2007 economic freedom

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2007 Indexof Economic Freedom


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ContributorsTim Kane, Ph.D., is Director of the Center for International Trade and Economics (CITE) at

The Heritage Foundation.

Kim R. Holmes, Ph.D., is Vice President of Foreign and Defense Policy and Director of the Kath-

ryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation.Mary Anastasia OGrady is a Member of The Wall Street Journal Editorial Board and Editor of

the Journals Americas column.

William W. Beach is Director of the Center for Data Analysis at The Heritage Foundation.

Ana Isabel Eiras is Senior Policy Analyst in International Economics in the Center for Interna-

tional Trade and Economics (CITE) at The Heritage Foundation. She is also Editor of the Spanish-

language edition of the Index of Economic Freedom.

Edwin J. Feulner, Ph.D., is President of The Heritage Foundation.

Paul A. Gigot is Editor of The Wall Street Journal Editorial Page.

Anthony B. Kim is Research Associate in the Center for International Trade and Economics(CITE) at The Heritage Foundation.

Daniella Markheim isJay Van Andel Senior Trade Policy Analyst in the Center for Interna-

tional Trade and Economics (CITE) at The Heritage Foundation.

Johnny Munkhammar is a research scholar at the Swedish think tank Timbro.

Andrew L. Peek is Research Assistant in the Center for International Trade and Economics

(CITE) at The Heritage Foundation.

Xavier Sala-i-Martin is a professor of economics at Columbia University.

Brett D. Schaefer is Jay Kingham Fellow in the Margaret Thatcher Center for Freedom at The

Heritage Foundation.


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2007 Indexof Economic Freedom

Tim Kane, Ph.D.

Kim R. Holmes, Ph.D.

Mary Anastasia OGrady

with Ana Isabel Eiras, Anthony B. Kim, Daniella Markheim,Andrew L. Peek, and Brett D. Schaefer


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Copyright 2007 by The Heritage Foundation and Dow Jones & Company, Inc.

The Heritage Foundation The Wall Street Journal214 Massachusetts Avenue, NE Dow Jones & Company, Inc.Washington, DC 20002 200 Liberty Street(202) 546-4400 New York, NY 10281heritage.org (212) 416-2000

www.wsj.com

Cover images by Punchstock, Corbis, World BankISBN: 0-89195-274-8ISSN: 1095-7308


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v

Table of Contents

Foreword .............. .............. .............. ............... .............. .............. .............. .............. ............... .............. .. ix

Paul A. Gigot

Preface .............. .............. ............... .............. .............. .............. .............. ............... .............. .............. ....... xi

Edwin J. Feulner, Ph.D.

Acknowledgments ..............................................................................................................................xiii

Tim Kane, Ph.D., Kim R. Holmes, Ph.D., and Mary Anastasia OGrady

Whats New in the 2007 Index?........................................................................................................... xv

Executive Summary ................................................................................................................................1

Chapter 1: Global Inequality Fades as the Global Economy Grows ..............................................15

Xavier Sala-i-Martin

Chapter 2: The Urgent Need for Labor Freedom in Europeand the World .............. .............. ...27

Johnny Munkhammar

Chapter 3: Methodology: Measuring the 10 Economic Freedoms .................................................37

William W. Beach and Tim Kane, Ph.D.

Chapter 4: Economic Freedom in Five Regions ................................................................................57

Tim Kane, Ph.D.

Chapter 5: The Countries .....................................................................................................................73


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vi 2007 Index of Economic Freedom

Albania ............................................................77

Algeria ............................................................79

Angola.............................................................81

Argentina ........................................................83

Armenia ..........................................................85

Australia .........................................................87Austria ............................................................89

Azerbaijan ......................................................91

The Bahamas ..................................................93

Bahrain ............................................................95

Bangladesh .....................................................97

Barbados .........................................................99

Belarus ............................................................101

Belgium ...........................................................103

Belize ...............................................................105

Benin ...............................................................107Bolivia .............................................................109

Bosnia and Herzegovina ..............................111

Botswana ........................................................113

Brazil ...............................................................115

Bulgaria...........................................................117

Burkina Faso ..................................................119

Burma (Myanmar) .........................................121

Burundi ...........................................................123

Cambodia .......................................................125

Cameroon .......................................................127

Canada ............................................................129

Cape Verde .....................................................131

Central African Republic ..............................133

Chad ................................................................135

Chile ................................................................137

China, Peoples Republic of .........................139

Colombia ........................................................141

Congo, Democratic Republic of (formerly

Zaire) ..........................................................143

Congo, Republic of ........................................145

Costa Rica .......................................................147

Croatia.............................................................149

Cuba ................................................................151

Cyprus (Greek) ..............................................153

Czech Republic ..............................................155

Denmark .........................................................157

Djibouti ...........................................................159

Dominican Republic .....................................161

Ecuador ...........................................................163

Egypt ...............................................................165

El Salvador .....................................................167

Equatorial Guinea .........................................169

Estonia ............................................................171Ethiopia...........................................................173

Fiji ....................................................................175

Finland ............................................................177

France ..............................................................179

Gabon ..............................................................181

The Gambia ....................................................183

Georgia ...........................................................185

Germany .........................................................187

Ghana ..............................................................189

Greece .............................................................191Guatemala ......................................................193

Guinea .............................................................195

GuineaBissau ...............................................197

Guyana............................................................199

Haiti.................................................................201

Honduras........................................................203

Hong Kong .....................................................205

Hungary .........................................................207

Iceland.............................................................209

India ................................................................211

Indonesia ........................................................213

Iran ..................................................................215

Iraq ..................................................................217

Ireland .............................................................219

Israel ................................................................221

Italy..................................................................223

Ivory Coast .....................................................225

Jamaica ............................................................227

Japan ...............................................................229

Jordan ..............................................................231

Kazakhstan .....................................................233

Kenya ..............................................................235

Korea, Democratic Peoples Republic of

(North Korea) ............................................237

Korea, Republic of (South Korea) ............. ...239

Kuwait ............................................................241

Kyrgyz Republic ............................................243


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Table of Contents vii

Laos .................................................................245

Latvia ..............................................................247

Lebanon ..........................................................249

Lesotho ...........................................................251

Libya ...............................................................253

Lithuania ........................................................255Luxembourg ...................................................257

