The Index of Economic Freedom 2022
In a joint effort of The Heritage Foundation and The Wall Street Journal, the Index of Economic Freedom has measured the degree of economic freedom across the globe since 1995. The index gives scores to countries and ranks them for economic freedom. It grades countries for various aspects of economic freedom between 0 and 100, with 0 being “no economic freedom” and 100 “total economic freedom.”
The 2022 Index of Economic Freedom ranked 184 countries, covering 12 aspects of economic freedom. The list below displays the top ten countries for 2022. Singapore topped the rankings, followed by Switzerland and Ireland. Seven out of the ten countries were in Europe, while the rest were in Asia Pacific.
How to Measure the Economic Freedom
According to the Methodology Appendix, the index gives scores to each country based on 12 quantitative and qualitative elements. These 12 factors are divided into four broader categories: Rule of Law, Government Size, Regulatory Efficiency, and Open Markets. Each broader category consists of three freedom factors as below:
- Rule of Law – Property Rights, Judicial Effectiveness, and Government Integrity,
- Government Size – Tax Burden, Government Spending, Fiscal Health,
- Regulatory Efficiency – Business Freedom, Labor Freedom, Monetary freedom,
- Open Markets – Trade Freedom, Investment Freedom, Financial Freedom.
Each of these elements is given a score between 0 and 100 for each country. Then countries are ranked according to the overall score which is an average score of these elements’ scores.
Taking the average score of the top ten countries for each category, the Rule of Law sector received the highest average score of 91.54. The lowest average score was 71.58 for Government Size.
Now, let’s look into each domain in detail in descending order in score to figure out tendency between the top 10 countries.
Rule of Law
The Rule of Law section includes Property Rights, Judicial Effectiveness, and Government Integrity.
The Property Rights component assesses a country’s effectiveness of the legal protection of property. The following sub-factors determine its score: risk of expropriation, respect for intellectual property rights, and quality of contract enforcement, property rights, and law enforcement.
The Judicial Effectiveness measures the effectiveness and fairness of a country’s judicial systems. This domain considers the following sub-factors: judicial independence, quality of the judicial process, perceptions of the quality of public services, and the independence of the civil service.
Corruption is a crucial element to achieve economic freedom. Hence the domain of Government Integrity assesses the prevalence of political corruption in a country. The following sub-factors are in consideration: perception of corruption, risk of bribery, and control of corruption including “capture” of the state by elites and private interests.
Rule of Law | Singapore and Taiwan Underperformed
Scores in Rule of Law were generally high for the top 10 countries. All the 10 countries scored above 80 for the three indices in this category, with two exceptions: Singapore Judicial Effectiveness at 58.30 and Taiwan Government Integrity at 73.76. Among the three elements, all the countries scored typically high in Property Rights with an average of 93.54. Finland achieved the full mark in this element.
The components of Open Markets domain are: Trade Freedom, Investment Freedom, and Financial Freedom.
The Trade Freedom element quantifies the extent to which tariff and nontariff affect imports and exports. The score is given based on the following two sub-factors: trade-weighted average tariff rate and nontariff barriers.
One would be able to invest or move their resources without any restrictions in a economically free country. Investment Freedom assesses how freely individuals and firms can invest both domestically and internationally.
Financial Freedom measures efficiency of the financial sector and its independence from the government in a country. Its score considers the following five factors: the extent of government regulation of financial services, the degree of state intervention in banks and other financial firms through direct and
indirect ownership, government influence on the allocation of credit, the extent of financial and capital market development, and openness to foreign competition.
Open Markets | Similar Level of Openness across the Top 10
In the Open Market domain, the top 10 countries performed relatively well mostly scoring between 70 and above. Additionally, many countries received the same scores; for example, Ireland, Luxembourg, Estonia, Netherlands, Finland, and Denmark all lied at 79.20 in Trade Freedom.
However, Taiwan underperformed in Financial Freedom, marking 60.
The highest and lowest scores in each components in this category is:
- Trade freedom – 95.00 (Singapore) and 79.20 (Ireland, Luxembourg, Estonia, Netherlands, Finland, and Denmark)
- Investment Freedom – 95.00 (Luxembourg) and 70.00 (New Zealand, Taiwan)
- Financial Freedom – 90.00 (Switzerland) and 60.00 (Taiwan).
Business Freedom, Labor Freedom, and Monetary Freedom compose the Regulatory Efficiency pillar.
Business Freedom assesses how easy it is to open, operate, and close a business in a country. The score considers the following four factors: access to electricity, business environment risk, regulatory quality, and women‘s economic inclusion.
The Labor Freedom element quantifies various aspects of legal and regulatory systems of a country’s labor market. The scoring considers the seven sub-factors: minimum wage, associational right, paid annual leave, notice period for redundancy dismissal, severance pay for redundancy dismissal, labor productivity, labor force participation rate, restrictions on overtime work, and redundancy dismissal permitted by law.
Monetary Freedom considers stability of prices and intervention of microeconomy in a country. The domain consists of two sub-factors: the weighted average rate of inflation for the most recent three years and price controls.
Regulatory Efficiency | Top 10 Countries Struggled in Labor Freedom
The overall average score in Regulatory Efficiency was 78.17. While all the 10 countries scored above this score for the two indices Business Freedom and Monetary Freedom, all of them scored below this for Labor Freedom.
The category of Government Size consists of Tax Burden, Government Spending, and Fiscal Health. Each of these components is derived from sub-factors likewise.
The Tax Burden scores indicate the level of tax rates on both personal and corporate income as well as the overall taxation level of a country. The following sub-factors quantifies Tax Burden: the top marginal tax rate on individual and corporate income and the total tax burden as a percentage of GDP.
The Government Spending quantifies the burden levied by government expenditure. A government’s expenditure includes consumption by the state and all transfer payments related to entitlement programs. It calculates scores by using general government expenditure data. Countries with more public goods and services may receive a lower score, while underdeveloped countries may receive a higher score.
Fiscal Health quantifies the deficits and debt burden in order to analyze how well a country manages its budget. The domain takes into account the following two sub-factors: average deficits as a percentage of GDP for the most recent three years and debt as a percentage of GDP. The poorer the government’s budget management, the lower the score.
Government Size | Europe Received Low Scores in Government Spending
Overall, the top 10 countries performed relatively poor in the domain of Government Size compared to the other three domains. Especially, all the European countries in the top 10 scored quite low in Government Spending. The lowest was 10.70 of Finland, followed by Denmark at 21.10. This result may indicate that these countries have more public goods and services available to their people.
On the other hand, the two Asian countries (Singapore and Taiwan) scored above 90 for Government Spending. New Zealand is geographically in Asia-Pacific but its tendency in Government Spending was much alike Europe. Its score was just below the category average.
In Tax Burden indicator, Singapore outperformed the others. The country is known as one of the low tax havens of the world.