Economic freedom of the world index Chan Wing Kiu 05009634 Cheng Yee Ling 05009642 Wong Chi Ki 05015049 Yim Kei Yan 05015626

Economic freedom of the world index

Chan Wing Kiu 05009634Cheng Yee Ling 05009642Wong Chi Ki 05015049Yim Kei Yan 05015626

What is Economic Freedom

The key ingredients of economic freedom are : Personal choice Voluntary exchange coordinated by markets Freedom to enter and compete in markets Protection of persons and their property from

aggression by other

Economic Freedom of the World Project

Objective: find a way to measure economic freedom and explore the connection between it and other variables

20 year project Led by Professor Milton Friedman, Rose

Friedman and Michael Walker of The Fraser Institute

Involved 60 of the world’s top scholars

Components of The Economic Freedom of the World Index

1) Size of government :expenditures ,taxes and enterprise

2) Legal Structure and Security of Property Rights

3) Soundness of Money

4) Freedom to trade internationally

5) Regulation of business, labor and capital markets

Based entirely on objective or third party data for 130 countries

Each component and sub-component is placed on a scale from 0 to 10 that reflects the distribution of the underlying data.

The component ratings within each area are averaged to derive ratings for each of the five areas.

In turn , rating is the average of the five area ratings.

1 ) Size of government and taxation

A ) General government consumption spending as a percentage of total consumption

B )Transfers and subsidies as a percentage of GDP

C) Government enterprises and investment as a share of total investment

D )Top marginal tax rate (and income threshold at which it applies)

i) Top marginal income tax rate (and income threshold at which it applies)

Ii) Top marginal income and payroll tax rate (and income threshold at which the top marginal income-tax rate applies)

Size of Government and the Top 10

0 2 4 6 8 10

Score (out of 10)

Luxembourg

Ireland

Canada

United Kingdom

New Zealand

Iceland

Average of Top 10

Switzerland

United States

Singapore

Hong Kong

Source: The Fraser Source: The Fraser Institute.Institute.

Legal Structure and Security of Property Rights

A ) Judicial independence—the judiciary is independent and not subject to interference by the government or parties in disputes

B) Impartial courts—a trusted legal framework exists for private businesses to challenge the legality of government actions or regulation

C) Protection of intellectual property D) Military interference in rule of law and the political

process E) Integrity of the legal system

Legal System and Property Rights and the Top 10

0 2 4 6 8 10

Score (out of 10)

Hong Kong

United States

Singapore

Canada

Average of Top 10

Luxembourg

Switzerland

Ireland

United Kingdom

Iceland

New Zealand


Access to Sound Money

A) Average annual growth of the money supply in the last five years minus average annual growth of real GDP in the last ten years

B) Standard inflation variability in the last five years

C) Recent inflation rate D) Freedom to own foreign currency bank

accounts domestically and abroad

Sound Money and the Top 10

0 2 4 6 8 10

Score (out of 10)

Iceland

Hong Kong

United Kingdom

Average of Top 10

New Zealand

Canada

Singapore

Luxembourg

Switzerland

Ireland

United States


Freedom to Trade Internationally

A) Taxes on international trade

i) Revenue from taxes on international trade as a percentage of exports plus imports

ii) Mean tariff rate

iii) Standard deviation of tariff rates B) Regulatory trade barriers

i) Non-tariff trade barriers

ii) Compliance cost of importing and exporting C) Actual size of trade sector compared to expected

size

Freedom to Trade Internationally and the Top 10

D) Difference between official exchange rate and black-market rate

E) International capital market controls

i) Foreign ownership / investment restrictions

ii) Restrictions on the freedom of citizens to engage in capital market exchange with foreigners

—index of capital controls among 13 IMF categories

Freedom to Trade Internationally and the Top 10

0 2 4 6 8 10

Score (out of 10)

Iceland

United States

Switzerland

Canada

United Kingdom

New Zealand

Average of Top 10

Ireland

Luxembourg

Singapore

Hong Kong


Regulation of Credit, Labor, and Business

A) Credit market regulations i) Ownership of banks—percentage of deposits held

in privately owned banks

ii) Competition—domestic banks face competition from foreign banks

iii) Extension of credit—percentage of credit extended to private sector


iv) Avoidance of interest rate controls and regulations that lead to negative real interest rates

v) Interest rate controls—interest rate controls on bank deposits and/or loans are freely determined by the market


B) Labor market regulations i) Impact of minimum wage

ii) Hiring and firing practices—hiring and firing practices of companies are determined by private contract

iii) Share of labor force whose wages are set by centralized collective bargaining


iv) Unemployment benefits—the unemployment benefits system preserves the incentive to work

v) Use of conscripts to obtain military personnel


C Business regulations i) Price controls—extent to which businesses are

free to set their own prices

ii) Burden of regulation

iii) Time with government bureaucracy—senior management spends a substantial amount of time dealing with government bureaucracy


iv) Starting a new business—starting a new business is generally easy

V) Irregular payments—irregular, additional payments connected with import and export permits, business licenses, exchange controls, tax assessments, police protection, or loan applications are very rare