Macedonia ......................................................259

Madagascar ....................................................261

Malawi ............................................................263

Malaysia..........................................................265

Mali .................................................................267

Malta ...............................................................269

Mauritania ......................................................271

Mauritius ........................................................273

Mexico .............................................................275Moldova..........................................................277

Mongolia.........................................................279

Morocco ..........................................................281

Mozambique ..................................................283

Namibia ..........................................................285

Nepal ...............................................................287

The Netherlands ............................................289

New Zealand..................................................291

Nicaragua .......................................................293

Niger ...............................................................295

Nigeria ............................................................297

Norway ...........................................................299

Oman...............................................................301

Pakistan ..........................................................303

Panama ...........................................................305

Paraguay .........................................................307

Peru .................................................................309

The Philippines ..............................................311

Poland .............................................................313

Portugal ..........................................................315

Qatar................................................................317

Romania ..........................................................319

Russia ..............................................................321

Rwanda ...........................................................323

Saudi Arabia ...................................................325

Senegal ............................................................327

Serbia and Montenegro ................................329

Sierra Leone....................................................331

Singapore ........................................................333

Slovak Republic .............................................335

Slovenia ..........................................................337

South Africa ...................................................339

Spain................................................................341Sri Lanka .........................................................343

Sudan ..............................................................345

Suriname.........................................................347

Swaziland .......................................................349

Sweden............................................................351

Switzerland ....................................................353

Syria ................................................................355

Taiwan .............................................................357

Tajikistan .........................................................359

Tanzania ..........................................................361Thailand ..........................................................363

Togo .................................................................365

Trinidad and Tobago .............. ............... ........ 367

Tunisia .............................................................369

Turkey .............................................................371

Turkmenistan .................................................373

Uganda ...........................................................375

Ukraine ...........................................................377

United Arab Emirates ...................................379

United Kingdom ............................................381

United States ..................................................383

Uruguay ..........................................................385

Uzbekistan......................................................387

Venezuela .......................................................389

Vietnam ...........................................................391

Yemen..............................................................393

Zambia ............................................................395

Zimbabwe.......................................................397

Appendix ........................................................399

Major Works Cited ........................................407


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Advisory BoardThe following members of the Advisory Board for the 2007 Index of Economic Freedom were con-

sulted as part of the ongoing review of the methodology used in this years edition. Their advice,

insights, and critiques, as well as the efforts of many others who participated in the review pro-

cess, are gratefully acknowledged.

William W. Beach, co-chairman, The Heritage Foundation

Tim Kane, co-chairman, The Heritage Foundation

Maria Sophia Aguirre,Catholic University of America

Donald J. Boudreaux, George Mason University

Ike Brannon,Economist, Washington, D.C.

Simeon Djankov,World Bank

Axel Dreher,ETH Zurich

Clive Granger,University of California, San Diego

Douglas Holtz-Eakin,Council on Foreign Relations

Garett Jones,Southern Illinois University Edwardsville

Mordechai Max Kreinin,Michigan State University

Philippe Lacoude,Economist, Paris, France

Richard Roll,University of California, Los Angeles

Xavier Sala-i-Martin, Columbia University

Friedrich Schneider,University of Linz

Aaron Smith,University of California, Davis


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ix

Foreword

T

he world economy has had another stel-

lar year, growing in the neighborhood of 5

percent and continuing what has become

the strongest four-year expansion since the1970s, defying war, terrorism, and $75-a-bar-

rel oil. This is testament in part to the policy

lessons highlighted these past 13 years in this

Index of Economic Freedom. As we greet 2007,

however, there are warning signs that adher-

ence to those lessons may be starting to fray.

On the surface, to be sure, the economic news

continues to be mostly good. While the United

States is shifting to a slower pace of growth fol-

lowing the boom from mid-2003 to early 2006,

there continues to be no sign of recession. The

major issue in the next year is whether thedecline in housing will be so deep that it sinks

the larger economy. That answer depends in

part on how much the Federal Reserve must

raise interest rates to compensate for its mis-

take of keeping monetary policy so loose for

too long in 2003 and 2004. The early evidence is

that rising corporate profits and a robust labor

market will offset the housing slump, but that

is no certainty.

China and India are roaring ahead, notwith-

standing the return of a center-left governmentin New Delhi that has tried to temper the pace

of economic change. Center-left isnt the eco-

nomic drag it used to be even in India, however,

and the emergence of India as a global econom-

ic player continues. Japan seems finally to have

shaken its decade-long deflation, and even Old

Europe left the doldrums in 2006, albeit in rela-

tively modest terms. The pace of world trade

and investment continued to accelerate, and

millions more of the worlds poor entered the

middle class.

One lesson of this Index, however, is thatwhat really matters is the direction of policy:

that is, the change at the margin. And on that

score, there is some reason for worry about an

erosion in economic freedom. Start with the

U.S., where the congressional election cam-

paign created bipartisan policy stampedes

against foreign investment from China and


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x 2007 Index of Economic Freedom

Dubai. Congress, in its lack of wisdom, is also

seeking to add even more political hurdles to

foreigners who want to create jobs by investing

in America.

The election also moved Congress to the left

economically, with strong new voices rejecting

the free trade consensus of the past 50 years.

President Bush retains his office lease and veto

pen for two more years, but the most he may

be able to accomplish is to prevent any major

policy mistakes. He will almost certainly not

be able to extend his trade promotion author-

ity, for example, when that expires in mid-

2007. Political gridlock is probably the best

we can expect until the policy showdown that

is likely to take place in the 2008 presidential

contest.

