The Economic Freedom of the World (EFW) measure is an
index that reveals the contributions of economic institutions and policies in
growth and development (Gwartney, Lawson, and Hall, 2017, p. 3). It is based on
the idea of self ownership where individuals are free to choose what they want
to do with their time and skills (p. 1). They are not as subject to government
pressures or other external influences that limit their access to individual
freedom, voluntary exchange, open markets and well-structured property rights
(p. 1). An analysis of the EFW index suggests that countries should work to
protect individual freedom by enforcing a limited government, installing more
clearly structured legal institutes and property rights, facilitating the
circulation of sound money, enabling freedom to international trade and
providing efficient credit, labor and business regulations.

       The EFW
index uses three important methodological principles: objective components are
ideal; external sources such as the International Monetary Fund and World
Economic Forum are used; and transparency is ensured (p. 3). These three
principles provide reliability to the EFW index that countries can use to guide
their policymaking.

Specifically, the EFW index has five
major areas that each have certain components/sub-components: (1) Size of
Government with components like transfers and subsidies and government
consumption; (2) Legal System and Property Rights with components like impartial
courts and reliability of police; (3) Sound Money with components like money
growth and standard deviation of inflation; (4) Freedom to International Trade
with components like tariffs and black-market exchange rates; and (5)
Regulation of credit, labor, and business with components like business
regulations (p. 3-4). The components and sub-components together add up to 42
distinct variables that are scaled from 0 to 10. Sub-components are averaged
for the component ratings which are then averaged for the ratings of each area.
The ratings for each area are averaged for the summary rating of a given
country. One challenge that this structure of the EFW index has is that
different researchers might have different conclusions about the weighting
methods of the five areas. Yet it can be noted that the areas are interdependent
and mutually influential (p. 5).

In general, high-income industrial
economies are more likely to have higher ratings for Legal System and Property
Rights, Sound Money, and Freedom to International Trade and lower ratings for
Size of Government and Regulation (p. 12). To ensure economic freedom countries
need smaller government as much as they need rule of law and property rights,
sound money, open trade, reasonable regulation (p. 12). These findings are
supported by the evidence that weaker rule of law and property rights in
countries in Sub-Saharan Africa like Chad, Islamic nations like Iran, and some
former communist countries like Ukraine have lower EFW index, though there are
some exceptions (p. 12). Take China and Hong Kong as examples. They are both in
the same region, but China’s EFW index is ranked 112 while that of Hong Kong is
ranked 1 because of the differences in the five areas. While Size of Government
in China is 5.1, it is 8.5 in Hong Kong. This gap partly explains why China is
placed outside of 100 in economic freedom and Hong Kong at the very top (p. 13-14).

To conclude, policymakers must
recognize that market-oriented economies have advantages over government-led
ones, and that higher economic freedom is linked to higher income per capita
and economic growth, reduction in poverty, longer life expectancy, lower gender
inequality, and so on (p. 22-26). It is time for them to work on their economic
freedom.  

Reference

 Gwartney, J., Robert Lawson, & Joshua
Hall. (2017). “Economic Freedom of the World in

2015.” Economic Freedom
of the World (2017 Annual Report). Fraser Institute. https://www.fraserinstitute.org/sites/default/files/economic-freedom-of-the-world-2017.pdf.
Accessed on 21 January 2018.