Index of Economic Freedom

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The Index of Economic Freedom is an indicator composed of 12 variables, which measures the economic freedom of 186 countries.

The Index of Economic Freedom is produced by the Heritage Foundation, based in the United States. It was also created in 1995.

Economic freedom

Economic freedom is the ability for people to exercise economic activities without state restrictions. This is a concept related to the free market. In fact, the motivation falls on the postulates of Adam Smith in The Wealth of Nations. That is, it is based on the principle of a reduced state that allows individuals to exercise their freedom without inefficient interventions.

Also, economic freedom is considered as a necessary measure for the enjoyment of other freedoms of individuals. For example, freedom to work, freedom of association, property rights, and civil liberties.

Methodology

This index is a simple average of the different elements that compose it and acquires values ​​between 0-100 points. In this sense, 0 denotes absence of economic freedoms, while 100 full freedoms.

Index components

The indicators that make up the index are:

  • Right to property: It is the extent to which the legal framework of a country guarantees the accumulation of property to individuals. That is, it takes into account the degree to which property rights are protected from expropriations, for example.
  • Freedom from corruption: This indicator measures the level of corruption. The greater the corruption, the greater the insecurity and uncertainty about economic stability.
  • Fiscal freedom: In this case, the tax burden is measured. Taxes lower the effective income level of the inhabitants. Therefore, the ideal is that the tax burden is as low as possible.
  • Public spending: This measure aims to capture the burden that the Government imposes on its inhabitants, based on the expenses it makes. At a certain point, the level of spending becomes excessive, to the detriment of the population.
  • Commercial freedom: This measure seeks to capture the legal restrictions that weigh on companies. Limiting the optimal functioning of companies discourages investment and production.
  • Labor freedom: In this case, the aim is to measure working conditions and restrictions on companies in this area. In this sense, measures such as severance pay, tenure and participation rate, for example, are taken into account.
  • Monetary freedom: It contemplates elements such as price stability and the establishment of distorting controls.
  • Freedom of trade: This indicator considers the existence of trade barriers such as tariffs and quotas. These measures discourage trade and investment for the development of local industry.
  • Investment freedom: The lower the restrictions on the flow of capital, the greater the stimulants to investment. A free economy does not establish restrictions on these flows or discriminate between national and foreign investment. Also, the existence of exchange controls is contemplated.
  • Financial freedom: This indicator refers to the freedom of operation of the domestic banking sector. The ideal scenario is a supervisory environment of the Central Bank with minimal government intervention.

Importance of this indicator

It is necessary to measure freedoms to determine if equal opportunities for all are met, or, on the contrary, this is not the case. This concept covers different measures that allow the free performance of economic activities. Therefore, the greater freedom there is, the greater the stimuli applied to increase production and improve the quality of life.

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