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2007 Indexof Economic Freedom
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ContributorsTim Kane, Ph.D., is Director of the Center for International Trade and Economics (CITE) at
The Heritage Foundation.
Kim R. Holmes, Ph.D., is Vice President of Foreign and Defense Policy and Director of the Kath-
ryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation.Mary Anastasia OGrady is a Member of The Wall Street Journal Editorial Board and Editor of
the Journals Americas column.
William W. Beach is Director of the Center for Data Analysis at The Heritage Foundation.
Ana Isabel Eiras is Senior Policy Analyst in International Economics in the Center for Interna-
tional Trade and Economics (CITE) at The Heritage Foundation. She is also Editor of the Spanish-
language edition of the Index of Economic Freedom.
Edwin J. Feulner, Ph.D., is President of The Heritage Foundation.
Paul A. Gigot is Editor of The Wall Street Journal Editorial Page.
Anthony B. Kim is Research Associate in the Center for International Trade and Economics(CITE) at The Heritage Foundation.
Daniella Markheim isJay Van Andel Senior Trade Policy Analyst in the Center for Interna-
tional Trade and Economics (CITE) at The Heritage Foundation.
Johnny Munkhammar is a research scholar at the Swedish think tank Timbro.
Andrew L. Peek is Research Assistant in the Center for International Trade and Economics
(CITE) at The Heritage Foundation.
Xavier Sala-i-Martin is a professor of economics at Columbia University.
Brett D. Schaefer is Jay Kingham Fellow in the Margaret Thatcher Center for Freedom at The
Heritage Foundation.
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2007 Indexof Economic Freedom
Tim Kane, Ph.D.
Kim R. Holmes, Ph.D.
Mary Anastasia OGrady
with Ana Isabel Eiras, Anthony B. Kim, Daniella Markheim,Andrew L. Peek, and Brett D. Schaefer
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Copyright 2007 by The Heritage Foundation and Dow Jones & Company, Inc.
The Heritage Foundation The Wall Street Journal214 Massachusetts Avenue, NE Dow Jones & Company, Inc.Washington, DC 20002 200 Liberty Street(202) 546-4400 New York, NY 10281heritage.org (212) 416-2000
www.wsj.com
Cover images by Punchstock, Corbis, World BankISBN: 0-89195-274-8ISSN: 1095-7308
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v
Table of Contents
Foreword .............. .............. .............. ............... .............. .............. .............. .............. ............... .............. .. ix
Paul A. Gigot
Preface .............. .............. ............... .............. .............. .............. .............. ............... .............. .............. ....... xi
Edwin J. Feulner, Ph.D.
Acknowledgments ..............................................................................................................................xiii
Tim Kane, Ph.D., Kim R. Holmes, Ph.D., and Mary Anastasia OGrady
Whats New in the 2007 Index?........................................................................................................... xv
Executive Summary ................................................................................................................................1
Chapter 1: Global Inequality Fades as the Global Economy Grows ..............................................15
Xavier Sala-i-Martin
Chapter 2: The Urgent Need for Labor Freedom in Europeand the World .............. .............. ...27
Johnny Munkhammar
Chapter 3: Methodology: Measuring the 10 Economic Freedoms .................................................37
William W. Beach and Tim Kane, Ph.D.
Chapter 4: Economic Freedom in Five Regions ................................................................................57
Tim Kane, Ph.D.
Chapter 5: The Countries .....................................................................................................................73
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vi 2007 Index of Economic Freedom
Albania ............................................................77
Algeria ............................................................79
Angola.............................................................81
Argentina ........................................................83
Armenia ..........................................................85
Australia .........................................................87Austria ............................................................89
Azerbaijan ......................................................91
The Bahamas ..................................................93
Bahrain ............................................................95
Bangladesh .....................................................97
Barbados .........................................................99
Belarus ............................................................101
Belgium ...........................................................103
Belize ...............................................................105
Benin ...............................................................107Bolivia .............................................................109
Bosnia and Herzegovina ..............................111
Botswana ........................................................113
Brazil ...............................................................115
Bulgaria...........................................................117
Burkina Faso ..................................................119
Burma (Myanmar) .........................................121
Burundi ...........................................................123
Cambodia .......................................................125
Cameroon .......................................................127
Canada ............................................................129
Cape Verde .....................................................131
Central African Republic ..............................133
Chad ................................................................135
Chile ................................................................137
China, Peoples Republic of .........................139
Colombia ........................................................141
Congo, Democratic Republic of (formerly
Zaire) ..........................................................143
Congo, Republic of ........................................145
Costa Rica .......................................................147
Croatia.............................................................149
Cuba ................................................................151
Cyprus (Greek) ..............................................153
Czech Republic ..............................................155
Denmark .........................................................157
Djibouti ...........................................................159
Dominican Republic .....................................161
Ecuador ...........................................................163
Egypt ...............................................................165
El Salvador .....................................................167
Equatorial Guinea .........................................169
Estonia ............................................................171Ethiopia...........................................................173
Fiji ....................................................................175
Finland ............................................................177
France ..............................................................179
Gabon ..............................................................181
The Gambia ....................................................183
Georgia ...........................................................185
Germany .........................................................187
Ghana ..............................................................189
Greece .............................................................191Guatemala ......................................................193
Guinea .............................................................195
GuineaBissau ...............................................197
Guyana............................................................199
Haiti.................................................................201
Honduras........................................................203
Hong Kong .....................................................205
Hungary .........................................................207
Iceland.............................................................209
India ................................................................211
Indonesia ........................................................213
Iran ..................................................................215
Iraq ..................................................................217
Ireland .............................................................219
Israel ................................................................221
Italy..................................................................223
Ivory Coast .....................................................225
Jamaica ............................................................227
Japan ...............................................................229
Jordan ..............................................................231
Kazakhstan .....................................................233
Kenya ..............................................................235
Korea, Democratic Peoples Republic of
(North Korea) ............................................237
Korea, Republic of (South Korea) ............. ...239
Kuwait ............................................................241
Kyrgyz Republic ............................................243
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Table of Contents vii
Laos .................................................................245
Latvia ..............................................................247
Lebanon ..........................................................249
Lesotho ...........................................................251
Libya ...............................................................253
Lithuania ........................................................255Luxembourg ...................................................257
Macedonia ......................................................259
Madagascar ....................................................261
Malawi ............................................................263
Malaysia..........................................................265
Mali .................................................................267
Malta ...............................................................269
Mauritania ......................................................271
Mauritius ........................................................273
Mexico .............................................................275Moldova..........................................................277
Mongolia.........................................................279
Morocco ..........................................................281
Mozambique ..................................................283
Namibia ..........................................................285
Nepal ...............................................................287
The Netherlands ............................................289
New Zealand..................................................291
Nicaragua .......................................................293
Niger ...............................................................295
Nigeria ............................................................297
Norway ...........................................................299
Oman...............................................................301
Pakistan ..........................................................303
Panama ...........................................................305
Paraguay .........................................................307
Peru .................................................................309
The Philippines ..............................................311
Poland .............................................................313
Portugal ..........................................................315
Qatar................................................................317
Romania ..........................................................319
Russia ..............................................................321
Rwanda ...........................................................323
Saudi Arabia ...................................................325
Senegal ............................................................327
Serbia and Montenegro ................................329
Sierra Leone....................................................331
Singapore ........................................................333
Slovak Republic .............................................335
Slovenia ..........................................................337
South Africa ...................................................339
Spain................................................................341Sri Lanka .........................................................343
Sudan ..............................................................345
Suriname.........................................................347
Swaziland .......................................................349
Sweden............................................................351
Switzerland ....................................................353
Syria ................................................................355
Taiwan .............................................................357
Tajikistan .........................................................359
Tanzania ..........................................................361Thailand ..........................................................363
Togo .................................................................365
Trinidad and Tobago .............. ............... ........ 367
Tunisia .............................................................369
Turkey .............................................................371
Turkmenistan .................................................373
Uganda ...........................................................375
Ukraine ...........................................................377
United Arab Emirates ...................................379
United Kingdom ............................................381
United States ..................................................383
Uruguay ..........................................................385
Uzbekistan......................................................387
Venezuela .......................................................389
Vietnam ...........................................................391
Yemen..............................................................393
Zambia ............................................................395
Zimbabwe.......................................................397
Appendix ........................................................399
Major Works Cited ........................................407
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Advisory BoardThe following members of the Advisory Board for the 2007 Index of Economic Freedom were con-
sulted as part of the ongoing review of the methodology used in this years edition. Their advice,
insights, and critiques, as well as the efforts of many others who participated in the review pro-
cess, are gratefully acknowledged.