This is all the more reason for the worldspolicymakers to complete the Doha Round of

trade talks as soon as possible. At this writing,

however, the talks remain caught between a

French-led Europe that refuses to reduce its

farm subsidies and an assertive bloc of devel-

oping nations that wont bend on manufac-

turing and services without such a European

concession. This is short-sighted in the extreme,

and one question is whether this is a tempo-

rary setback due to weak political leadership,

or whether it reflects a larger popular backlash

against the dynamic forces of globalization.

My guess is the former, but I would prefer not

to test that proposition in the teeth of a global

recession.

This policy drama is all the more reason to

welcome the refinements in this years Index.

The shift to a 0100 freedom scale allows for

more nuanced distinctions among countries.

The introduction of a measure for labor free-

dom is also notable and informative because

labor mobility has clearly become crucial to

national prosperity and competitiveness. Mere-

ly contrast the job creation in the U.S., where

labor mobility is high, with the record in France

and Germany to prove that point. The slight

overall decline in average world economic

freedomdown 0.3 percentage point from a

year earlieralso suggests the policy setbacks

I have described.There are no permanent victories in poli-

tics or economics, which is one reason that this

Index exists to chronicle annual progress or

regression. The next year is one to watch care-

fully for setbacks and to remind forgetful poli-

ticians of the benefits of economic freedom.

Paul A. Gigot

Editorial Page Editor

The Wall Street Journal

November 2006


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xi

Preface

I

f there is a single triumph that history will

remember about the 20th century, it is not

the defeat of Nazism or the collapse of Sovi-

et Russia, but the Wests enduring confidencein freedom as a moral and liberating force for

all peoples. The victory of political freedom

as a universal ideal is so complete today that

even modern tyrannies cloak their countries

as peoples republics. Now, as we progress

into a new century, countries around the world

are adopting new institutions to enhance their

economic growth. Thus, history will surely

remark that the more fundamental freedoms

of property, trade, entrepreneurship, work, and

investment served as the foundations of true

democracy and revolutionized the world.The importance of economic freedoman

individuals natural right to own the value of

what he or she createswould seem to be any-

thing but controversial. People crave liberation

from poverty, and they hunger for the dignity

of free will. Yet the struggle for economic free-

dom faces timeless opposition. Tariffs, just one

example of protectionism, never lack champi-

ons or supporters, and the urge to avoid risk

will always pressure societies to expand the

size and weight of government intervention.It is therefore precisely the importance of eco-

nomic freedomand ultimately, as Milton

Friedman pointed out, political freedomthat

makes our publication of the Index of Economic

Freedom so necessary.

The Index of Economic Freedom has docu-

mented the progress of market economics with

research and analysis for 13 years and encom-

passes 161 countries. Published jointly by The

Heritage Foundation and The Wall Street Jour-

nal, the Index has created a global portrait of

economic freedom and established a bench-mark by which to gauge a countrys prospects

for economic success. It follows the simple tenet

that something cannot be improved if it is not

measured. Tracing the path to economic pros-

perity, the annual Index continues to serve as a

critical tool for students, teachers, policymak-

ers, business leaders, investors, and the media.


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xii 2007 Index of Economic Freedom

In this 13th edition, we have refined the

methodology to reflect a clearer picture of eco-

nomic freedom. Countries are assigned a per-

cent score rather than a 15 rating. In addition,

labor freedom (something that was simply not

measurable before) has been added as a vari-

able, and several other factors have been honed

to provide more objectivity and greater atten-

tion to detail. Despite these changes, a core of

stability remains, starting with our tradition of

blending Ten Freedoms equally to produce a

simple, unbiased overall score. Most of the 20

freest countries from last year are still ranked

among the freest, although others, in the mid-

dle of the pack, have experienced some shuf-

fling as a result of the greater level of detail in

the new methodology.

The 2007 Index shows that economic freedomworldwide has decreased slightly since last year

but remains high. The Middle Easts freedom

increased to its highest level since 1995. Europe,

Asia, and the Americas are the three freest

regions, and each has something special worth

noting. Asia has both the worlds three freest

economies and its least free economy. Europe

has over half of the top 20 countries, and the

Americas are home to both the richest and some

of the most dynamic countries in the world.

The 2007 Index contains two guest chapters

written by outside scholars that document the

spectacular growth of incomes in the face of

globalization, as well as the vital importance

of labor freedom in Europe and elsewhere.

This edition also contains a description of

the new methodology and an entirely new

chapter analyzing each of the five geographic

regionsa focus that matters for local compe-

tition. And of course, this edition includes our

traditional country pages, so that each free-

dom in every economy is explained in detail.

Each country page includes new charts high-

lighting the strengths and weaknesses of each

economy.

At the most personal level, however, it may

well be that academic methodology and care-

fully measured charts cannot make the bestcase for economic freedom. The real worlda

walk, perhaps, through downtown Hong

Kongis far more eloquent than we can ever

hope to be.

Edwin J. Feulner, Ph.D.

President

The Heritage Foundation

November 2006


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xiii

Acknowledgments

W

e wish to express our profound

gratitude to the many individuals,

especially those at The Heritage Foun-

dation, who have made such valuable contri-butions to this 13th annual edition of the Index

of Economic Freedom. The Heritage Foundations

Center for International Trade and Economics

(CITE) produces the Index, an effort that this

year involved Ana Isabel Eiras, Anthony Kim,

Daniella Markheim, and Brett Schaefer, as well

as research assistant Andrew Peek.

Others at The Heritage Foundation also

made invaluable contributions to this year s

edition. We are particularly grateful to Cen-

ter for Data Analysis Director William Beach

for his continued support and for his contri-butions to the methodology chapter. In the

Douglas and Sarah Allison Center for Foreign

Policy Studies, a division of the Kathryn and

Shelby Cullom Davis Institute for Interna-

tional Studies, Ariel Cohen, Stephen John-

son, James Phillips, and Will Schirano wrote

introductory paragraphs and provided their

expertise. We are especially grateful for the

many insightful contributions that Helle C.

