What Is an Index of Economic Freedom?
An index of economic freedom measures jurisdictions by trade freedom, tax burden, and judicial effectiveness. These factors may be weighted according to their influence on economic freedom and compiled into a single score. Ranking can be completed by country or wider region.
The Heritage Foundation publishes an annual Index of Economic Freedom, which ranks countries from "free" to "repressed." Singapore ranked first, and the United States ranked 25th in 2023.
Key Takeaways
- An index of economic freedom is a composite measure of the quality of political-economic institutions across different jurisdictions.
- Scores and ranks in an index are based on criteria such as property rights and tax burden.
- Economies based on a free market tend to experience greater levels of investment, more rapid growth, and higher average incomes.
- The Heritage Foundation publishes the most widely used economic freedom index.
History of Economic Freedom Indexes
The use of indexing arose as part of New Institutional Economics, the study of political-economic institutions and economic development. Historical economists like Adam Smith developed theories about how free trade and private property rights were essential to promoting economic growth and general prosperity. 20th-century economists Milton Friedman and Friedrich Hayek argued that exchange and entrepreneurial activity coordinated through markets made modern living standards possible.
Quantifying the "economic freedom" that institutions embody was viewed as a concept that could be used in empirical studies to test and demonstrate the link between institutions and economic growth. These studies would also highlight apparent failures by theories of economic development.
Indexes generally measure economic freedom based on categories like property rights, tax burden, business freedom, and trade freedom. Once a composite score for each country is calculated, economists can rank each region.
The Heritage Foundation Index of Economic Freedom
The Heritage Foundation's Index of Economic Freedom is one of the most popular indexes, scoring countries based on 12 factors:
- Property rights
- Judicial effectiveness
- Government integrity
- Tax burden
- Government spending
- Fiscal health
- Business freedom
- Labor freedom
- Monetary freedom
- Trade freedom
- Investment freedom
- Financial freedom
The Heritage Foundation's Index of Economic Freedom has highlighted correlations that encourage nations to improve their scores over time. A common observation is that people living in countries categorized as free or mostly free enjoy higher incomes than those living in lower-scoring nations. There is also a correlation between economic freedom and GDP growth, as well as a higher standard of living and a general rule of law for citizens.
| Top 10 Countries By Economic Freedom | |
|---|---|
| Singapore | 83.9 |
| Switzerland | 83.8 |
| Ireland | 82.0 |
| Taiwan | 80.7 |
| New Zealand | 78.9 |
| Estonia | 78.6 |
| Luxembourg | 78.4 |
| Netherlands | 78.0 |
| Denmark | 77.6 |
| Sweden | 77.5 |
Four out of 10 countries in the Top 10 for Economic Freedom also ranked in the Top 10 of the World Happiness Report in 2023.
Investing and Index of Economic Freedom
The Heritage Foundation's Index of Economic Freedom website features a heat map that allows investors to view the changes in the world over time. Changes to economic freedom can be a significant data source for investors, particularly those interested in emerging markets. Additionally, negative changes in the index tell investors to trim their direct and indirect exposure to nations experiencing a decline.
The index of economic freedom can monitor whether new markets like BRICS nations (Brazil, Russia, India, China, and South Africa) are seeing the policy changes necessary for growth to benefit investors. The countries operate as a loose organization seeking to expand economic cooperation amongst member nations and increase their economic and political standing. In 2023, the BRICS bloc agreed to admit Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the United Arab Emirates in 2024.
Limitations of the Index
Definitions of economic freedom can vary among economists. The absence of binding minimum wage laws appeals to a laissez-faire economist as a high degree of labor freedom but to a liberal economist as a policy that limits the economic freedom of the workers. Even among free-market-oriented economists, there are sometimes differences of opinion regarding whether specific policies and institutions should be considered economically free.
Despite these disagreements, the advent and application of indexes of economic freedom were influential in the 1990s and 2000s in driving economic development and public policy. The benefits of tracking economic freedom help countries considering economic reforms find opportunities for improving economic performance in factors where they score the lowest.
How Does Political Freedom Determine Economic Growth?
Although there is a correlative relationship between political freedom and economic growth, establishing causation is less certain. One study found that countries that transitioned to a democratic government enjoyed a 20% average gain over 25 years compared to those that retained authoritarian forms of government. An MIT economist who co-authored the study suggested that democracies "get rid of special favors" that might inhibit economic growth. They are also more likely to invest in health and human capital, generating long-term economic gains.
How Is a Free Enterprise System Linked to Economic Freedom?
Economic freedom is an element of free enterprise, a market-based system in which business decisions are made with minimal government interference. Economic freedom allows individuals to work, do business, and enter into voluntary contracts with one another.
What Is the Human Freedom Index?
The human freedom index is a composite measure of personal, civil, and economic freedoms in different countries jointly published by the Cato Institute and the Fraser Institute. Unlike the economic freedom index, the human freedom index also measures the freedom of noneconomic areas, such as religion, movement, and association in civil society.
The Bottom Line
The index of economic freedom is one of several metrics for comparing different economic regimes. Although the Heritage Foundation publishes the most widely used economic freedom index, several institutions publish their versions. Each seeks to quantify elements such as regulation, taxation, government interference, price controls, or other constraints on free enterprise and market activity.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
The Heritage Foundation. "2023 Index of Economic Freedom."
Cato Institute. "Economic Freedom of the World."
The Heritage Foundation. "About the Index.”
World Happiness Report. "World Happiness Report 2023."
ING Bank. "BRICS Expansion: the Saudi Surprise Adds Momentum to theDe-Dollarisation Debate."
Massachusetts Institute of Technology. “Study: Democracy Fosters Economic Growth."
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