Economic Freedom Index Reveals Continued US Slide


EspañolThe Heritage Foundation — a US-based free market policy institute — today released its 2014 Index of Economic Freedom. This ranking, published since 1995, aims to compare the economic and entrepreneurial environments across 178 countries.

The report shows a slight increase for economic freedom across the entire world. However, it also affirms the continued decline of the United States, slipping to 12th from 10th, amid diverse results throughout the rest of the continent. Canada leads in sixth, closely followed by Chile in seventh; then Venezuela and Cuba occupy the tail end at 175th and 177th, respectively.

The average score of all 178 countries studied was 60.3, seven-tenths of a point above the 2013 average. For the highest score in the history of the index, 114 countries improved their scores, while just 59 declined.

The top-ten mostly occupy the Asia-Pacific region: Hong Kong, Singapore, and Australia head the index. Then Switzerland, New Zealand, Canada, Chile, Mauritius, Ireland, and Denmark constitute the top-ten — all with higher scores than 75 points.

South and Central America: Leading Both Extremes

South and Central America was the most varied of all regions within the Index. Composed of 29 nations, 17 improved their scores in 2014, while 12 countries declined.

The index categorizes one country as “Free” — Chile — and two as “Mostly Free” — Saint Lucia and Colombia. Colombia managed this climb by improving its score by 1.1 points. Chile, on the other hand, continues to lead the region and the world, maintaining its ranking of seventh with a score of 78.7.

south america economic freedon 2014

Source: Heritage Foundation, 2014 Index of Economic Freedom.

On the other hand, six Latin-American countries are in the “repressed economies” category: Haiti, Bolivia, Ecuador, Argentina, Venezuela, and Cuba. Argentina — which joined this group in 2012 — showed the worst decline in the region (-2.1), with a final score of 44.6. Cuba and Venezuela have even lower scores, at 28.7 and 36.3 points, respectively.

James Roberts, a research fellow for economic freedom and growth with the Heritage Foundation, thinks the foundations of economic freedom are collapsing in Venezuela and Argentina:

“[They] have tried price control strategies to try to reduce the runaway inflation that is plaguing both countries. The actual rates of inflation in both Argentina and Venezuela are much higher than the reports issued by governmental statistics agencies,” he shared with the PanAm Post.

“For Argentina, 8 of the 10 economic freedoms have deteriorated because of policies that include harsh capital controls, price fixing, restrictions on imports, and a series of nationalizations. The Venezuelan government’s highly expansive fiscal and monetary policy, coupled with exchange and price controls, has resulted in a sharply overvalued official exchange rate. . . . The inflation problems are the result of poor monetary and fiscal policies in a climate where rule of law and property rights are not respected. These price control strategies have failed and have exacerbated the loss of economic freedom.”

Heritage’s researchers added that, even though the South and Central America region gained in economic freedom last year, corruption and weak property rights impeded its progress.

Methodology and Categories

On a 0-100 scale, researchers measure 10 components in economic freedom, which they then weight equally and average. The scores classify countries as “free” (80 or more); “mostly free” (70-79.9); “moderately free” (60-69.9); “mostly unfree” (50-59.9); or “repressed” (under 50).

The freedom index takes into account four overarching aspects of the economic environment: rule of law, government size, regulatory efficiency, and openness to trade. The data that assesses these comes from the latter half of 2012 and the first half of 2013.

The first category, rule of law, has two components: property rights as a qualitative assessment — how freely individuals can accumulate private property, and freedom from corruption.

The second, government size, also includes two factors: fiscal freedom and government spending. fiscal freedom includes the burden of direct and indirect taxes imposed by all levels of government as a percentage of economic activity. Similarly, government spending is a total relative to the size of the economy, but Heritage does not offer an ideal level. Within the range on offer, simply lower is better.

The third variable, regulatory efficiency, includes ease of starting a business, labor mobility, and monetary freedom. That includes the inflation rate and price controls.

Finally, openness to trade is a function of tariff and non-tariff barriers (NTF), investment freedom — measured by constraints to the flow of investment capital — and financial freedom, which analyses banking efficiency.

This index methodology, however, has generated concern. Robert Lawson, coauthor of the Economic Freedom of the World Report by Fraser Institute, notes that “Their numbers are generally consistent with ours, though there are differences. [But] It hasn’t always been easy to discern how they arrive at their final ratings.”

For example, the index scores the freedom of corruption component with Transparency International’s Corruption Perceptions Index (CPI), which is based on perceptions, rather than actual cases of corruption.

Another case would be the non-tariff barriers component, which merges both qualitative and quantitative data, due to the difficulty of identifying them quantitatively. NTBs include quotas, investment, and price restrictions, but also some qualitative categories, such as regulatory restrictions and direct government intervention.

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