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Economic
Freedom of the
World: 2004
Annual Report
James Gwartney
Professor of Economics & Gus A. Stavros
Eminent Scholar Chair Cato Institute
Florida State University July 15, 2004
Robert Lawson
Professor of Economics & George H. Moor Chair
Capital University
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?
8.8 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
7.2
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3.0
3.5
4.0
4.5
5.0
5.5
6.0
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Selected Countries
5.0
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bw
4.6
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3.4
Economic Freedom Ratings of
Economic Freedom Is Increasing
(Mean Summary Rating, 1980-2002*)
7.0
6.5 6.5
6.5
6.2
6.0
5.6
5.5
5.1 5.2
5.0
4.5
4.0
1980 1985 1990 1995 2000 2002
Source: Exhibit 1.5
*chain-linked index
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 India
– Up to 7.4 in 2002 from – Up to 6.3 in 2002 from
5.1 in 1985. 4.9 in 1990.
Chile Ireland
– Up to 7.3 in 2002 from – Up to 7.8 in 2002 from
3.6 in 1975. 6.2 in 1985.
China New Zealand
– Up to 5.7 in 2002 from – Up to 8.2 from 5.9 in
3.8 in 1980. 1985.
A look at selected countries (cont.)
Estonia Zimbabwe
– Up to 7.7 in 2002 from – Down to 3.4 in 2002
5.3 in 1995. from 6.0 in 1995.
United Kingdom Argentina
– Up to 8.2 in 2002 from – Down to 5.8 in 2002
6.1 in 1980. from 6.7 in 1995.
Uganda Venezuela
– Up to 6.6 in 2002 from – Down to 4.6 in 2002
2.6 in 1990. from 6.7 in 1980.
Economic Freedom and Per Capita Income
$30,000
$26,106
$25,000
$20,000
$14,461 GDP per Capita (PPP
$15,000
US$)
$10,000
$6,551
$5,285
$5,000 $2,828
$0
Bottom Fourth Third Second Top
EFW Quintiles, 2002
Economic Freedom and Economic Growth
3.0
2.4
2.5
2.1
2.0
1.9
2.0
1.5
Growth Rate of GDP
1.0
per Capita, 1993-2002
0.5
0.0
-0.5 Bottom Fourth Third Second Top
-0.5
-1.0
EFW Quintiles, 2002
Economic Freedom and the Income Level of
the Poorest 10% of Population
$8,000
$6,877
$7,000
$6,000
$5,000
Income of Poorest
$4,000 $3,407
10%, 2002
$3,000
$2,000 $1,591
$1,032
$823
$1,000
$0
Bottom Fourth Third Second Top
EFW Quintiles, 2002
Economic Freedom and Infant Mortality
90 81.4
80
70
60
50 45.0 Infant Mortality Rate
39.5 (per 1000 live births),
40 2002
30
20 14.2
9.0
10
0
Bottom Fourth Third Second Top
EFW Quintiles, 2002
Economic Freedom and Political Rights and
Civil Liberties Note: Political Rights
and Civil Liberties are
measured on 1-7 scale:
5 1 is highest degree of
4.6
5 4.3 freedom; 7 lowest.
4 3.7 3.6
Source: Freedom
House
4
3 2.8
2.6
Political Rights Index
3 2.1
1.8 1.8
Civil Liberties Index
2 1.6
2
1
1
0
Bottom Fourth Third Second Top
EFW Quintiles, 2002
Chapter 2
of the empirical relationship between
Study
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
$6,000 investment per
worker, 1980-2000
(US$)
$4,000 $3,319
$3,117
$2,000
$845
$444
$68
$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
18.0 Private investment,
1980-2000 (% of
GDP)
14.2
15
Total investment,
1980-2000 (% of
9.6 GDP)
10
5
0
EFW < 5 5 < EFW < 7 EFW > 7
Economic Freedom and the Productivity of
Investment, 1980-2000
0.5
0.4 Change in economic
0.35
0.33 growth (1980-2000) per
unit difference in Private
0.3 I/GDP
0.27 0.27
Change in economic
0.21 growth (1980-2000) per
0.19
0.2 0.17 0.17 unit difference in Private
I/GDP (LDCs only)
0.1
0.0
EFW < 5 5 < EFW < 7 EFW > 7 Public Investment
Economic Freedom and Changes in
Economic Freedom and Economic Growth,
1980-2000
2.2
1.90 Estimated impact of a one-unit
difference in the 1980 EFW
rating on growth of GDP per
1.7 1.52
capita, 1980-2000.
1.28 Estimated impact of a one-unit
change in EFW in the 1980s on
1.2 growth of GDP per capita,
1.00
1980-2000.
0.82
0.7 Estimated impact of a one-unit
0.58
change in EFW in the 1990s on
growth of GDP per capita,
1980-2000.
0.2
Direct Impact Total Impact
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