William W. Beach, co-chairman, The Heritage Foundation
Tim Kane, co-chairman, The Heritage Foundation
Maria Sophia Aguirre,Catholic University of America
Donald J. Boudreaux, George Mason University
Ike Brannon,Economist, Washington, D.C.
Simeon Djankov,World Bank
Axel Dreher,ETH Zurich
Clive Granger,University of California, San Diego
Douglas Holtz-Eakin,Council on Foreign Relations
Garett Jones,Southern Illinois University Edwardsville
Mordechai Max Kreinin,Michigan State University
Philippe Lacoude,Economist, Paris, France
Richard Roll,University of California, Los Angeles
Xavier Sala-i-Martin, Columbia University
Friedrich Schneider,University of Linz
Aaron Smith,University of California, Davis
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ix
Foreword
T
he world economy has had another stel-
lar year, growing in the neighborhood of 5
percent and continuing what has become
the strongest four-year expansion since the1970s, defying war, terrorism, and $75-a-bar-
rel oil. This is testament in part to the policy
lessons highlighted these past 13 years in this
Index of Economic Freedom. As we greet 2007,
however, there are warning signs that adher-
ence to those lessons may be starting to fray.
On the surface, to be sure, the economic news
continues to be mostly good. While the United
States is shifting to a slower pace of growth fol-
lowing the boom from mid-2003 to early 2006,
there continues to be no sign of recession. The
major issue in the next year is whether thedecline in housing will be so deep that it sinks
the larger economy. That answer depends in
part on how much the Federal Reserve must
raise interest rates to compensate for its mis-
take of keeping monetary policy so loose for
too long in 2003 and 2004. The early evidence is
that rising corporate profits and a robust labor
market will offset the housing slump, but that
is no certainty.
China and India are roaring ahead, notwith-
standing the return of a center-left governmentin New Delhi that has tried to temper the pace
of economic change. Center-left isnt the eco-
nomic drag it used to be even in India, however,
and the emergence of India as a global econom-
ic player continues. Japan seems finally to have
shaken its decade-long deflation, and even Old
Europe left the doldrums in 2006, albeit in rela-
tively modest terms. The pace of world trade
and investment continued to accelerate, and
millions more of the worlds poor entered the
middle class.
One lesson of this Index, however, is thatwhat really matters is the direction of policy:
that is, the change at the margin. And on that
score, there is some reason for worry about an
erosion in economic freedom. Start with the
U.S., where the congressional election cam-
paign created bipartisan policy stampedes
against foreign investment from China and
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x 2007 Index of Economic Freedom
Dubai. Congress, in its lack of wisdom, is also
seeking to add even more political hurdles to
foreigners who want to create jobs by investing
in America.
The election also moved Congress to the left
economically, with strong new voices rejecting
the free trade consensus of the past 50 years.
President Bush retains his office lease and veto
pen for two more years, but the most he may
be able to accomplish is to prevent any major
policy mistakes. He will almost certainly not
be able to extend his trade promotion author-
ity, for example, when that expires in mid-
2007. Political gridlock is probably the best
we can expect until the policy showdown that
is likely to take place in the 2008 presidential
contest.
This is all the more reason for the worldspolicymakers to complete the Doha Round of
trade talks as soon as possible. At this writing,
however, the talks remain caught between a
French-led Europe that refuses to reduce its
farm subsidies and an assertive bloc of devel-
oping nations that wont bend on manufac-
turing and services without such a European
concession. This is short-sighted in the extreme,
and one question is whether this is a tempo-
rary setback due to weak political leadership,
or whether it reflects a larger popular backlash
against the dynamic forces of globalization.
My guess is the former, but I would prefer not
to test that proposition in the teeth of a global
recession.
This policy drama is all the more reason to
welcome the refinements in this years Index.
The shift to a 0100 freedom scale allows for
more nuanced distinctions among countries.
The introduction of a measure for labor free-
dom is also notable and informative because
labor mobility has clearly become crucial to
national prosperity and competitiveness. Mere-
ly contrast the job creation in the U.S., where
labor mobility is high, with the record in France
and Germany to prove that point. The slight
overall decline in average world economic
freedomdown 0.3 percentage point from a
year earlieralso suggests the policy setbacks
I have described.There are no permanent victories in poli-
tics or economics, which is one reason that this
Index exists to chronicle annual progress or
regression. The next year is one to watch care-
fully for setbacks and to remind forgetful poli-
ticians of the benefits of economic freedom.
Paul A. Gigot
Editorial Page Editor
The Wall Street Journal
November 2006
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xi
Preface
I
f there is a single triumph that history will
remember about the 20th century, it is not
the defeat of Nazism or the collapse of Sovi-
et Russia, but the Wests enduring confidencein freedom as a moral and liberating force for
all peoples. The victory of political freedom
as a universal ideal is so complete today that
even modern tyrannies cloak their countries
as peoples republics. Now, as we progress
into a new century, countries around the world
are adopting new institutions to enhance their
economic growth. Thus, history will surely
remark that the more fundamental freedoms
of property, trade, entrepreneurship, work, and
investment served as the foundations of true
democracy and revolutionized the world.The importance of economic freedoman
individuals natural right to own the value of
what he or she createswould seem to be any-
thing but controversial. People crave liberation
from poverty, and they hunger for the dignity
of free will. Yet the struggle for economic free-
dom faces timeless opposition. Tariffs, just one
example of protectionism, never lack champi-
ons or supporters, and the urge to avoid risk
will always pressure societies to expand the
size and weight of government intervention.It is therefore precisely the importance of eco-
nomic freedomand ultimately, as Milton
Friedman pointed out, political freedomthat
makes our publication of the Index of Economic
Freedom so necessary.
The Index of Economic Freedom has docu-
mented the progress of market economics with
research and analysis for 13 years and encom-
passes 161 countries. Published jointly by The
Heritage Foundation and The Wall Street Jour-
nal, the Index has created a global portrait of
economic freedom and established a bench-mark by which to gauge a countrys prospects
for economic success. It follows the simple tenet
that something cannot be improved if it is not
measured. Tracing the path to economic pros-
perity, the annual Index continues to serve as a
critical tool for students, teachers, policymak-
ers, business leaders, investors, and the media.
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xii 2007 Index of Economic Freedom
In this 13th edition, we have refined the
methodology to reflect a clearer picture of eco-
nomic freedom. Countries are assigned a per-
cent score rather than a 15 rating. In addition,
labor freedom (something that was simply not
measurable before) has been added as a vari-
able, and several other factors have been honed
to provide more objectivity and greater atten-
tion to detail. Despite these changes, a core of
stability remains, starting with our tradition of
blending Ten Freedoms equally to produce a
simple, unbiased overall score. Most of the 20
freest countries from last year are still ranked
among the freest, although others, in the mid-
dle of the pack, have experienced some shuf-
fling as a result of the greater level of detail in
the new methodology.
The 2007 Index shows that economic freedomworldwide has decreased slightly since last year
but remains high. The Middle Easts freedom
increased to its highest level since 1995. Europe,
Asia, and the Americas are the three freest
regions, and each has something special worth
noting. Asia has both the worlds three freest
economies and its least free economy. Europe
has over half of the top 20 countries, and the
Americas are home to both the richest and some
of the most dynamic countries in the world.
The 2007 Index contains two guest chapters
written by outside scholars that document the
spectacular growth of incomes in the face of
globalization, as well as the vital importance
of labor freedom in Europe and elsewhere.
This edition also contains a description of
the new methodology and an entirely new
chapter analyzing each of the five geographic
regionsa focus that matters for local compe-
tition. And of course, this edition includes our
traditional country pages, so that each free-
dom in every economy is explained in detail.
Each country page includes new charts high-
lighting the strengths and weaknesses of each
economy.
At the most personal level, however, it may
well be that academic methodology and care-
fully measured charts cannot make the bestcase for economic freedom. The real worlda
walk, perhaps, through downtown Hong
Kongis far more eloquent than we can ever
hope to be.
Edwin J. Feulner, Ph.D.
President
The Heritage Foundation
November 2006
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xiii
Acknowledgments
W
e wish to express our profound
gratitude to the many individuals,
especially those at The Heritage Foun-
dation, who have made such valuable contri-butions to this 13th annual edition of the Index
of Economic Freedom. The Heritage Foundations
Center for International Trade and Economics
(CITE) produces the Index, an effort that this
year involved Ana Isabel Eiras, Anthony Kim,
Daniella Markheim, and Brett Schaefer, as well
as research assistant Andrew Peek.