Dale, Director of the Douglas and Sarah Alli-

son Center for Foreign Policy Studies, made tothe content of this years Index. Yvette Campos

and Marla Graves provided valuable produc-

tion support, and Marla did the initial editing

of all 161 country introductions.

In the Asian Studies Center, Dana Dillon,

Balbina Hwang, and John J. Tkacik, Jr., wrote

introductions and provided assistance, and

Allison Goodman provided valuable produc-

tion support. In the Information Technology

Department, invaluable help was provided

by Vice President of Information Technology

Michael Spiller and Michael Smith. We aregrateful for their professionalism.

In Publishing Services, Manager Therese

Pennefather, Elizabeth Brewer, and Alex Adri-

anson were responsible for all aspects of the

production process, including the extensive

design and layout that make this 13th edition

the most readable and accessible yet published,


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xiv 2007 Index of Economic Freedom

as well as for developing the world and coun-

try maps and formatting the charts and tables.

We are grateful to Director of Online Commu-

nications Ted Morgan, Tosan Ogharaerumi, and

the other IT staff for placing the entire Index on

the Heritage Web site (www.heritage.org/index/).

We also thank James Dean, Alison Fraser, Mike

Franc, Rebecca Hagelin, John Sieg, Jan Smith,

and Bridgett Wagner for their insightful contri-

butions and support.

Once again, we wish to express our deep

appreciation for the work of Senior Editor

Richard Odermatt, who was responsible for

final review of the completed text, and Senior

Copy Editor William T. Poole, who continues

to bear the primary responsibility for editing

the entire book. Each year, their professional-

ism, commitment to the project, and attentionto detail play a crucial role in making the Index

a reality. We are likewise grateful to Editor Jon

Rodeback, who carefully reviewed every one

of the many charts and tables included in the

book. In addition, Andrew Peek was respon-

sible for proofreading the English-language

drafts and crosschecking the facts and figures,

and the dedicated research of Heritage interns

Hayley Darden, Peter Farmer, Alana Finley,

Sarah MacArthur, and Caroline Walsh did

much to make the specialists in-depth analy-

sis possible.

Countless individuals serving with various

accounting firms, businesses, research orga-

nizations, U.S. government agencies, foreign

embassies, and other organizations cooper-

ated by providing us with the data used in the

Index. Their assistance is much appreciated. As

always, we acknowledge our enduring debt

to Heritage Trustee Ambassador J. William

Middendorf II, who originally encouraged us

to undertake such a study of global economic

freedom.

Finally, we would like to express our appre-

ciation to the many people who, year after year,

either praise or criticize the Index of Economic

Freedom so enthusiastically. The support and

encouragement of people in all parts of the

world continue to serve as a major source of

inspiration for The Heritage Foundation andThe Wall StreetJournal in their ongoing collabo-

ration on this important work. We hope this

years effort once again matches the expecta-

tions of our supporters, as well as the thought-

ful critics who so often have provided the

insights that enable us to continue to improve

the Index.

Tim Kane, Ph.D.

Kim R. Holmes, Ph.D.

Mary Anastasia OGrady

November 2006


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xv

Whats New in the 2007 Index?

E

very year, the editors evaluate the Index

of Economic Freedom and consider ways to

improve the product. This years edition

of the Index embodies the most dramatic chang-es, in both style and substance, that have been

made since publication of the inaugural edi-

tion in 1995. The book is physically smaller to

enhance its usability and portability. An exten-

sive redesign of the country pages includes two

new charts to help readers quickly assess each

economys progress. Finally, the methodology

has been improved with the help of a newly

formed academic advisory board and utiliza-

tion of new data from the World Bank that have

been made available only recently. Previous

years scores have been revised to reflect themore rigorous approach.

These changes continue the Heritage Foun-

dation/Wall Street Journal tradition of continu-

ing, year-by-year improvement. Changes in

the methodology were instituted in 2000, 2002,

2004, and 2006 to enhance the robustness of one

or more of the 10 factors that are used to mea-

sure overall economic freedom, and the entire

time series was revised so that all scores were

and are as consistent as possible, dating back

to 1995. The 2001 Index saw the publication of aSpanish-language edition in cooperation with

several Latin American think tanks. That same

edition was the first to suspend countries from

grading as a result of insufficient or inappli-

cable data.

To the extent that the changes are bigger

in 2007 than ever before, they are driven by a

new process: a fundamental effort to formal-

ize the feedback so that suggestions of friends,

scholars, policymakers, and other readers are

collected, considered, and acted upon. For

example, we conducted an internal survey ofscholars at Heritage and an external survey of

375 people from the academic, business, gov-

ernment, and international communities who

downloaded the Index from our Web site last

year to assess our strengths and weaknesses.

We also solicited advice from academic schol-

ars before revising the methodology.


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xvi 2007 Index of Economic Freedom

Some of the most common suggestions were(1) to use a new 0100 percent grading scale

rather than 51 so that a higher score now repre-

sents more freedom; (2) to add regional context

to the rankings; (3) to enhance the methodologi-

cal rigor by using equations instead of brackets

where possible; and (4) to add a factor for labor

freedom. One example of the increased detail in

the new Index is the way monetary freedom is

measured: Two economies with inflation rates

of 1 percent and 2 percent, respectively, tradi-

tionally were given identical monetary scores

in the Index because both economies were in thesame bracket, but now we use an equation that

allows for finer detail in the scores. In the new

methodology for monetary freedom, the closer

an inflation rate is to zeroeven one-tenth of

a percentage pointthe higher the monetary

freedom score.

A more detailed explanation of what has

changed, as well as what has not changed, in

the 2007 Index follows:

Academic Advisory Board. The method-

ology is the heart of the entire Index project.It gives credibility to the product and is a key

tool in fighting claims of bias. While scholars

working on different ways to measure eco-

nomic freedom agree that such an abstract con-

cept can never be measured perfectly, the most

important attribute of any approach is that it

be unbiased. For this reason, we assembled an

academic advisory board to review the

methodology with us on a continuing

basis, both this year and in future years.

