INDEX OF ECONOMIC FREEDOM(IEF) VS. UNEMPLOYMENT RATE 06010938 TAM Shui Lik 06016295 TSANG Ho Fung...
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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
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
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
Slide 2
W HAT IS I NDEX OF E CONOMIC F REEDOM (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
Slide 3
H ISTORY OF THE IEF Created by the Heritage Foundation and the
Wall Street Journal in 1995Heritage FoundationWall Street Journal
based on economic theories like Adam Smith's The Wealth of
NationsAdam Smith'sThe 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
Slide 4
I NDEX OF E CONOMIC F REEDOM (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.
Slide 5
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.
Slide 6
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
Slide 7
5 BROAD CATEGORIES OF ECONOMIC FREEDOM CategoriesFreeMostly
free Moderately Free Mostly Unfree Repressed Average overall score
80-10070-79.960-69.950-50.90-49.9
Slide 8
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
Slide 9
1. B USINESS F REEDOM 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 Banks Doing
Business study. Each component is converted to a 100 percent scale
using the above equation
Slide 10
2.T RADE F REEDOM 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)
Slide 11
3.F ISCAL F REEDOM 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
Slide 12
4.G OVERNMENT S IZE The burden of excessive government is a
central issue in economic freedom, both in terms of generating
revenue and in terms of expenditure. The governments 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.
Slide 13
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 5.M ONETARY F
REEDOM
Slide 14
6. I NVESTMENT F REEDOM 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
countrys 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
Slide 15
7. F INANCIAL F REEDOM 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 countrys banking and
financial system. description of the countrys financial climate and
assign it an overall score between 0%(Negligible government
influence) and 100 %(Repressive)
Slide 16
8. P ROPERTY R IGHTS 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 countrys 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.
Slide 17
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 Internationals 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.
Slide 18
10. L ABOR F REEDOM Labor policy has been a key variable in the
IEF 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.
Slide 19
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 19952005 in order to
make them comparable as a time series with the new methodology in
place for 20062008; Revising last years business freedom and labor
freedom scores to reflect revisions to the World Bank Doing
Business data;
Slide 20
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 factorsgovernment
size and fiscal freedomto align them with each other and with the
other eight freedoms; and Adding new data from Transparency
International for earlier years back to 1997.
Slide 21
RANKING IN 2008
Slide 22
Slide 23
Top 10 countries in 2008
Slide 24
Slide 25
Slide 26
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)
Slide 27
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
Slide 28
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.
Slide 29
The unemployment rate : Determined by dividing the number of
unemployed workers by the total civilian labor force.
Slide 30
UNEMPLOYMENT VS. ECONOMIC FREEDOM Unemployment rate of the top
10 IEF Countries or Regions 2008
Slide 31
RELATIONSHIP BETWEEN IEF AND UNEMPLOYMENT Negatively related
Higher IEF Lower unemployment rate Lower IEF Higher unemployment
rate
Slide 32
Slide 33
R ELATIONSHIP BETWEEN U NEMPLOYMENT 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)
Slide 34
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 govt and lower Fiscal Freedom lower IEF higher unemployment
rate
Slide 35
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
Slide 36
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
Slide 37
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
Exceptional case : Under the central planning system, there is
no unemployment
Slide 42
EVALUATION OF THE INDEX Criticism Contribution
Slide 43
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
Slide 44
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 Moodys. 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=4http://www.bi-me.com/main.php?id=16985&t=1&c=33&cg=4
Slide 45
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 countrys
economic freedom score improves. the freedom-to-prosperity
relationship is strong.freedom-to-prosperity relationship However,
China has grown so much with such a low rate of economic freedom
Reference:
http://www.heritage.org/Research/TradeandForeignAid/wm1375.cfmhttp://www.heritage.org/Research/TradeandForeignAid/wm1375.cfm
Slide 46
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.
Slide 47
THE FREEDOM-TO-PROSPERITY RELATIONSHIP
Slide 48
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
Slide 49
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
