Economic Freedom of the

World: 2005 Annual Report

James GwartneyProfessor of Economics & Gus A. Stavros

Eminent Scholar Chair

Florida State University

Robert LawsonProfessor of Economics & George H. Moor Chair

Capital University

Cato InstituteSeptember 8, 2005

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 Sub-

Components• 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?

8.5

8.2 8.2 8.28.1

8.07.9

7.8 7.8 7.8 7.8

8.7

7.2

7.4

7.6

7.8

8.0

8.2

8.4

8.6

8.8

Hong K

ong

Singa

pore

New Z

ealan

d

Switzerl

and

United

Stat

es

United

King

dom

Canad

a

Irelan

d

Austra

lia

Estonia

Luxem

bour

g

United

Arab

Emira

tes

Economic Freedom Ratings of Selected Countries

7.4 7.3 7.27.0 6.9

6.5 6.46.0

5.1

4.3

3.3

7.5

3.03.54.04.55.05.56.06.57.07.58.0

German

y (19

)

Chile (

20)

Sweden

(24)

Japa

n (30

)

South

Korea

(35)

France

(38)

Mex

ico (5

9)

Indi

a (66

)

China (

86)

Russia

(115

)

Venez

uela

(124

)

Zimba

bwe (

126)

Countries with Big Increases (> +2.5) in Economic Freedom, 1985-2003

4.64.0 3.9 3.7

3.3 3.2 3.1 2.9 2.7 2.7 2.6 2.6 2.6 2.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Nicara

quaPer

u

Uganda

Ghan

a

Zambia

El Sal

vador

Bolivi

a

Tanza

nia

Brazil

Poland

Costa

Rica

Jam

aica

Icela

nd

Hunga

ry

Source: Exhibit 1.4

Countries with Decreases (< -0.5) in Economic Freedom, 1985-2003

-0.8-0.9

-1.3

-2.0

-3.0

-2.0

-1.0

0.0Kuwait Myanmar Zimbabwe Venezuela

Source: Exhibit 1.4

Economic Freedom and Per Capita Income

$2,409

$5,062$6,404

$13,789

$25,062

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Bottom Fourth Third Second Top

GDP per Capita (PPPUS$)

EFW Quintiles, 2003

Economic Freedom and Economic Growth

0.6

2.01.8

2.42.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Bottom Fourth Third Second Top

Growth Rate of GDPper Capita, 1994-2003

EFW Quintiles, 2003

Economic Freedom and Investment

$195$462

$840

$1,913

$4,903

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Bottom Fourth Third Second Top

Investment per Capita(US$), 2003

EFW Quintiles, 2003

Economic Freedom and Infant Mortality

81.2

43.6

34.7

20.7

5.4

0

10

20

30

40

50

60

70

80

90

Bottom Fourth Third Second Top

Infant Mortality Rate(per 1000 live births),2003

EFW Quintiles, 2003

Economic Freedom and Political Rights and Civil Liberties

3.6

2.7

1.8 1.7

4.6

3.6

2.72.3

1.8

5.0

0

1

2

3

4

5

6

Bottom Fourth Third Second Top

Political Rights IndexCivil Liberties Index

EFW Quintiles, 2003

Note: Political Rights and Civil Liberties are measured on 1-7 scale: 1 is highest degree of freedom; 7 lowest. Source: Freedom House

New research: Economic Freedom and Peace

by

Erik GartzkeAssociate Professor of Political Science

Columbia University

The Democratic Peace?

• Does the concept of a “democratic peace” hold up to scrutiny?

• Democracies tend not to go to war with each other but go to war about as often in general as non-democracies.

• Developing democracies are as prone as non-democracies to violent conflict.

• Thus, “democratic peace” fails close study.

The Capitalist Peace?

• Stable democracies typically have high levels of economic freedom – which promotes peace.

• When both are included in a statistical test, economic freedom is 50 times more potent in reducing conflict than democracy.

• Nations which score below 2 in the EF index are 14 times more prone to conflict than top scoring nations.

• Economically free nations fight each other less and go to war against other nations less as well.

Causes of the Capitalist Peace

• Wealth and power are created by markets and the efficient production that arises from them, not by conquest of land or raw materials.

• Wealth created by market economies through efficient production, unlike wealth derived from land or resources, is difficult for nations to “steal” by violent action.

• Efficient production requires property rights and free decisions by market participants that cannot be effectively coordinated to the victor’s advantage.

• Markets provide new methods for signaling among nations and create areas in which states can compete without having to go to war.

Source: EFW 2005Source: EFW 2005

Source: EFW 2005Source: EFW 2005

End