Those scholars who approved of the

final methodology that was developed

then offered their endorsement.

Continuous Percentile Scores.

The Index is converting to a 0100 scor-

ing scale that both translates more eas-

ily into percentages of freedom and

ends the use of discrete brackets (1,

2, 3, 4, and 5) in favor of a continuous

scale that allows an economy in many

cases to receive, for example, a score of

83.3 percent instead of an 80 or 90. All

previous scores back to 1995 have been

converted to the new 0100 scale. The

51 rankings in use in the 19952006 editions(where a lower number equaled more freedom)

were based on the original methodology. As the

methodology and precision improved in subse-

quent editions, it became increasingly obvious

that the scoring should be brought into line. In

addition, economic freedom is apositive quan-

tity, not a mere absence of oppression, and the

use of a zero to denote a total lack of freedom

seems to epitomize this.

New Methodology. The Indexmethodology

is changing substantively in several ways. First,

new data from the World Banks Doing Businessreport that became available only recently are

utilized as the basis for the business freedom

factor (replacing the old regulation factor) and

a new labor freedom factor. Second, an equa-

tion-based approach replaces the bracket scores

for numerous factor variables, notably inflation

and tariffs. The 10 factors have been renamed as

described in the accompanying table. It must be

emphasized that the new methodology is not

only for 2007 scores; rather, it has been imple-

mented for this year and all previous years.

An obvious consequence of the new method-ology is the effect on each countrys overall

freedom score and ranking, which is due to the

new attention to detail. Small policy changes

are detected more easily in the more detailed

methodology and can cause a large change in

worldwide rank for many countries.

A New Labor Freedom Factor. The recent

10 Factors(Old Methodology)

10 Freedoms(New Methodology)

Regulation Business Freedom

Trade Policy Trade Freedom

Fiscal Burden Fiscal Freedom

Government Intervention Freedom from Government

Monetary Policy Monetary Freedom (80%)

Wages and Prices Monetary Freedom (20%)

Foreign Investment Investment Freedom

Banking and Finance Financial Freedom

Property Rights Property Rights

Informal Market Freedom from Corruption

(N/A) Labor Freedom


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labor riots in France and the wide disparity in

unemployment rates across countries call for

a stronger focus on labor freedom. Labor laws

were covered in the previous methodology as

a small component of the regulation factor and

less-than-equal component of the wages and

prices factor, but this was primarily because no

consistent data source existed for cross-coun-

try comparisons until 2003. The new labor

freedom factor is based on objective data from

the World Banks Doing Business study, which

covers minimum wages, laws inhibiting lay-

offs, severance requirements, and measurable

regulatory burdens on hiring, hours, and so on.

These cross-country labor data, though cutting-

edge and well-respected, are available only for

20052007.

New Country Page Design. The newcountry page design emphasizes overall eco-

nomic freedom on the first page and details for

each of the 10 areas of economic freedom on the

second page. The heading includes the world

rank for each economy and a new regional rank.

The new approach focuses more precisely on

economic policy and the Index scores. A para-

graph that describes historical background for

each country, with political context, remains as

an anchor on the first page. The Quick Facts

box has been revised to include many new vari-

ables: unemployment and inflation rates, GDPin terms of purchasing power parity, a five-year

compound average annual growth rate, foreign

direct investment (FDI), three official develop-

ment assistance measures, and external debt.

The time series chart has been expanded to give

a better sense of how a countrys economic free-

dom is evolving, which now includes both time

series lines for the world and regional averages

from 1995 to the present. Finally, a new second

chart created for each economy shows graphi-

cally how each of a countrys 10 economic free-

doms compares to the world average. New Regions. From this year forward, the

Index will emphasize a countrys regional rank

as well as its global rank. For example, the Unit-

ed Kingdom ranks as the 6th freest economy in

the world in 2007, but it also ranks as the freest

in Europe. Similarly, Israel has the freest econ-

omy in the Middle East/North Africa region,

Mauritius is the best in sub-Saharan Africa, and

the United States is number one in the Ameri-

cas. These five regions are consistent with past

Index groupings with the exception of three

countries: Canada, Mexico, and the U.S. are

now included in the Americas (which replaces

Latin America as a region). As a result, Europe

is now a separate region, replacing the old North

America and Europe. These regions are not only

more geographically consistent; they also rep-

resent our long-standing philosophy of human

equality. Just because Canada is wealthier than

many other New World economies does not

necessarily mean that its people are better or

that its economy merits inclusion in a different

class of countries. We believe (and have always

believed) that all peoples have equal potential

and that all economies deserve equal liberty.

We hope the changes in the Index make it an

even better research tool and a more accessible

policymaking guide. Despite the new look,

however, our goal is and will remain the same:

to advance human freedom. We believe that the

redesigned Index might even make the transi-

tion to a better world faster and surer.

One of the editors paramount concerns is

that the Index always remains a useful tool for

researchers. This means that the integrity of the

current-year scores is crucial. During a periodof aggressive improvements, there undoubt-

edly will be mistakes in the scores, based on

our errors and errors in source data. We cannot

promise perfection, but we do promise objec-

tivity: Our methods and modifications will

always be transparent and duplicable by other

scholars.

Moreover, even though the Index itself is

published in January, based on policies and data

available as of the previous June, we remain

committed to providing the most accurate and

up-to-date measures on-line and will make anyneeded corrections to that source file immediate-

ly. For researchers who want to weight the Index

or consider individual components in statistical

analysis, the 10 freedoms and even the raw data

are also available transparently on-line. Revised

scores of individual factors for all years are avail-

able for download at www.heritage.org/Index.

