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INTERVIEW

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

Every year, releases the Index of Economic – 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

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 talked of producing one, and it was discussed periodically at meetings of during that decade. In fact, Friedman elaborated: “The role of competitive – 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.

10 INTERNATIONAL INNOVATION Can you provide an overview of the Index and its purpose? individuals are free to work, produce, consume and invest in any way they chose. In economically free societies, governments refrain from For over two decades, the Index of Economic Freedom, in partnership coercion or constraint of beyond the extent necessary to protect with , has measured the impact of liberty on and maintain liberty itself. free markets around the globe. Through analysis of diverse economies – ranging from to – and using metrics to What have been the key findings from pouring over this year’s data? examine government size, market openness, regulatory efficiency and the , the Index has demonstrated the strong relationship Despite the continuing challenges that confront the world economy, between economic freedom and progress. There is no single formula the global average economic freedom score has improved over the for overcoming challenges to , but one thing past year by one-tenth of a point, reaching a record 60.4 (on a 0-to-100 is clear: around the world, governments that respect and promote scale) in the 2015 Index. Although the rate of advancement has slowed economic freedom provide greater opportunities for innovation, in comparison to last year’s near record 0.7-point increase, the world progress and human flourishing. average has now reached a level that is a full point higher than that recorded in the aftermath of the 2008 and , Since its inception, the Index has served as a cross-country policy thus regaining all of the ground that had been lost. guide and data tool for analysing various economies throughout the world. The 10 measures of economic freedom and accompanying In 101 countries – the majority of which are less developed or emerging historical data provide a comprehensive set of principles and facts economies – there were advances in economic freedom over the past year. for those who wish to understand the fundamentals of and lasting prosperity as well as the critical linkage between Were any of the findings particularly insightful or surprising? opportunity and empowerment. There were several particularly insightful findings. For example, the Does the Foundation pay special care to ensure that the Index is intensity of in countries whose economies are considered mostly objective and not influenced by political or social factors? free or moderately free is only about one-fourth the level found in countries that are rated less free. Yes, indeed. In assessing economic freedom of various countries, the Index carefully examines factual and publicly available data from Despite varying degrees of economic freedom across the globe, the internationally well-recognised and reliable sources so that we can positive relationship between economic freedom and prosperity is ensure objective and transparent cross-country analysis in the most unequivocally consistent within the regions: per capita incomes are much possible consistent manner. Every country is subject to the same test, higher in countries that are economically free. according to the data available worldwide. Unsurprisingly, overall human development also thrives in an How does the Foundation define economic freedom and why is it so environment that is economically free. Economic freedom is about more important to track? than a business environment in which and prosperity can flourish. Higher economic freedom induces greater overall human Economic freedom is the fundamental right of every human to control development in such key areas as life expectancy, literacy, education and his or her own labour and . In an economically free society, the standard of living.

There is a robust relationship between improving economic freedom and achieving higher per capita economic growth. Whether long-term Some go up, some go down (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 Since last year, levels of economic freedom advanced in half of freedom and thus achieve dynamic growth, individuals and the six Index regions. According to their average scores: are empowered to build businesses, create jobs and generate greater innovation for their communities and societies. • Sub-Saharan Africa: increase of 0.3 points Hong Kong has ranked in the top spot for the third year in a row. Why • Asia & the Pacific: increase of 0.3 points is this the case, and what does it mean both for the region and in a global sense? • North Africa & the Middle East: increase of 0.1 points Hong Kong has maintained its status as the world’s freest economy, a • South and Central America/Caribbean: No change 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 • Europe: decrease of 0.1 points of goods, services and capital. As the economic and financial gateway to China, and with an efficient regulatory framework, low and simple • North America: decrease of 0.2 points 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

www.internationalinnovation.com 11 Basic support for R&D has been vital in supporting the foundations of some of the world’s most important and technologies. Top 10 economically However, government policies often hinder private sector development and divert financial resource into unproductive free countries schemes. It is important to balance basic research support with efficient regulatory frameworks that facilitate innovation and business formation. 1. Hong Kong – 89.6 6. – 79.1 Does the report make any suggestions on how countries can work to 2. – 89.4 7. – 78.5 improve their economic freedom? What might these be?

3. – 82.1 8. Estonia – 76.8 The Index is a practical tool for analysing 186 economies throughout the world and each country page is a resource for in-depth 4. – 81.4 9. Ireland – 76.6 analysis of a country’s political and economic developments. The 10 economic and accompanying historical data also provide 5. Switzerland – 80.5 10. Mauritius – 76.4 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) it to navigate global economic swings and domestic shocks. However, it ranked on a numeric scale from 0 to 100. With easy-to-read graphics is notable that the for the top spot between Hong Kong and on each country page, policy makers considering economic reforms Singapore, the second-freest economy, has been further intensified in may find significant opportunities for improving economic performance the 2015 Index. in those factors in which they score the lowest. These factors may indicate significant binding constraints on economic growth and Can you describe the relationship between economic freedom and prosperity. In addition, each country page presents in-depth justification advancements in science and technology? for each factor score, allowing individuals to identify which specific reforms to undertake. Globally, the most economically free countries are the countries that are the forefront of technological innovation. Indeed, it is not surprising, for What are the biggest challenges you have faced in putting together this example, that questions have been raised about US growth report and how have you overcome them? and technological innovation in recent years as economic freedom has stagnated. Meanwhile, countries like Singapore and Estonia have made It may sound too simple, but the biggest challenge is the overall research aggressive improvements in economic freedom while also climbing process. In each stage of the process, we pay great attention to details global ranks in broadband speed and connectivity. 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 Do you see a relationship between countries that ranked high in their so that we can safeguard the high quality and credibility of our Index score and their level of scientific and technological advancement? of Economic Freedom to the highest professional degree. The task of producing our annual Index requires a great level of team spirit and Countries with higher levels of economic freedom score positively on collaboration in a fast moving research and production environment a number of measures of advancement, including productivity. For under multiple deadlines. instance, the countries with the highest levels of economic freedom issue far more patents than the least economically free countries and have far Are the future plans for the Index that you can share? better research universities. Going into its 22nd year, the Index has the potential to be an even Will investments in STEM improve countries’ overall economic more vital tool for a large constituency, from investors to students to freedom and opportunities for economic growth? policy makers and beyond. One of the central tenants of the Index is its emphasis on promoting competitiveness through the principles Broad-based economic freedom policies that encourage competition of economic freedom. As global markets expand and become more do indeed lead to better educational outcomes. Whether STEM interconnected, businesses are increasingly looking for resources to help investments improve innovation and economic growth is yet to be identify competitive opportunities. The Index has become a practical tool seen. But it is clear that students who live in the freest societies score and database for meeting this need. 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? www.heritage.org/index

12 INTERNATIONAL INNOVATION 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 • Property • Labour freedom of economic theory,” Anthony B Kim, Research Manager and Senior Policy Analyst, states. “However, it does reflect the main economic and • Freedom from corruption • Monetary freedom structural factors involved in economic freedom and growth.” • Fiscal freedom • Trade freedom

• Government spending • Investment freedom

• Business freedom • Financial freedom

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