Others at The Heritage Foundation also
made invaluable contributions to this year s
edition. We are particularly grateful to Cen-
ter for Data Analysis Director William Beach
for his continued support and for his contri-butions to the methodology chapter. In the
Douglas and Sarah Allison Center for Foreign
Policy Studies, a division of the Kathryn and
Shelby Cullom Davis Institute for Interna-
tional Studies, Ariel Cohen, Stephen John-
son, James Phillips, and Will Schirano wrote
introductory paragraphs and provided their
expertise. We are especially grateful for the
many insightful contributions that Helle C.
Dale, Director of the Douglas and Sarah Alli-
son Center for Foreign Policy Studies, made tothe content of this years Index. Yvette Campos
and Marla Graves provided valuable produc-
tion support, and Marla did the initial editing
of all 161 country introductions.
In the Asian Studies Center, Dana Dillon,
Balbina Hwang, and John J. Tkacik, Jr., wrote
introductions and provided assistance, and
Allison Goodman provided valuable produc-
tion support. In the Information Technology
Department, invaluable help was provided
by Vice President of Information Technology
Michael Spiller and Michael Smith. We aregrateful for their professionalism.
In Publishing Services, Manager Therese
Pennefather, Elizabeth Brewer, and Alex Adri-
anson were responsible for all aspects of the
production process, including the extensive
design and layout that make this 13th edition
the most readable and accessible yet published,
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xiv 2007 Index of Economic Freedom
as well as for developing the world and coun-
try maps and formatting the charts and tables.
We are grateful to Director of Online Commu-
nications Ted Morgan, Tosan Ogharaerumi, and
the other IT staff for placing the entire Index on
the Heritage Web site (www.heritage.org/index/).
We also thank James Dean, Alison Fraser, Mike
Franc, Rebecca Hagelin, John Sieg, Jan Smith,
and Bridgett Wagner for their insightful contri-
butions and support.
Once again, we wish to express our deep
appreciation for the work of Senior Editor
Richard Odermatt, who was responsible for
final review of the completed text, and Senior
Copy Editor William T. Poole, who continues
to bear the primary responsibility for editing
the entire book. Each year, their professional-
ism, commitment to the project, and attentionto detail play a crucial role in making the Index
a reality. We are likewise grateful to Editor Jon
Rodeback, who carefully reviewed every one
of the many charts and tables included in the
book. In addition, Andrew Peek was respon-
sible for proofreading the English-language
drafts and crosschecking the facts and figures,
and the dedicated research of Heritage interns
Hayley Darden, Peter Farmer, Alana Finley,
Sarah MacArthur, and Caroline Walsh did
much to make the specialists in-depth analy-
sis possible.
Countless individuals serving with various
accounting firms, businesses, research orga-
nizations, U.S. government agencies, foreign
embassies, and other organizations cooper-
ated by providing us with the data used in the
Index. Their assistance is much appreciated. As
always, we acknowledge our enduring debt
to Heritage Trustee Ambassador J. William
Middendorf II, who originally encouraged us
to undertake such a study of global economic
freedom.
Finally, we would like to express our appre-
ciation to the many people who, year after year,
either praise or criticize the Index of Economic
Freedom so enthusiastically. The support and
encouragement of people in all parts of the
world continue to serve as a major source of
inspiration for The Heritage Foundation andThe Wall StreetJournal in their ongoing collabo-
ration on this important work. We hope this
years effort once again matches the expecta-
tions of our supporters, as well as the thought-
ful critics who so often have provided the
insights that enable us to continue to improve
the Index.
Tim Kane, Ph.D.
Kim R. Holmes, Ph.D.
Mary Anastasia OGrady
November 2006
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xv
Whats New in the 2007 Index?
E
very year, the editors evaluate the Index
of Economic Freedom and consider ways to
improve the product. This years edition
of the Index embodies the most dramatic chang-es, in both style and substance, that have been
made since publication of the inaugural edi-
tion in 1995. The book is physically smaller to
enhance its usability and portability. An exten-
sive redesign of the country pages includes two
new charts to help readers quickly assess each
economys progress. Finally, the methodology
has been improved with the help of a newly
formed academic advisory board and utiliza-
tion of new data from the World Bank that have
been made available only recently. Previous
years scores have been revised to reflect themore rigorous approach.
These changes continue the Heritage Foun-
dation/Wall Street Journal tradition of continu-
ing, year-by-year improvement. Changes in
the methodology were instituted in 2000, 2002,
2004, and 2006 to enhance the robustness of one
or more of the 10 factors that are used to mea-
sure overall economic freedom, and the entire
time series was revised so that all scores were
and are as consistent as possible, dating back
to 1995. The 2001 Index saw the publication of aSpanish-language edition in cooperation with
several Latin American think tanks. That same
edition was the first to suspend countries from
grading as a result of insufficient or inappli-
cable data.
To the extent that the changes are bigger
in 2007 than ever before, they are driven by a
new process: a fundamental effort to formal-
ize the feedback so that suggestions of friends,
scholars, policymakers, and other readers are
collected, considered, and acted upon. For
example, we conducted an internal survey ofscholars at Heritage and an external survey of
375 people from the academic, business, gov-
ernment, and international communities who
downloaded the Index from our Web site last
year to assess our strengths and weaknesses.
We also solicited advice from academic schol-
ars before revising the methodology.
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xvi 2007 Index of Economic Freedom
Some of the most common suggestions were(1) to use a new 0100 percent grading scale
rather than 51 so that a higher score now repre-
sents more freedom; (2) to add regional context
to the rankings; (3) to enhance the methodologi-
cal rigor by using equations instead of brackets
where possible; and (4) to add a factor for labor
freedom. One example of the increased detail in
the new Index is the way monetary freedom is
measured: Two economies with inflation rates
of 1 percent and 2 percent, respectively, tradi-
tionally were given identical monetary scores
in the Index because both economies were in thesame bracket, but now we use an equation that
allows for finer detail in the scores. In the new
methodology for monetary freedom, the closer
an inflation rate is to zeroeven one-tenth of
a percentage pointthe higher the monetary
freedom score.
A more detailed explanation of what has
changed, as well as what has not changed, in
the 2007 Index follows:
Academic Advisory Board. The method-
ology is the heart of the entire Index project.It gives credibility to the product and is a key
tool in fighting claims of bias. While scholars
working on different ways to measure eco-
nomic freedom agree that such an abstract con-
cept can never be measured perfectly, the most
important attribute of any approach is that it
be unbiased. For this reason, we assembled an
academic advisory board to review the
methodology with us on a continuing
basis, both this year and in future years.
Those scholars who approved of the
final methodology that was developed
then offered their endorsement.
Continuous Percentile Scores.
The Index is converting to a 0100 scor-
ing scale that both translates more eas-
ily into percentages of freedom and
ends the use of discrete brackets (1,
2, 3, 4, and 5) in favor of a continuous
scale that allows an economy in many
cases to receive, for example, a score of
83.3 percent instead of an 80 or 90. All
previous scores back to 1995 have been
converted to the new 0100 scale. The
51 rankings in use in the 19952006 editions(where a lower number equaled more freedom)
were based on the original methodology. As the
methodology and precision improved in subse-
quent editions, it became increasingly obvious
that the scoring should be brought into line. In
addition, economic freedom is apositive quan-
tity, not a mere absence of oppression, and the
use of a zero to denote a total lack of freedom
seems to epitomize this.
New Methodology. The Indexmethodology
is changing substantively in several ways. First,
new data from the World Banks Doing Businessreport that became available only recently are
utilized as the basis for the business freedom
factor (replacing the old regulation factor) and
a new labor freedom factor. Second, an equa-
tion-based approach replaces the bracket scores
for numerous factor variables, notably inflation
and tariffs. The 10 factors have been renamed as
described in the accompanying table. It must be
emphasized that the new methodology is not
only for 2007 scores; rather, it has been imple-
mented for this year and all previous years.
An obvious consequence of the new method-ology is the effect on each countrys overall
freedom score and ranking, which is due to the
new attention to detail. Small policy changes
are detected more easily in the more detailed
methodology and can cause a large change in
worldwide rank for many countries.
A New Labor Freedom Factor. The recent
10 Factors(Old Methodology)
10 Freedoms(New Methodology)
Regulation Business Freedom
Trade Policy Trade Freedom
Fiscal Burden Fiscal Freedom
Government Intervention Freedom from Government
Monetary Policy Monetary Freedom (80%)
Wages and Prices Monetary Freedom (20%)
Foreign Investment Investment Freedom
Banking and Finance Financial Freedom
Property Rights Property Rights
Informal Market Freedom from Corruption
(N/A) Labor Freedom
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labor riots in France and the wide disparity in
unemployment rates across countries call for
a stronger focus on labor freedom. Labor laws
were covered in the previous methodology as
a small component of the regulation factor and
less-than-equal component of the wages and
prices factor, but this was primarily because no
consistent data source existed for cross-coun-
try comparisons until 2003. The new labor
freedom factor is based on objective data from
the World Banks Doing Business study, which
covers minimum wages, laws inhibiting lay-
offs, severance requirements, and measurable
regulatory burdens on hiring, hours, and so on.