Whats New in the 2007Index? xvii


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1

Executive Summary

W

ith the publication o this edition, The

Heritage Foundation/Wall Street Jour-

nal Index o Economic Freedom marks

its 13th anniversary. The idea o producing auser-riendly index o economic reedom as

a tool or policymakers and investors was irst

discussed at The Heritage Foundation in the

late 1980s. The goal then, as it is today, was to

develop a systematic, empirical measurement

o economic reedom in countries throughout

the world. To this end, the decision was made

to establish a set o objective economic criteria

that, since the inaugural edition in 1995, have

been used to study and grade various countries

or the annual publication o the Index o Eco-

nomic Freedom.Economic theory dating back to the publica-

tion o Adam Smiths The Wealth o Nations in

1776 emphasizes the lesson that basic institu-

tions that protect the liberty o individuals to

pursue their own economic interests result in

greater prosperity or the larger society. Per-

haps the idea o reedom is too sophisticated, as

popular support or it constantly erodes beore

the onslaught o populism, whether democrat-

ic or autocratic. Yet modern scholars o politi-

cal economy are rediscovering the centrality oree institutions as undamental ingredients

or rapid long-term growth. In other words, the

techniques may be new, but they reairm clas-

sic truths. The objective o the Index is to catalog

those economic institutions in a quantitative

and rigorous manner.

Yet the Index is more than a simple ranking

based on economic theory and empirical study.

It also identiies the variables that comprise

economic reedom and analyzes the interaction

o reedom with wealth.

The 2007 Index o Economic Freedom mea-sures 157 countries across 10 speciic actors

o economic reedom, which are listed below.

Chapter 3 explains these actors in detail. High

scores approaching 100 represent higher levels

o reedom. The higher the score on a actor, the

lower the level o government intererence in

the economy.


20/424

2 2007 Index of Economic Freedom

The 10 Economic Freedoms

Business Freedom

Trade Freedom

Fiscal Freedom

Freedom rom Government

Monetary Freedom

Investment Freedom

Financial Freedom

Property Rights

Freedom rom Corruption

Labor Freedom

HIGHLIGHTS FROM THE 2007 INDEX

Global economic freedom holds steady,

but there is much room for improvement. The

average economic reedom score is 60.6 per-

cent, the second highest level since the Index

began in 1995 and down by 0.3 percentagepoint rom last year. Each region has experi-

enced an increase in economic reedom during

the past decade.

Former British colonies in Asia lead the

world in economic freedom. Hong Kong has

the highest level o economic reedom or the

13th straight year. Singapore remains close,

ranked second in the world, and Australia

is ranked third reest economy in the world,

which means that the AsiaPaciic region is

home to the top three economies.

Twelve of the top 20 freest economies are

European. A majority o the reest economies

are in Europe, led by the United Kingdom, Ire-

land, Luxembourg, and Switzerland. Only ive

are in the AsiaPaciic region. The remaining

three are rom the Americas: the United States,

Canada, and Chile.

The methodology for measuring economic

freedom is significantly upgraded. The new

methodology uses a scale o 0100 rather thanthe 15 brackets o previous years when assess-

ing the 10 component economic reedoms,

which means that the new overall scores are


21/424

more reined and thereore more accurate. Sec-

ond, a new labor reedom actor has been added,

and entrepreneurship is being emphasized in

the business reedom actor. Both o these new

categories are based on data that became avail-

able rom the World Bank only recently. This

attention to detail beneits some countries and

punishes others, and readers may note some

dramatic changes in rankings. The methodol-

ogy has been vetted with a new academic advi-sory board and should better relect the details

o each countrys economic policies. In order to

compare country perormances rom past years

accurately, scores and rankings or all previous

years dating back to 1995 have been adjusted to

relect the new methodology.

Economic freedom is strongly related to

good economic perfor-

mance. The worlds reest

countries have twice the

average per capita income

o the second quintile o

countries and over ive

times the average income

o the ith quintile o

countries. The reest econ-

omies also have lower

rates o unemployment

and lower inlation. These

relationships hold across

each quintile, meaning

that every quintile o less

ree economies has worse

average rates o inlation

and unemployment thanthe preceding quintile has.

The top 20 countries

have held relatively

steady. Even though the

methodology used or

rating economic reedom

has been revised with this

edition o the Index, the

composition and order o

the top 20 economies have

hardly changed at all.

Japan and Belgium movedinto the top group (com-

pared to the old methodol-

ogy, not compared to 2006 scores using the new

methodology), whereas Austria and Sweden ell

to lower positions.

Progress is universal across all continents.

Across the ive regions, Europe is clearly the

most ree using an unweighted average (67.5

percent), ollowed at some distance by the

Americas (62.3 percent). The other three regions

all below the world average: AsiaPaciic (59.1

percent), Middle East/North Arica (57.2 per-cent), and sub-Saharan Arica (54.7 percent).

However, trends in reedom are mirrored close-

ly across all regions. The main distinguishing

eature o the regions is that AsiaPaciic coun-

tries have the highest variance, which means

that there is a much wider gap between the

heights o reedom in some economies and

Table 1: Global Distribution of Economic Freedom

Scores Category Number of Countries

80100 Free 7

7079.9 Mostly Free 23

6069.9 Moderately Free 48

5059.9 Mostly Unfree 59

049.9 Repressed 20

Source: Tim Kane, Kim R. Holmes, and Mary Anastasia OGrady,2007 Index of Economic Freedom

(Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2007), at www.heritage.org/index.

Executive Summary 3


22/424


the lows in others that is

nearly twice as variable as

the norm.

O the 157 countries

graded numerically in the

2007 Index, only seven have

very high reedom scores

o 80 percent or more,1

making them what we

categorize as ree econo-

mies. Another 23 are in the

70 percent range, placing

them in the mostly ree

category. This means that

less than one-ith o all

countries have economic

reedom scores higher

than 70 percent. The bulk o countries107economieshave reedom scores o 50 percent

70 percent. Hal are moderately ree (scores

o 60 percent70 percent), and hal are mostly

unree (scores o 50 percent60 percent). Only

20 countries have repressed economies with

scores below 50 percent.

