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Of Economic Freedom INTERVIEW How free are we? Anthony B Kim Research Manager & Senior Policy Analyst, Heritage Foundation 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 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. 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 liberty beyond the extent necessary to protect with The Wall Street Journal, has measured the impact of liberty on and maintain liberty itself. free markets around the globe. Through analysis of diverse economies – ranging from North Korea to Hong Kong – 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 rule of law, 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 economic development, 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 financial crisis and recession, 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 economic growth 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 poverty 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 entrepreneurship 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 property. 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 companies 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 inventions 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. Canada – 79.1 Does the report make any suggestions on how countries can work to 2. Singapore – 89.4 7. Chile – 78.5 improve their economic freedom? What might these be? 3. New Zealand – 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. Australia – 81.4 9. Ireland – 76.6 analysis of a country’s political and economic developments. The 10 economic freedoms 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 competition 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 productivity 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.
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