These cross-country labor data, though cutting-
edge and well-respected, are available only for
20052007.
New Country Page Design. The newcountry page design emphasizes overall eco-
nomic freedom on the first page and details for
each of the 10 areas of economic freedom on the
second page. The heading includes the world
rank for each economy and a new regional rank.
The new approach focuses more precisely on
economic policy and the Index scores. A para-
graph that describes historical background for
each country, with political context, remains as
an anchor on the first page. The Quick Facts
box has been revised to include many new vari-
ables: unemployment and inflation rates, GDPin terms of purchasing power parity, a five-year
compound average annual growth rate, foreign
direct investment (FDI), three official develop-
ment assistance measures, and external debt.
The time series chart has been expanded to give
a better sense of how a countrys economic free-
dom is evolving, which now includes both time
series lines for the world and regional averages
from 1995 to the present. Finally, a new second
chart created for each economy shows graphi-
cally how each of a countrys 10 economic free-
doms compares to the world average. New Regions. From this year forward, the
Index will emphasize a countrys regional rank
as well as its global rank. For example, the Unit-
ed Kingdom ranks as the 6th freest economy in
the world in 2007, but it also ranks as the freest
in Europe. Similarly, Israel has the freest econ-
omy in the Middle East/North Africa region,
Mauritius is the best in sub-Saharan Africa, and
the United States is number one in the Ameri-
cas. These five regions are consistent with past
Index groupings with the exception of three
countries: Canada, Mexico, and the U.S. are
now included in the Americas (which replaces
Latin America as a region). As a result, Europe
is now a separate region, replacing the old North
America and Europe. These regions are not only
more geographically consistent; they also rep-
resent our long-standing philosophy of human
equality. Just because Canada is wealthier than
many other New World economies does not
necessarily mean that its people are better or
that its economy merits inclusion in a different
class of countries. We believe (and have always
believed) that all peoples have equal potential
and that all economies deserve equal liberty.
We hope the changes in the Index make it an
even better research tool and a more accessible
policymaking guide. Despite the new look,
however, our goal is and will remain the same:
to advance human freedom. We believe that the
redesigned Index might even make the transi-
tion to a better world faster and surer.
One of the editors paramount concerns is
that the Index always remains a useful tool for
researchers. This means that the integrity of the
current-year scores is crucial. During a periodof aggressive improvements, there undoubt-
edly will be mistakes in the scores, based on
our errors and errors in source data. We cannot
promise perfection, but we do promise objec-
tivity: Our methods and modifications will
always be transparent and duplicable by other
scholars.
Moreover, even though the Index itself is
published in January, based on policies and data
available as of the previous June, we remain
committed to providing the most accurate and
up-to-date measures on-line and will make anyneeded corrections to that source file immediate-
ly. For researchers who want to weight the Index
or consider individual components in statistical
analysis, the 10 freedoms and even the raw data
are also available transparently on-line. Revised
scores of individual factors for all years are avail-
able for download at www.heritage.org/Index.
Whats New in the 2007Index? xvii
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1
Executive Summary
W
ith the publication o this edition, The
Heritage Foundation/Wall Street Jour-
nal Index o Economic Freedom marks
its 13th anniversary. The idea o producing auser-riendly index o economic reedom as
a tool or policymakers and investors was irst
discussed at The Heritage Foundation in the
late 1980s. The goal then, as it is today, was to
develop a systematic, empirical measurement
o economic reedom in countries throughout
the world. To this end, the decision was made
to establish a set o objective economic criteria
that, since the inaugural edition in 1995, have
been used to study and grade various countries
or the annual publication o the Index o Eco-
nomic Freedom.Economic theory dating back to the publica-
tion o Adam Smiths The Wealth o Nations in
1776 emphasizes the lesson that basic institu-
tions that protect the liberty o individuals to
pursue their own economic interests result in
greater prosperity or the larger society. Per-
haps the idea o reedom is too sophisticated, as
popular support or it constantly erodes beore
the onslaught o populism, whether democrat-
ic or autocratic. Yet modern scholars o politi-
cal economy are rediscovering the centrality oree institutions as undamental ingredients
or rapid long-term growth. In other words, the
techniques may be new, but they reairm clas-
sic truths. The objective o the Index is to catalog
those economic institutions in a quantitative
and rigorous manner.
Yet the Index is more than a simple ranking
based on economic theory and empirical study.
It also identiies the variables that comprise
economic reedom and analyzes the interaction
o reedom with wealth.
The 2007 Index o Economic Freedom mea-sures 157 countries across 10 speciic actors
o economic reedom, which are listed below.
Chapter 3 explains these actors in detail. High
scores approaching 100 represent higher levels
o reedom. The higher the score on a actor, the
lower the level o government intererence in
the economy.
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2 2007 Index of Economic Freedom
The 10 Economic Freedoms
Business Freedom
Trade Freedom
Fiscal Freedom
Freedom rom Government
Monetary Freedom
Investment Freedom
Financial Freedom
Property Rights
Freedom rom Corruption
Labor Freedom
HIGHLIGHTS FROM THE 2007 INDEX
Global economic freedom holds steady,
but there is much room for improvement. The
average economic reedom score is 60.6 per-
cent, the second highest level since the Index
began in 1995 and down by 0.3 percentagepoint rom last year. Each region has experi-
enced an increase in economic reedom during
the past decade.
Former British colonies in Asia lead the
world in economic freedom. Hong Kong has
the highest level o economic reedom or the
13th straight year. Singapore remains close,
ranked second in the world, and Australia
is ranked third reest economy in the world,
which means that the AsiaPaciic region is
home to the top three economies.
Twelve of the top 20 freest economies are
European. A majority o the reest economies
are in Europe, led by the United Kingdom, Ire-
land, Luxembourg, and Switzerland. Only ive
are in the AsiaPaciic region. The remaining
three are rom the Americas: the United States,
Canada, and Chile.
The methodology for measuring economic
freedom is significantly upgraded. The new
methodology uses a scale o 0100 rather thanthe 15 brackets o previous years when assess-
ing the 10 component economic reedoms,
which means that the new overall scores are
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more reined and thereore more accurate. Sec-
ond, a new labor reedom actor has been added,
and entrepreneurship is being emphasized in
the business reedom actor. Both o these new
categories are based on data that became avail-
able rom the World Bank only recently. This
attention to detail beneits some countries and
punishes others, and readers may note some
dramatic changes in rankings. The methodol-
ogy has been vetted with a new academic advi-sory board and should better relect the details
o each countrys economic policies. In order to
compare country perormances rom past years
accurately, scores and rankings or all previous
years dating back to 1995 have been adjusted to
relect the new methodology.
Economic freedom is strongly related to
good economic perfor-
mance. The worlds reest
countries have twice the
average per capita income
o the second quintile o
countries and over ive
times the average income
o the ith quintile o
countries. The reest econ-
omies also have lower
rates o unemployment
and lower inlation. These
relationships hold across
each quintile, meaning
that every quintile o less
ree economies has worse
average rates o inlation
and unemployment thanthe preceding quintile has.
The top 20 countries
have held relatively
steady. Even though the
methodology used or
rating economic reedom
has been revised with this
edition o the Index, the
composition and order o
the top 20 economies have
hardly changed at all.
Japan and Belgium movedinto the top group (com-
pared to the old methodol-
ogy, not compared to 2006 scores using the new
methodology), whereas Austria and Sweden ell
to lower positions.
Progress is universal across all continents.
Across the ive regions, Europe is clearly the
most ree using an unweighted average (67.5
percent), ollowed at some distance by the
Americas (62.3 percent). The other three regions
all below the world average: AsiaPaciic (59.1
percent), Middle East/North Arica (57.2 per-cent), and sub-Saharan Arica (54.7 percent).
However, trends in reedom are mirrored close-
ly across all regions. The main distinguishing
eature o the regions is that AsiaPaciic coun-
tries have the highest variance, which means
that there is a much wider gap between the
heights o reedom in some economies and
Table 1: Global Distribution of Economic Freedom
Scores Category Number of Countries
80100 Free 7
7079.9 Mostly Free 23
6069.9 Moderately Free 48
5059.9 Mostly Unfree 59
049.9 Repressed 20
Source: Tim Kane, Kim R. Holmes, and Mary Anastasia OGrady,2007 Index of Economic Freedom
(Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2007), at www.heritage.org/index.