Regulations and the Top 10

0 2 4 6 8 10

Score (out of 10)

Ireland

Luxembourg

Singapore

United Kingdom

Switzerland

Average of Top 10

Canada

New Zealand

United States

Hong Kong

Iceland


2006 Overall Economic Freedom Index and the Top 10

0 2 4 6 8 10

Score (out of 10)

Iceland

Luxembourg

Canada

Ireland

United Kingdom

Average of Top 10

New Zealand

Switzerland

United States

Singapore

Hong Kong


Why is Economic Freedom Important?

Economic freedom is fundamental human right, without them there can be no political freedom or civil freedoms

They are a prerequisite for growth and development

They are a prerequisite for broader human development

Economic Freedom in the World, 2002 and per-Capita Income

Economic freedom of the world 2002

Log per capital income,

2002

Per Capita Income and Economic Freedom Quartile

$0

$5,000

$10,000

$15,000

$20,000

$25,000

GD

P P

er

Cap

ita

(pp

p),

2003

Least FreeQuartile

3rd Quartile 2nd Quartile Most FreeQuartile

Least Free …………… Most FreeLeast Free …………… Most FreeSources: The Fraser Institute; The World Bank, World Development Sources: The Fraser Institute; The World Bank, World Development Indicators CD-ROM, 2005.Indicators CD-ROM, 2005.

Growth in Real GDP Per Capita and Economic Freedom Quartile

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

GD

P P

er

Ca

pit

a %

Gro

wth

,

19

94

-20

03

Least FreeQuartile

3rd Quartile 2nd Quartile Most FreeQuartileLeast Free ……………..….. Most FreeLeast Free ……………..….. Most Free

Sources: The Fraser Institute; The World Bank, World Development Indicators Sources: The Fraser Institute; The World Bank, World Development Indicators CD-ROM, 2005.CD-ROM, 2005.

How do economic freedom related to economic development?

Why do planners fail so badly? In a world of great uncertainty and unpredictability, economic freedom succeeds for the following reasons.

Reasons for the successful of economic freedom

1. Economic freedom fosters competition and weeds out themany failures.

2. Economic freedom give rise of market mechanism.


3. Economic freedom ruthlessly reallocates resources away from what is failing towards what is succeeding.

4. Economic freedom makes it possible to increase the scale of a successful activity rapidly and by a huge magnitude.


5. Economic freedom makes possible sophisticated contracts that allow individuals and firms to deal with uncertainty.

Correlation between EFI and unemployment

1. Size of Government: 1) High tax ( low economic freedom) ->low incentive to work -> high unemployment rate

2) Large proportion of transfer payment

->Low incentive to work -> high unemployment rate


2. Legal Structure and Security of Property Right1) Well PPR increase confidence to invest fruit of labor is protected reduce Unemployment

2) Good legal structure -> reduce uncertainty ->encourage investment -> low unemployment rate


3. Access to Sound Money 1)Sound money is essential to PPR -> reduce uncertainty -> encourage investment -> low unemployment rate2)inflation distort relative price alter the fundamental term of long term contract difficult for future planning erode the value of property held in monetary instrument


4. Freedom to trade internationally 1)High degree of freedom to trade -> well development of export sector -> well development of domestic production -> low unemployment rate


5. Regulation of credit, labor and business 1)credit example: limiting no. of banks lower the ability for banks to loan lower investment -> higher unemployment rate

2)labor example: Minimum wages exists of unemployment

Better way- let market determines labor wages


5. Regulation of credit, labor and business 3)business burden of regulation lower the incentives for investment lower the ease to enter market high unemployment rate

Economic Freedom and Unemployment

0.0

3.0

6.0

9.0

12.0

15.0

To

tal U

ne

mp

loy

me

nt

(% o

fto

tal l

ab

or

forc

e),

20

00

-20

02

Least FreeQuartile

3rd Quartile 2nd Quartile Most FreeQuartile

Least Free ……………..….. Most FreeLeast Free ……………..….. Most Free

Sources: The Fraser Institute; The World Bank, World Development Sources: The Fraser Institute; The World Bank, World Development Indicators CD-ROM, 2005.Indicators CD-ROM, 2005.

Conclusion

economic freedom is not easy to achieve principles such as private property,

freedom of choice of occupation, protection against state expropriation, freedom of entry and competition in markets, prices determined by markets are difficult to implement the principles in practice

End of our presentation Thank You

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Economic freedom of the world index Chan Wing Kiu 05009634 Cheng Yee Ling 05009642 Wong Chi Ki 05015049 Yim Kei Yan 05015626