What inspired the Heritage Foundation to create the Index of Economic Freedom, which is now in its 21st year of publishing?

The idea of creating an index to measure the impact of economic freedom in the world began percolating in the 1980s. Nobel laureate Milton Friedman talked of producing one, and it was discussed periodically at meetings of free market economists during that decade. In fact, Friedman elaborated: “The role of competitive capitalism – the organisation of the bulk of economic activity through private enterprise operating in a free market – as a system of economic freedom”.

Inspired by that, the Index of Economic Freedom was born as a data-driven policy guide that empirically evaluates countries’ economic policies through a simple and transparent methodology. Demonstrating why economic freedom matters, the inaugural edition of the Index was published in 1995. Since then, the Index has continued to document reform efforts in over 170 economies and monitor increases and decreases of economic freedom around the world.

Every year, the Heritage Foundation releases the Index of Economic Freedom – an annual data-driven report that compares the degree of freedom citizens from countries around the world have to pursue their own economic interests. Anthony B Kim, Research Manager and Senior Policy Analyst, shares highlights of this year’s edition, and illuminates science and technology’s role in the economy

How free are we?Anthony B KimResearch Manager & Senior Policy Analyst, Heritage Foundation

Economic Freedom – an annual data-driven report that compares the degree of freedom citizens from countries around the world have

How free are we?Research Manager & Senior Policy Analyst, Heritage Foundation

10 INTERNATIONAL INNOVATION

INTERVIEW

Can you provide an overview of the Index and its purpose?

For over two decades, the Index of Economic Freedom, in partnership with The Wall Street Journal, has measured the impact of liberty on free markets around the globe. Through analysis of diverse economies – ranging from North Korea to Hong Kong – and using metrics to examine government size, market openness, regulatory efficiency and the rule of law, the Index has demonstrated the strong relationship between economic freedom and progress. There is no single formula for overcoming challenges to economic development, but one thing is clear: around the world, governments that respect and promote economic freedom provide greater opportunities for innovation, progress and human flourishing.

Since its inception, the Index has served as a cross-country policy guide and data tool for analysing various economies throughout the world. The 10 measures of economic freedom and accompanying historical data provide a comprehensive set of principles and facts for those who wish to understand the fundamentals of economic growth and lasting prosperity as well as the critical linkage between opportunity and empowerment.

Does the Foundation pay special care to ensure that the Index is objective and not influenced by political or social factors?

Yes, indeed. In assessing economic freedom of various countries, the Index carefully examines factual and publicly available data from internationally well-recognised and reliable sources so that we can ensure objective and transparent cross-country analysis in the most possible consistent manner. Every country is subject to the same test, according to the data available worldwide.

How does the Foundation define economic freedom and why is it so important to track?

Economic freedom is the fundamental right of every human to control his or her own labour and property. In an economically free society,

individuals are free to work, produce, consume and invest in any way they chose. In economically free societies, governments refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.

What have been the key findings from pouring over this year’s data?

Despite the continuing challenges that confront the world economy, the global average economic freedom score has improved over the past year by one-tenth of a point, reaching a record 60.4 (on a 0-to-100 scale) in the 2015 Index. Although the rate of advancement has slowed in comparison to last year’s near record 0.7-point increase, the world average has now reached a level that is a full point higher than that recorded in the aftermath of the 2008 financial crisis and recession, thus regaining all of the ground that had been lost.

In 101 countries – the majority of which are less developed or emerging economies – there were advances in economic freedom over the past year.

Were any of the findings particularly insightful or surprising?

There were several particularly insightful findings. For example, the intensity of poverty in countries whose economies are considered mostly free or moderately free is only about one-fourth the level found in countries that are rated less free.

Despite varying degrees of economic freedom across the globe, the positive relationship between economic freedom and prosperity is unequivocally consistent within the regions: per capita incomes are much higher in countries that are economically free.

Unsurprisingly, overall human development also thrives in an environment that is economically free. Economic freedom is about more than a business environment in which entrepreneurship and prosperity can flourish. Higher economic freedom induces greater overall human development in such key areas as life expectancy, literacy, education and the standard of living.

There is a robust relationship between improving economic freedom and achieving higher per capita economic growth. Whether long-term (20 years), medium-term (10 years) or short-term (five years), the relationship between changes in economic freedom and changes in economic growth is consistently positive. As economies gain economic freedom and thus achieve dynamic growth, individuals and companies are empowered to build businesses, create jobs and generate greater innovation for their communities and societies.

Hong Kong has ranked in the top spot for the third year in a row. Why is this the case, and what does it mean both for the region and in a global sense?