Executive Summary 3
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4 2007 Index of Economic Freedom
the lows in others that is
nearly twice as variable as
the norm.
O the 157 countries
graded numerically in the
2007 Index, only seven have
very high reedom scores
o 80 percent or more,1
making them what we
categorize as ree econo-
mies. Another 23 are in the
70 percent range, placing
them in the mostly ree
category. This means that
less than one-ith o all
countries have economic
reedom scores higher
than 70 percent. The bulk o countries107economieshave reedom scores o 50 percent
70 percent. Hal are moderately ree (scores
o 60 percent70 percent), and hal are mostly
unree (scores o 50 percent60 percent). Only
20 countries have repressed economies with
scores below 50 percent.
The typical country has an economy that
is 60.6 percent ree, down slightly rom 60.9
percent in 2006. This decline is caused primar-
ily by monetary reedom scores, which are 2.6
percentage points lower on average due to
slightly more extensive price controls and amild increase in inlation. Even so, the past
scores or these two years produced the over-
all highest scores ever recorded in the Index,
so the overall trend continues to be positive.
As noted, although the methodology used or
1 Four countries (the Democratic Republic oCongo, Iraq, Serbia and Montenegro, and Sudan)were suspended rom grading again this year
because o questions about the accuracy o thedata reported by each country or about whetherthe data truly refect economic circumstances or
most o the country. Data or suspended countriesare reviewed annually to ascertain whether thesituation has improved. The Democratic Republico Congo and Sudan were suspended rom gradingin the 2007 Index because in each case, civil unrestor anarchy indicated that ocial governmentpolicies did not apply to large portions o thecountry. Serbia and Montenegro and Iraq weresuspended because reliable data were notavailable.
measuring reedom was revised this year, pre-vious scores were also revised to be consistent
across time.2
Among speciic economies during the past
year, the scores o 65 countries are now higher,
and the scores o 92 countries are worse.
The variation in reedom among all o these
countries declined again or the sixth year in a
row, and the standard deviation among scores
now stands at 11.4, down one-tenth o a per-
centage point rom last year and down two ull
points since 1996.3
THE IMPACT OF ECONOMICFREEDOM
There is a clear relationship between eco-
nomic reedom and numerous other cross-
country variables, the most prominent being
the strong relationship between the level o
reedom and the level o prosperity in a given
country. Previous editions o the Index have
conirmed the tangible beneits o living in
2 The minor discontinuity in methodology or
three actors may have a slight impact on a handulo countries, but the aggregate eect is nil. Thus,the decline in global economic reedom is real,not a refection o the new level o methodologicaldetail. See For a more detailed discussion, seeChapter 3, Methodology: Measuring the 10Economic Freedoms.3 The analysis does not extend to the 1995edition o the Index because many ewer countrieswere graded in that year.
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Executive Summary 5
BUSINESS FREEDOM 62.8%Business reedom is a measure o how ree entre-
preneurs are to start businesses, how easy it is to
obtain licenses, and how easy it is to close a business.
Impediments to any o these three components deter
business activity and job creation. Globally, startinga business takes an average o 48 days, while get-
ting necessary licenses takes an average o about 215
days.1 Bankruptcy proceedings take an average othree years.
TRADE FREEDOM 64%Taris are the primary obstacle to ree trade, but
non-tari barriers like quotas and bureaucratic
delays are also signiicant impediments. Usingour equation, which assigns our-iths o the
score based on weighted average taris and a ull
20 percentage point reduction or the existence
o non-tari barriers, the average trade reedom
score is 64 percent. The mean weighted averagetari is 8 percent. Notably, every one o the 157
countries graded was penalized 20 points or its
non-tari barriers.
FISCAL FREEDOM 82.8%The top tax rate on individual income averages 31
percent, and the top tax rate on corporate income
averages 27 percent. The total revenue rom all
orms o taxation (including taris) averages 20percent o country GDP. Mixing the three scores
together is the basis o the iscal reedom score.
Using an equation that deines higher reedom
with lower taxes and tax rates, the average scoreis 82.8 percent.
FREEDOM FROM GOVERNMENT 70.2%Government expenditures are the other side o the
iscal intervention coin. The average level o govern-
1 The global average is based on data or 145 countriesthat are graded by both the Index o Economic Freedom andthe 2007 edition o the World Banks Doing Business.
ment spending as a portion o GDP is 31 percent.2
Governments that generate revenue rom state-owned enterprises are also penalized.
MONETARY FREEDOM 75.1%
The worldwide average o the weighted average rate
o inlation rom 2003 to 2005 is 7.9 percent. Price sta-
bility explains most o the monetary reedom score,although there is also a penalty o up to 20 percentage
points or countries that use price controls. The aver-
age price control penalty was 9.9 points this year.
INVESTMENT FREEDOM 49.6%Only 13 countries enjoy high investment reedom,earning scores o 80 percent and higher. These coun-
tries impose ew or no restrictions on oreign invest-
ment, which promotes economic expansion and
enhances overall economic reedom. Meanwhile,
more than one-third o countries earn scores o lessthan 50 percent.
FINANCIAL FREEDOM 52%The inancial reedom actor measures the relative
openness o a countrys banking and inancial system.Burdensome bank regulation still reduces opportuni-
ties and restricts economic reedom in the preponder-
ance o countries in all areas o the world.
PROPERTY RIGHTS 45.6%Strong property rights are still a work in progress.Although many Western economies along with
Hong Kong and Singapore beneit rom secure
protection o property rights, earning scores o 80percent or higher, more than hal o the worldscountries receive a score o less than 50 percent.
FREEDOM FROM CORRUPTION 41.2%There has been little progress since last year. Only 16
countries earned scores o 80 percent or higher, and
110 countries earned scores o less than 50 percent.Freedom rom corruption is the lowest average score
among the 10 actors.
LABOR FREEDOM 62.3%The world average o labor reedom is 62.3 percent,
relecting wage, hour, and other restrictions. The aver-
age ratio o minimum wage to average wage is 0.32.The average cost o iring equals 54 weeks o salary.
Only 22 countries have notably lexible labor market
policies that earn scores o 80 percent or higher.
2 In general, reedom rom government looks at thegeneral government expenditure data that combine alllevels o government. In grading countries or whichgeneral government spending data are not available,central government expenditure data are used.
Business FreedomTrade FreedomFiscal Freedom
Fdm fm GovernmentMonetary Freedom
Investment FreedomFinancial Freedom
Property RightsFdm fm Corruption
Labor Freedom
0 50 100
62.8
64
82.8
70.2
75.1
49.6
52
45.6
41.2
62.3
Economic Freedom Score
100 = most free
THE 10 ECONOMIC FREEDOMS: A GLOBAL GUIDE
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6 2007 Index of Economic Freedom
reer societies. Not only is a higher level o eco-
nomic reedom clearly associated with a higher
level o per capita gross domestic product, but
those higher GDP growth rates seem to create
a virtuous cycle, triggering urther improve-
ments in economic reedom. Our 13 years o
Index data strongly suggest that countries that
increase their levels o reedom experience ast-
er growth rates.
Chart 4 shows a strong relationship between
the level o economic reedom in 2007 and thelogarithmic value o the most recent data or
per capita GDP using 157 countries as data
points.
Charts 58 illustrate our dierent relation-
ships using a quintile ramework. The top quin-
tile o countries is composed o those that are
ranked rom 1 to 31 globally (Hong Kong to the
Czech Republic), and each subsequent quintile
includes the next group o countries. Quintiles
are not the same as categorical groups (ree,
mostly ree, etc.) and are used here because
each quintile is comparable based on the same
number o countries.
Chart 5 shows that our o ive quintiles have
roughly equal populations, but the ourth quin-
tile alone contains hal o the worlds popula-
tion. This is due to the presence o China and
India together. This act suggests that whenChina and India urther open their economies
to globalization so that internal economic ree-
doms are strengthened, the rise in global pros-
perity is poised or very large increases.
Chart 6 is another look at the relationship
between economic reedom and average per
capita incomes. The quintiles with higher
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economic reedom have dramatically higher
incomes per person.
Charts 7 and 8 show that unemployment
rates are higher or each quintile o lower eco-
nomic reedom. Likewise,
inlation rates rise on aver-
age as economic reedom
declines.
The lesson rom these
charts is simple. Econom-
ic repression is a sad con-
sequence o other events.
Countries that are able to
relect the desires o their
people or better lives will
adopt economic reedom,
and countries that repress
their people or political
reasons will cause eco-
nomic suering.