The typical country has an economy that

is 60.6 percent ree, down slightly rom 60.9

percent in 2006. This decline is caused primar-

ily by monetary reedom scores, which are 2.6

percentage points lower on average due to

slightly more extensive price controls and amild increase in inlation. Even so, the past

scores or these two years produced the over-

all highest scores ever recorded in the Index,

so the overall trend continues to be positive.

As noted, although the methodology used or

1 Four countries (the Democratic Republic oCongo, Iraq, Serbia and Montenegro, and Sudan)were suspended rom grading again this year

because o questions about the accuracy o thedata reported by each country or about whetherthe data truly refect economic circumstances or

most o the country. Data or suspended countriesare reviewed annually to ascertain whether thesituation has improved. The Democratic Republico Congo and Sudan were suspended rom gradingin the 2007 Index because in each case, civil unrestor anarchy indicated that ocial governmentpolicies did not apply to large portions o thecountry. Serbia and Montenegro and Iraq weresuspended because reliable data were notavailable.

measuring reedom was revised this year, pre-vious scores were also revised to be consistent

across time.2

Among speciic economies during the past

year, the scores o 65 countries are now higher,

and the scores o 92 countries are worse.

The variation in reedom among all o these

countries declined again or the sixth year in a

row, and the standard deviation among scores

now stands at 11.4, down one-tenth o a per-

centage point rom last year and down two ull

points since 1996.3

THE IMPACT OF ECONOMICFREEDOM

There is a clear relationship between eco-

nomic reedom and numerous other cross-

country variables, the most prominent being

the strong relationship between the level o

reedom and the level o prosperity in a given

country. Previous editions o the Index have

conirmed the tangible beneits o living in

2 The minor discontinuity in methodology or

three actors may have a slight impact on a handulo countries, but the aggregate eect is nil. Thus,the decline in global economic reedom is real,not a refection o the new level o methodologicaldetail. See For a more detailed discussion, seeChapter 3, Methodology: Measuring the 10Economic Freedoms.3 The analysis does not extend to the 1995edition o the Index because many ewer countrieswere graded in that year.


23/424

Executive Summary 5

BUSINESS FREEDOM 62.8%Business reedom is a measure o how ree entre-

preneurs are to start businesses, how easy it is to

obtain licenses, and how easy it is to close a business.

Impediments to any o these three components deter

business activity and job creation. Globally, startinga business takes an average o 48 days, while get-

ting necessary licenses takes an average o about 215

days.1 Bankruptcy proceedings take an average othree years.

TRADE FREEDOM 64%Taris are the primary obstacle to ree trade, but

non-tari barriers like quotas and bureaucratic

delays are also signiicant impediments. Usingour equation, which assigns our-iths o the

score based on weighted average taris and a ull

20 percentage point reduction or the existence

o non-tari barriers, the average trade reedom

score is 64 percent. The mean weighted averagetari is 8 percent. Notably, every one o the 157

countries graded was penalized 20 points or its

non-tari barriers.

FISCAL FREEDOM 82.8%The top tax rate on individual income averages 31

percent, and the top tax rate on corporate income

averages 27 percent. The total revenue rom all

orms o taxation (including taris) averages 20percent o country GDP. Mixing the three scores

together is the basis o the iscal reedom score.

Using an equation that deines higher reedom

with lower taxes and tax rates, the average scoreis 82.8 percent.

FREEDOM FROM GOVERNMENT 70.2%Government expenditures are the other side o the

iscal intervention coin. The average level o govern-

1 The global average is based on data or 145 countriesthat are graded by both the Index o Economic Freedom andthe 2007 edition o the World Banks Doing Business.

ment spending as a portion o GDP is 31 percent.2

Governments that generate revenue rom state-owned enterprises are also penalized.

MONETARY FREEDOM 75.1%

The worldwide average o the weighted average rate

o inlation rom 2003 to 2005 is 7.9 percent. Price sta-

bility explains most o the monetary reedom score,although there is also a penalty o up to 20 percentage

points or countries that use price controls. The aver-

age price control penalty was 9.9 points this year.

INVESTMENT FREEDOM 49.6%Only 13 countries enjoy high investment reedom,earning scores o 80 percent and higher. These coun-

tries impose ew or no restrictions on oreign invest-

ment, which promotes economic expansion and

enhances overall economic reedom. Meanwhile,

more than one-third o countries earn scores o lessthan 50 percent.

FINANCIAL FREEDOM 52%The inancial reedom actor measures the relative

openness o a countrys banking and inancial system.Burdensome bank regulation still reduces opportuni-

ties and restricts economic reedom in the preponder-

ance o countries in all areas o the world.

PROPERTY RIGHTS 45.6%Strong property rights are still a work in progress.Although many Western economies along with

Hong Kong and Singapore beneit rom secure

protection o property rights, earning scores o 80percent or higher, more than hal o the worldscountries receive a score o less than 50 percent.

FREEDOM FROM CORRUPTION 41.2%There has been little progress since last year. Only 16

countries earned scores o 80 percent or higher, and

110 countries earned scores o less than 50 percent.Freedom rom corruption is the lowest average score

among the 10 actors.

LABOR FREEDOM 62.3%The world average o labor reedom is 62.3 percent,

relecting wage, hour, and other restrictions. The aver-

age ratio o minimum wage to average wage is 0.32.The average cost o iring equals 54 weeks o salary.

Only 22 countries have notably lexible labor market

policies that earn scores o 80 percent or higher.

2 In general, reedom rom government looks at thegeneral government expenditure data that combine alllevels o government. In grading countries or whichgeneral government spending data are not available,central government expenditure data are used.