Hong Kong has maintained its status as the world’s freest economy, a distinction that it has achieved for 21 consecutive years. The economy, a global free port and financial hub, continues to thrive on the free flow of goods, services and capital. As the economic and financial gateway to China, and with an efficient regulatory framework, low and simple taxation, and sophisticated capital markets, the territory continues to offer the most convenient platform for international companies doing business on the mainland. An impressive level of resilience has enabled

Since last year, levels of economic freedom advanced in half of the six Index regions. According to their average scores:

• Sub-Saharan Africa: increase of 0.3 points

• Asia & the Pacific: increase of 0.3 points

• North Africa & the Middle East: increase of 0.1 points

• South and Central America/Caribbean: No change

• Europe: decrease of 0.1 points

• North America: decrease of 0.2 points

Some go up, some go down

www.internationalinnovation.com 11www.internationalinnovation.com 11

it to navigate global economic swings and domestic shocks. However, it is notable that the competition for the top spot between Hong Kong and Singapore, the second-freest economy, has been further intensified in the 2015 Index.

Can you describe the relationship between economic freedom and advancements in science and technology?

Globally, the most economically free countries are the countries that are the forefront of technological innovation. Indeed, it is not surprising, for example, that questions have been raised about US productivity growth and technological innovation in recent years as economic freedom has stagnated. Meanwhile, countries like Singapore and Estonia have made aggressive improvements in economic freedom while also climbing global ranks in broadband speed and connectivity.

Do you see a relationship between countries that ranked high in their score and their level of scientific and technological advancement?

Countries with higher levels of economic freedom score positively on a number of measures of advancement, including productivity. For instance, the countries with the highest levels of economic freedom issue far more patents than the least economically free countries and have far better research universities.

Will investments in STEM improve countries’ overall economic freedom and opportunities for economic growth?

Broad-based economic freedom policies that encourage competition do indeed lead to better educational outcomes. Whether STEM investments improve innovation and economic growth is yet to be seen. But it is clear that students who live in the freest societies score the highest on Programme for International Student Assessment (PISA) tests, which the Organisation for Economic Co-operation and Development administers globally. They also have better rates of literacy and stay in school later longer.

What sort of government spending policies in relationship to STEM could help foster economic growth?

Basic support for R&D has been vital in supporting the foundations of some of the world’s most important inventions and technologies. However, government policies often hinder private sector development and divert financial resource into unproductive schemes. It is important to balance basic research support with efficient regulatory frameworks that facilitate innovation and business formation.

Does the report make any suggestions on how countries can work to improve their economic freedom? What might these be?

The Index is a practical tool for analysing 186 economies throughout the world and each country page is a resource for in-depth analysis of a country’s political and economic developments. The 10 economic freedoms and accompanying historical data also provide a comprehensive set of principles and facts for those who wish to understand the fundamentals of economic growth and prosperity.

As explained earlier, the Index is based on 10 factors (see page 13) ranked on a numeric scale from 0 to 100. With easy-to-read graphics on each country page, policy makers considering economic reforms may find significant opportunities for improving economic performance in those factors in which they score the lowest. These factors may indicate significant binding constraints on economic growth and prosperity. In addition, each country page presents in-depth justification for each factor score, allowing individuals to identify which specific reforms to undertake.

What are the biggest challenges you have faced in putting together this report and how have you overcome them?

It may sound too simple, but the biggest challenge is the overall research process. In each stage of the process, we pay great attention to details in order to ensure the objective and consistency of our analysis. We tend to rely on multiple fact checkers as well as experienced copy editors so that we can safeguard the high quality and credibility of our Index of Economic Freedom to the highest professional degree. The task of producing our annual Index requires a great level of team spirit and collaboration in a fast moving research and production environment under multiple deadlines.

Are the future plans for the Index that you can share?

Going into its 22nd year, the Index has the potential to be an even more vital tool for a large constituency, from investors to students to policy makers and beyond. One of the central tenants of the Index is its emphasis on promoting competitiveness through the principles of economic freedom. As global markets expand and become more interconnected, businesses are increasingly looking for resources to help identify competitive opportunities. The Index has become a practical tool and database for meeting this need.

www.heritage.org/index

1. Hong Kong – 89.6

2. Singapore – 89.4

3. New Zealand – 82.1

4. Australia – 81.4

5. Switzerland – 80.5

6. Canada – 79.1

7. Chile – 78.5

8. Estonia – 76.8

9. Ireland – 76.6

10. Mauritius – 76.4

Top 10 economically free countries

INTERNATIONAL INNOVATION12 INTERNATIONAL INNOVATION12

• Property rights

• Freedom from corruption

• Fiscal freedom

• Government spending

• Business freedom

• Labour freedom

• Monetary freedom

• Trade freedom

• Investment freedom

• Financial freedom

10 factors contributing to economic freedom

The Index of Economic Freedom measures economic freedom based on 10 quantitative and qualitative factors, chosen to represent factors that affect an economy’s institutional, macroeconomic and entrepreneurial aspects:

Each of the 10 economic freedoms within these categories is graded on a scale of 0 to 100. A country’s overall score is derived by averaging these economic freedoms, with equal weight being given to each. “Our Index methodology may not capture all of the theoretical nuances of economic theory,” Anthony B Kim, Research Manager and Senior Policy Analyst, states. “However, it does reflect the main economic and structural factors involved in economic freedom and growth.”

www.internationalinnovation.com 13