In other words, the
claim that the suspen-sion o economic reedom
is done or the good o
the people is no longer
tenable.
Executive Summary 7
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8 2007 Index of Economic Freedom
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Index of Economic Freedom World Rankings
2007Ra
nk
Country
Econom
icFreedom
2007
BusinessFreedom
TradeFreedom
FiscalFr
eedom
Freedom
from
Government
Moneta
ryFreedom
Investm
ent
Freedom
Financia
lFreedom
PropertyRights
Freedom
from
Corrupt
ion
LaborFreedom
1 Hong Kong 89.29 88.3 80.0 95.3 91.6 91.1 90 90 90 83 93.6
2 Singapore 85.65 94.6 80.0 93.0 86.2 89.5 8 0 50 90 94 99.3
3 Australia 82.69 91.7 73.8 75.4 70.1 84.8 70 90 90 88 93.1
4 United States 81.98 94.5 76.6 79.4 67.5 83.8 80 80 90 76 92.1
5 New Zealand 81.59 93.7 74.0 74.2 63.6 84.5 70 80 90 96 89.9
6 United Kingdom 81.55 92.1 76.6 74.6 54.2 79.3 90 90 90 86 82.7
7 Ireland 81.31 92.8 76.6 81.1 73.1 85.1 90 90 90 74 60.4
8 Luxembourg 79.31 90.0 76.6 75.4 55.9 80.2 90 80 90 85 70.0
9 Switzerland 79.05 83.3 77.0 78.6 68.6 83.6 7 0 70 90 91 78.4
10 Canada 78.72 96.1 78.2 83.9 61.8 80.6 60 70 90 84 82.7
11 Chile 78.29 68.9 72.4 85.7 87.6 79.9 70 70 90 73 85.3
12 Estonia 78.13 80.0 76.6 89.7 66.8 83.0 90 90 90 64 51.2
13 Denmark 77.56 95.3 76.6 55.2 32.1 86.8 80 90 90 95 74.7
14 Netherlands 77.08 88.3 76.6 65.8 47.8 87.0 90 80 90 86 59.2
15 Iceland 77.06 94.1 74.0 82.4 50.3 82.9 60 70 90 97 69.9
16 Finland 76.55 95.3 76.6 75.4 39.0 89.7 70 80 90 96 53.4
17 Belgium 74.53 90.8 76.6 62.2 41.2 80.0 90 80 80 74 70.5
18 Japan 73.57 94.3 75.2 80.6 67.2 92.0 60 50 70 73 73.4
19 Germany 73.52 88.2 76.6 74.3 48.0 81.5 90 50 90 82 54.6
20 Cyprus 73.10 70.0 76.6 87.8 54.9 84.7 70 70 90 57 70.0
21 Sweden 72.59 95.0 76.6 53.6 31.5 85.2 80 70 90 92 52.0
22 Lithuania 72.00 86.4 76.6 91.0 76.6 81.2 70 80 50 48 60.1
23 Trinidad and Tobago 71.44 61.8 69.0 88.0 83.7 74.7 70 70 70 38 89.2
24 Bahamas 71.43 80.0 28.8 98.3 89.9 77.3 40 70 80 70 80.0
25 Austria 71.33 79.8 76.6 66.9 40.5 85.7 70 70 90 87 46.8
26 Taiwan 71.12 73.0 76.7 84.7 89.8 81.3 70 50 70 59 56.7
27 Spain 70.87 77.1 76.6 70.1 63.6 78.6 70 80 70 70 52.7
28 Barbados 70.52 90.0 47.0 78.3 64.4 76.5 50 60 90 69 80.0
29 El Salvador 70.31 62.6 66.6 90.9 95.1 76.7 70 70 50 42 79.230 Norway 70.09 97.0 79.2 66.1 45.9 82.6 50 50 90 89 51.1
31 Czech Republic 69.68 61.2 76.6 79.9 52.7 86.2 70 80 70 43 77.2
32 Armenia 69.43 84.5 75.6 93.1 91.6 79.7 60 70 30 29 80.9
33 Uruguay 69.33 68.1 71.6 90.8 81.7 73.1 70 30 70 59 79.0
34 Mauritius 68.96 74.5 70.0 87.5 82.0 76.2 70 60 60 42 67.4
35 Georgia 68.70 78.9 61.8 94.2 91.3 77.9 60 70 30 23 99.9
Executive Summary 9
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10 2007 Index of Economic Freedom
2007Ra
nk
Country
Econom
icFreedom
2007
BusinessFreedom
TradeFreedom
FiscalFr
eedom
Freedom
from
Government
Moneta
ryFreedom
Investm
ent
Freedom
Financia
lFreedom
PropertyRights
Freedom
from
Corrupt
ion
LaborFreedom
36 Korea, South (ROK) 68.65 83.1 64.2 81.0 81.5 79.0 70 50 70 50 57.7
37 Israel 68.42 69.7 75.2 72.0 60.0 84.2 70 50 70 63 70.1
38 Botswana 68.40 66.6 59.6 82.6 54.5 76.8 70 70 70 59 74.9
39 Bahrain 68.40 80.0 69.6 99.6 56.7 80.1 50 90 60 58 40.0
40 Slovakia 68.37 71.1 76.6 93.0 60.8 76.7 70 80 50 43 62.5
41 Latvia 68.21 76.8 76.6 89.3 69.2 74.1 70 70 50 42 64.1
42 Malta 67.80 70.0 76.6 74.0 42.2 79.2 50 70 90 66 60.0
43 Portugal 66.66 79.6 76.6 79.6 49.6 80.2 70 50 70 65 46.0
44 Hungary 66.15 71.2 76.6 79.2 41.8 76.7 70 60 70 50 66.1
45 France 66.11 86.1 76.6 64.2 32.0 81.3 50 60 70 75 65.9
46 Jamaica 66.05 78.3 60.4 83.4 67.4 70.9 80 60 50 36 74.1
47 Panama 65.87 75.1 66.2 88.7 86.8 85.8 70 60 30 35 61.2
48 Malaysia 65.85 68.6 71.8 87.8 79.8 80.0 40 40 50 51 89.5
49 Mexico 65.80 82.1 72.6 88.1 77.2 77.0 50 60 50 35 66.0
50 Thailand 65.56 76.1 69.2 83.2 91.2 77.6 30 50 50 38 90.4
51 Costa Rica 65.12 63.5 72.4 88.6 92.3 67.1 70 40 50 42 65.4
52 South Africa 64.10 70.8 68.8 79.8 79.3 78.8 50 60 50 45 58.5
53 Jordan 64.02 54.8 64.2 88.8 64.1 83.5 50 60 50 57 67.9
54 Oman 63.94 63.6 73.8 99.0 37.7 79.1 50 50 50 63 73.2
55 Namibia 63.76 76.7 79.0 78.6 70.5 78.6 40 60 30 43 8 1.2
56 Belize 63.71 76.7 57.2 79.8 80.1 73.5 50 50 50 37 82.8
57 Kuwait 63.66 67.9 72.2 99.9 39.2 78.8 50 50 50 47 81.7
58 Slovenia 63.60 74.2 76.6 69.7 56.8 79.0 70 50 50 61 4 8.7
59 Uganda 63.41 54.1 58.8 87.1 86.7 78.3 50 70 30 25 94.0
60 Italy 63.36 73.7 76.6 68.5 46.4 80.8 70 60 50 50 57.6
61 Nicaragua 62.70 59.7 72.4 86.4 85.6 71.2 70 60 30 26 65.7
62 Bulgaria 62.17 66.9 60.8 91.3 65.6 75.7 60 60 30 40 71.5
63 Peru 62.07 65.1 62.6 86.8 92.2 85.7 50 60 40 35 43.3
64 Swaziland 61.58 71.5 59.0 81.5 73.3 76.3 50 50 50 27 77.265 Madagascar 61.43 51.2 72.8 87.2 85.0 70.0 70 50 50 28 50.1
66 Albania 61.38 56.1 63.2 91.5 77.7 80.7 60 70 30 24 60.6
67 Romania 61.26 70.9 74.0 91.7 74.9 69.7 50 60 30 30 61.4
68 Guatemala 61.25 54.1 70.2 86.5 96.4 72.2 50 60 30 25 68.0
69 Tunisia 60.99 78.3 61.8 80.8 82.1 80.0 30 30 50 49 67.9
70 Brazil 60.89 53.3 64.8 88.6 88.8 72.6 50 40 50 37 63.8
Index of Economic Freedom World Rankings
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2007Ra
nk
Country
Econom
icFreedom
2007
BusinessFreedom
TradeFreedom
FiscalFr
eedom
Freedom
from
Government
Moneta
ryFreedom
Investm
ent
Freedom
Financia
lFreedom
PropertyRights
Freedom
from
Corrupt
ion
LaborFreedom
71 Macedonia 60.84 60.9 73.4 90.0 67.8 91.1 50 60 30 27 58.1
72 Qatar 60.73 60.0 71.4 99.9 54.6 72.4 30 50 50 59 60.0
73 Colombia 60.54 71.4 6 1.4 82.4 87.0 70.2 50 60 30 40 53.0
74 United Arab Emirates 60.39 49.2 70.0 99.9 60.3 75.3 30 40 40 62 77.2
75 Kazakhstan 60.35 66.5 64.2 87.6 85.9 72.9 30 60 30 26 80.5
76 Honduras 60.32 56.6 69.2 87.8 82.9 71.5 50 70 30 26 59.2
77 Lebanon 60.27 56.2 67.4 95.9 64.3 83.5 30 70 30 31 74.4
