Economic freedom- (02.07.02)

The Economic Freedom of the World report attempts to measure and rank countries based on the how consistent their policies and institutions are with a notion of economic freedom. As is fitting for Milton Friedman, Gary Becker and the other laissez-faire economists involved in its creation, economic freedom is seen as personal choice, voluntary exchange, the freedom to compete and the the protectionm of property from fraud or seizure. For governments there is also a negative requirement on them to refrain from regulations, taxation or other actions that intefere with these fundamental economic freedoms.

At face value it is difficult to argue that much of the restrictions on economic freedom that governments impose can destroy wealth overall. The main problem with a ranking system such as the EFW index is that it does not take into account the initial economic situation within a country in the final rankings. It is very easy for economies such as the UK or New Zealand to appear open to freedom as the economic base relies largely on free growth. This does not tell us however that countries that are measured with less freedom, particularly developing coutries, would be better off economically if their governments opened them up to market forces.

There are 5 main categories of measures. Size of government is measured through items such as proportion of consumption and marginal tax rates. This clearly unfairly penalises small and poor economies with a large number of poor households. Legal structure and property rights is less arguable but more subjective in terms of judicial independence in particular for non-democracies. Access to sound money is biased against higher inflation countries, which may not be an indicator of a lack of economic freedom at all depending on the mobility of money out of the economy. Freedom of exchange with foreigners is less contraversial, but there is little evidence that removing tariff structures improves the wealth of poorer countries. Finally regulation of credit, labour and business is less deterministic but may be appropriate indicators of government policies, particularly in terms of administrative conditions.

The key point would be to measure how far a countries economic potential is restricted through the policies genuinely under its control. This could be measured for instance through a survey of international companies success in operating in a country compared to the largest of its national firms. This would allow a real comparison of how economic freedom works across the globe, given that all countries operate in the international economy to some extent or another. What about the economic freedom of the country in the global economy?