's economic freedom
rating

2. Promotion
 Higher ranking means better business
atmosphere and more maturity the economy is.
 A kind of promotion of the economy
 Attract more foreign investment
 That is why the index stated that there is a
strong freedom-to-prosperity relationship
THANK YOU FOR YOUR
ATTENTION!
~THE END~