78 Mongolia 60.12 73.1 70.0 81.0 56.9 74.3 60 60 30 30 65.9
79 Kyrgyzstan 59.87 61.4 71.4 9 5.1 76.3 7 7.1 40 50 30 23 74.4
80 Fiji 59.80 70.4 61.8 86.3 74.3 74.7 30 60 30 40 70.5
81 Moldova 59.47 70.0 74.4 90.4 71.7 68.0 30 50 50 29 61.2
82 Kenya 59.41 58.9 65.0 85.9 83.6 74.4 50 50 40 21 65.2
83 Turkey 59.33 67.4 76.0 79.4 69.9 70.2 50 50 50 35 45.4
84 Sri Lanka 59.30 69.2 66.6 85.7 85.7 69.8 30 40 50 32 63.9
85 Saudi Arabia 59.10 52.9 65.4 99.6 46.1 80.1 30 40 50 34 92.9
86 Senegal 58.79 56.4 61.6 73.9 85.9 82.9 50 50 50 32 45.2
87 Poland 58.77 56.1 76.6 79.1 55.3 80.3 50 50 50 34 56.2
88 Cape Verde 58.41 50.5 31.2 78.0 77.7 84.2 50 50 70 30 62.5
89 Pakistan 58.20 70.9 53.6 82.0 89.3 72.0 50 40 30 21 73.2
90 Guyana 58.16 57.0 57.0 78.5 66.1 74.0 50 60 4 0 25 74.1
91 Ghana 58.15 54.9 58.0 88.4 72.0 70.0 50 50 50 40 48.2
92 Zambia 57.91 63.6 60.8 80.4 81.9 57.8 50 50 40 26 68.6
93 Gambia 57.65 59.0 54.6 81.4 76.4 67.2 50 60 30 27 70.9
94 Greece 57.65 70.2 76.6 74.5 45.3 78.3 50 40 50 43 48.5
95 Argentina 57.47 65.5 61.4 82.3 89.6 71.3 50 40 30 28 56.6
96 Morocco 57.43 74.3 51.0 75.5 76.3 83.3 70 40 30 32 41.9
97 Philippines 57.35 54.2 74.8 84.0 91.4 73.4 30 50 30 25 60.7
98 Tajikistan 56.91 53.2 66.0 93.2 86.8 67.2 3 0 40 30 21 81.7
99 Paraguay 56.81 47.0 67.4 97.8 79.8 78.4 50 60 30 21 3 6.7100 Dominican Republic 56.75 57.6 63.8 86.5 91.5 63.2 50 40 30 30 54.9
101 Mozambique 56.55 51.5 60.2 85.5 86.2 75.9 50 50 30 28 48.2
102 Cambodia 56.54 37.1 47.2 94.2 85.1 81.1 50 50 30 23 67.7
103 Tanzania 56.40 44.8 63.6 87.1 8 5.7 74.4 5 0 50 30 29 49.4
104 India 55.60 49.6 51.2 84.8 89.0 77.2 40 30 50 29 55.1
105 Ivory Coast 55.52 48.1 58.6 66.3 86.2 78.6 40 70 30 19 58.4
Index of Economic Freedom World Rankings
Executive Summary 11
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2007Ra
nk
Country
Econom
icFreedom
2007
BusinessFreedom
TradeFreedom
FiscalFr
eedom
Freedom
from
Government
Moneta
ryFreedom
Investm
ent
Freedom
Financia
lFreedom
PropertyRights
Freedom
from
Corrupt
ion
LaborFreedom
141 Sierra Leone 48.37 50.5 50.2 82.0 83.8 72.9 30 40 10 24 40.2
142 Syria 48.17 56.6 49.0 88.3 57.5 68.9 30 10 30 34 57.4
143 Bangladesh 47.80 64.3 - 89.4 91.5 68.7 30 2 0 30 17 67.0
144 Venezuela 47.68 48.8 56.2 83.7 69.5 57.6 20 40 30 23 48.0
145 Belarus 47.36 54.5 62.2 87.9 66.9 61.4 20 10 20 26 64.7
146 Burundi 46.77 40.9 50.6 80.0 60.0 68.1 30 30 30 23 55.2
147 Chad 46.38 25.1 54.2 57.7 81.9 77.7 40 50 20 17 40.2
148 Guinea-Bissau 45.71 27.2 52 .8 88.6 59.9 80.7 40 40 20 10 37.9
149 Angola 43.47 33.9 68.0 90.0 38.4 47.7 20 40 20 20 56.7
150 Iran 43.13 54.9 50.4 84.8 59.8 61.3 10 10 10 29 61.2
151 Congo, Republic of 43.00 40.4 44.4 73.2 56.9 77.3 30 30 10 23 44.8
152 Turkmenistan 42 .54 30.0 74.2 94.4 82 .9 65.9 10 10 10 18 30.0
153 Burma 40.14 20.0 71.8 87.9 88.3 65.4 10 10 10 18 20.0
154 Zimbabwe 35.81 42.9 42.6 79.5 83.9 - 10 20 10 26 43.2
155 Libya 34.48 20.0 29.6 87.8 23.5 78.9 30 20 10 25 20.0
156 Cuba 29.68 10.0 60.2 62.8 10.0 65.8 10 10 10 38 20.0
157 Korea, North (DPRK) 3.00 - - - - - 10 - 10 10 -
Source: Tim Kane, Kim R. Holmes, and Mary Anastasia OGrady,2007 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow
Jones & Company, Inc., 2007), at www.heritage.org/index.
Index of Economic Freedom World Rankings
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15
Chapter 1
Global Inequality Fades as theGlobal Economy Grows
Xavier Sala-i-Martin
In this age o globalization, countless studies
oer conficting conclusions about overall poverty
rates and income inequality worldwide. All observ-
ers agree that the rapid integration o international
economies is one o the dominant experiences o the
postCold War world.
Many critics have assailed globalization as a
orm o extreme capitalism that is leaving the worlds
poor behind. At a conerence in the all o 2001, or
example, Noam Chomsky declared that Inequality
is soaring through the globalization periodwith-
in countries and across countries.1 To substanti-
ate their claims, however, such anti-globalization
activists rely on the United Nations Development
Programmes Human Development Report or
1999, which claims that:
Gaps in income between the poorest
and richest countries have continued to
widen. In 1960, the 20% o the worlds
1 Virginia Postrel, The Rich Get Rich and PoorGet Poorer. Right? Lets Take Another Look, TheNew York Times, August 15, 2002.
people in the richest countries had 30
times the income o the poorest 20%
in 1997, 74 times as much.2
How could it be true that globalization has
helped rather than hurt the worlds poor?
Xavier Sala-i-Martin, a proessor o economics
at Columbia University, is a renowned expert on
economic growth who in recent years has published
authoritative research on global incomes. Here, in
his own words, he reviews the latest evidence. He
notes that the conusion about growing global in-
equality among individuals is based on a logical
misunderstanding. Comparing countries and com-
paring individuals within those countries is akin to
the classic problem o mixing apples and oranges.The correct analysis is to integrate apples and apple
trees, and that is what Proessor Sala-i-Martin does
with powerul lessons or all o us.
The Editors
2 United Nations Development Programme,Human Development Report 1999, at http://hdr.undp.org/reports/global/1999/en/.
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Looking at the planet as a whole, never in
history has poverty been eradicated so rapidly
as it has been during our lietimes. Moreover,
individual income inequalities have been all-
ing, and this is the irst time they have allen
since the eve o the Industrial Revolution. The
aggregate numbers have never looked better.
Looking at the world distribution o income
(WDI), the world is a better place.
Poverty and inequality are, o course, di-
icult to measure because o the arduousness
o collecting data, the ambiguity o the dei-
nition o poverty, and debate concerning the
proper unit o measures o both poverty and
inequality. However, the mounting empirical
evidence points to signiicant improvements
in these two dimensions over the past two to
three decades.Although this is certainly good news, the
analysis presented in this discussion also shows
that, alongside these positive global trends, the
continued deterioration o the economic situa-
tion o Arican countries is pushing up our mea-
sures o poverty rates and head counts in that
continent. The positive economic income growth
experienced by billions o Asian citizens, along
with the negative growth experienced by the
majority o Aricans, has turned poverty, which
used to be an essentially Asian phenomenon,
into an essentially Arican problem.
MEASURING POVERTY
The empirical literature on cross-coun-
try convergence shows that the dispersion o
incomes per capita across countries tends to
increase over time, a phenomenon that Rob-
ert Barro and I have called -divergence.3
Countries are useul units i we want to test
growth theories because many o the policies
or institutions considered by the theories are
country-wide.
I we are interested in whether poor peoplesstandards o living improve more rapidly than
rich peoples, however, then the correct unit is
a person rather than a country: The evolution
3 Robert J. Barro and Xavier Sala-i-Martin,Convergence,Journal o Political Economy, Vol.100, No. 2 (April 1992), pp. 223251.
o Chinas per capita income is more important
than the evolution o Lesothos because China
has a lot more people. In act, China has almost
twice as many citizens as all Arican countries
combined, even though Arica has around
35 independent states. There is no reason to
downweight the well-being o a Chinese peas-
ant relative to a Senegalese armer just because
Chinas population is larger than Senegals. The
country analysis o the traditional convergence
literature does not help to answer such ques-
tions as how many people in the world live in
poverty, how poverty rates have changed over
the past ew decades, or whether inequalities
across citizens are growing over time.
A better measure o the evolution o personal
inequality is the population-weighted variance
o the log o income per capita, as opposed to thesimple variance o the log o income per capita,
which gives the same weight to all countries
regardless o population. The striking result is
that the weighted variance does not increase
monotonically over time. As shown by T. Paul
Schultz and by Steve Dowrick and Muhammad
Akmal,4 the weighted variance increases or
most o the 1960s and 1970s but peaks in 1978.
Ater that, the weighted variance declines, and
this is rooted in the act that China, with 20 per-
cent o the worlds population, has experienced
large increases in per capita income. This eectwas reinorced in the 1990s when India, with
another 1 billion inhabitants, started its process
o rapid growth.
Using population-weighted distributions o
per capita income (rom national accounts) is a
step in the right direction, but it is not suicient
to provide accurate estimates o concepts like
poverty rates or indexes o income inequality.
These measures still miss within-country disper-
sion, a actor that needs to be included i sensible
estimates o the WDI are to be constructed.
4 T. Paul Schultz, Inequality and theDistribution o Personal Income in the World: HowIt Is Changing and Why,Journal o PopulationEconomics, Vol. 11, No. 3 (1998), pp. 307344; SteveDowrick and Muhammad Akmal, ContradictoryTrends in Global Income Inequality: A Tale oTwo Biases, mimeographed, Australian NationalUniversity, March 2003.
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By using population weights, researchers
recognize that dierent countries have dier-
ent population sizes, but this alone is insu-
icient because it still implicitly assumes that
all citizens o a country have the same level o
income. This can yield misleading results. I the
per capita income in a country were a couple
o dollars above the poverty line, or example,
researchers would conclude that no poor citi-
zens lived in that country. Similarly, they would
tend to ind dramatic declines in poverty rates
as the income per capita o very populated
countries grew rom a ew dollars below to a
ew dollars above the poverty line. Additional-
ly, in terms o inequality, population-weighted
indexes o inequality could show a decline in
overall global inequality, while the true indi-
vidual inequalities could be rising i within-country inequalities increased suiciently.
Incorporating inormation about within-
country income dispersion is problematic, how-
ever, because such inormation is not readily
availablebut there is hope. Klaus Deininger
and Lyn Squire, or example, collected data rom
a large number o microeconomic surveys con-
ducted in a variety o countries over a period
o 30 years,5 and the United Nations Universi-
tys World Institute or Development Research
(UNU-WIDER) keeps an update o this collec-
tion. Although these surveys contain a largeamount o inormation about the distribution
o income (or expenditure) within many coun-
tries, however, they are still incomplete. Surveys
do not exist or a number o economies, and or
the countries or which surveys do exist, many
years are missing. Nevertheless, this inorma-
tion can and should be used to complement the
population-weighted national accounts and to
construct estimates o the WDI.
MEASURING THE WORLD
DISTRIBUTION OF INCOMEI construct a WDI by estimating an annual
income distribution or each o 138 countries
and then integrating these country distributions
5 Klaus Deininger and Lyn Squire, A New DataSet Measuring Income Inequality, World BankEconomic Review, Vol. 10 (1996), pp. 565591.
or all levels o income.6 The starting point o
the analysis is the population-weighted income
per capita, which we will use as the mean o
each countrys distribution. As a measure o
income, I use the purchasing power parity
adjusted GDP per capita rom the Penn World
Tables.7 One could anchor the country distribu-
tions to other measures o average income, such
as the mean income rom surveys. I choose not
to do so or a variety o reasons, including (but
not limited to) the lack o survey data or many
countries and time periods. Since surveys are
not available every year, i one used the mean
income o those surveys to anchor the mean o
the distribution, then one would have to ore-
cast the means or missing years. National
accounts data, on the other hand, are reported
by the Penn World Tables or all countries dur-ing our sample period.
The mean o the distribution can be comple-
mented by adding within-country inormation
on income distribution contained in microeco-
nomic income surveys reported by Deininger
and Squire8 and extended with UNU-WIDER
compilation. Non-parametric kernel density
analysis is used to determine annual income
distribution data or the various countries.
Once a distribution o income has been esti-
mated or each country/year, I construct an
annual world distribution o income by inte-grating all o the country distributions.9 Charts
1 and 2 report the estimates o the density unc-
tion or some o the largest countries as well as
WDI or 1970 and 2000, respectively. For con-
venience, the charts also include a vertical line
representing the equivalent annual income o
$1 per day, a widely used measure o poverty
that will be discussed below.
6 Xavier Sala-i-Martin, The World Distributiono Income: Falling Poverty andConvergence,
Period, Quarterly Journal o Economics, Vol. 121,No. 2 (May 2006), pp. 351397.7 Allan Heston, Robert Summers, and BettinaAten, Penn World Table Version 6.1, Center orInternational Comparisons at the University oPennsylvania, December 2002.8 Deininger and Squire, A New Data SetMeasuring Income Inequality.9 Sala-i-Martin, The World Distribution oIncome.
Chapter 1 17
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An interesting aspect o the charts is that
one can visually appreciate that a substantial
part o individual income inequality across
the world comes rom dierences in per capita
incomes across countries rather than dier-
ences within countries. In other words, the
distance between country distributions (say,
the dierence between the mean o the United
States and China) seems to be much larger thanthe dierences between rich and poor Ameri-
cans or rich and poor Chinese.
A quick comparison o Chart 1 and Chart 2
reveals the ollowing eatures. First, the WDI
has shited to the right. This, o course, relects
the act that per capita GDP is much larger in
2000 than in 1970. Second, it is not visually
evident whether the WDI is more dispersed in
1970 than in 2000. Third, i we analyze the rea-
sons or the WDIs change in shape, we observe
that a major change occurs in China, whose dis-
tribution both shits dramatically to the right(China is getting richer) and increases in dis-
persion (China is becoming more unequal).
To see the evolution o the WDI over time,
Chart 3 plots together the global distributions
(without individual country unctions) or
1970, 1980, 1990, and 2000. It is now apparent
that the distribution shits rightward, implying
that the incomes o the majority o the worlds
citizens increased over time. It is also clear that
the raction o the overall area that lies to the
let o the poverty line declines, which indi-
cates a reduction in poverty rates, and that
the absolute area to the let o the poverty line
also diminishes, which indicates an overall
reduction in the number o poor citizens in the
world. Again, the chart does not show clearlywhether world income inequality increased
or decreased, so precise measures o income
inequality will have to be used i we want to
discuss the evolution o inequality over the last
three decades.
DEFINING POVERTY
Once we have a good estimate o the WDI,
we can use it to estimate poverty rates and head
counts. The irst problem we encounter, how-
ever, is deining what we mean by poverty. For
a long time, analysts identiied poverty withthe lack o physical means or survival. Thus,
some attempted to deine
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