Business FreedomTrade FreedomFiscal Freedom

Fdm fm GovernmentMonetary Freedom

Investment FreedomFinancial Freedom

Property RightsFdm fm Corruption

Labor Freedom

0 50 100

62.8

64

82.8

70.2

75.1

49.6

52

45.6

41.2

62.3

Economic Freedom Score

100 = most free

THE 10 ECONOMIC FREEDOMS: A GLOBAL GUIDE


24/424


reer societies. Not only is a higher level o eco-

nomic reedom clearly associated with a higher

level o per capita gross domestic product, but

those higher GDP growth rates seem to create

a virtuous cycle, triggering urther improve-

ments in economic reedom. Our 13 years o

Index data strongly suggest that countries that

increase their levels o reedom experience ast-

er growth rates.

Chart 4 shows a strong relationship between

the level o economic reedom in 2007 and thelogarithmic value o the most recent data or

per capita GDP using 157 countries as data

points.

Charts 58 illustrate our dierent relation-

ships using a quintile ramework. The top quin-

tile o countries is composed o those that are

ranked rom 1 to 31 globally (Hong Kong to the

Czech Republic), and each subsequent quintile

includes the next group o countries. Quintiles

are not the same as categorical groups (ree,

mostly ree, etc.) and are used here because

each quintile is comparable based on the same

number o countries.

Chart 5 shows that our o ive quintiles have

roughly equal populations, but the ourth quin-

tile alone contains hal o the worlds popula-

tion. This is due to the presence o China and

India together. This act suggests that whenChina and India urther open their economies

to globalization so that internal economic ree-

doms are strengthened, the rise in global pros-

perity is poised or very large increases.

Chart 6 is another look at the relationship

between economic reedom and average per

capita incomes. The quintiles with higher


25/424

economic reedom have dramatically higher

incomes per person.

Charts 7 and 8 show that unemployment

rates are higher or each quintile o lower eco-

nomic reedom. Likewise,

inlation rates rise on aver-

age as economic reedom

declines.

The lesson rom these

charts is simple. Econom-

ic repression is a sad con-

sequence o other events.

Countries that are able to

relect the desires o their

people or better lives will

adopt economic reedom,

and countries that repress

their people or political

reasons will cause eco-

nomic suering.

In other words, the

claim that the suspen-sion o economic reedom

is done or the good o

the people is no longer

tenable.

Executive Summary 7


26/424



27/424

Index of Economic Freedom World Rankings

2007Ra

nk

Country

Econom

icFreedom

2007

BusinessFreedom

TradeFreedom

FiscalFr

eedom

Freedom

from

Government

Moneta

ryFreedom

Investm

ent

Freedom

Financia

lFreedom

PropertyRights

Freedom

from

Corrupt

ion

LaborFreedom

1 Hong Kong 89.29 88.3 80.0 95.3 91.6 91.1 90 90 90 83 93.6

2 Singapore 85.65 94.6 80.0 93.0 86.2 89.5 8 0 50 90 94 99.3

3 Australia 82.69 91.7 73.8 75.4 70.1 84.8 70 90 90 88 93.1

4 United States 81.98 94.5 76.6 79.4 67.5 83.8 80 80 90 76 92.1

5 New Zealand 81.59 93.7 74.0 74.2 63.6 84.5 70 80 90 96 89.9

6 United Kingdom 81.55 92.1 76.6 74.6 54.2 79.3 90 90 90 86 82.7

7 Ireland 81.31 92.8 76.6 81.1 73.1 85.1 90 90 90 74 60.4

8 Luxembourg 79.31 90.0 76.6 75.4 55.9 80.2 90 80 90 85 70.0

9 Switzerland 79.05 83.3 77.0 78.6 68.6 83.6 7 0 70 90 91 78.4

10 Canada 78.72 96.1 78.2 83.9 61.8 80.6 60 70 90 84 82.7

11 Chile 78.29 68.9 72.4 85.7 87.6 79.9 70 70 90 73 85.3

12 Estonia 78.13 80.0 76.6 89.7 66.8 83.0 90 90 90 64 51.2

13 Denmark 77.56 95.3 76.6 55.2 32.1 86.8 80 90 90 95 74.7

14 Netherlands 77.08 88.3 76.6 65.8 47.8 87.0 90 80 90 86 59.2

15 Iceland 77.06 94.1 74.0 82.4 50.3 82.9 60 70 90 97 69.9

16 Finland 76.55 95.3 76.6 75.4 39.0 89.7 70 80 90 96 53.4

17 Belgium 74.53 90.8 76.6 62.2 41.2 80.0 90 80 80 74 70.5

18 Japan 73.57 94.3 75.2 80.6 67.2 92.0 60 50 70 73 73.4

19 Germany 73.52 88.2 76.6 74.3 48.0 81.5 90 50 90 82 54.6

20 Cyprus 73.10 70.0 76.6 87.8 54.9 84.7 70 70 90 57 70.0

21 Sweden 72.59 95.0 76.6 53.6 31.5 85.2 80 70 90 92 52.0

22 Lithuania 72.00 86.4 76.6 91.0 76.6 81.2 70 80 50 48 60.1

23 Trinidad and Tobago 71.44 61.8 69.0 88.0 83.7 74.7 70 70 70 38 89.2

24 Bahamas 71.43 80.0 28.8 98.3 89.9 77.3 40 70 80 70 80.0

25 Austria 71.33 79.8 76.6 66.9 40.5 85.7 70 70 90 87 46.8

26 Taiwan 71.12 73.0 76.7 84.7 89.8 81.3 70 50 70 59 56.7

27 Spain 70.87 77.1 76.6 70.1 63.6 78.6 70 80 70 70 52.7

28 Barbados 70.52 90.0 47.0 78.3 64.4 76.5 50 60 90 69 80.0

29 El Salvador 70.31 62.6 66.6 90.9 95.1 76.7 70 70 50 42 79.230 Norway 70.09 97.0 79.2 66.1 45.9 82.6 50 50 90 89 51.1

31 Czech Republic 69.68 61.2 76.6 79.9 52.7 86.2 70 80 70 43 77.2

32 Armenia 69.43 84.5 75.6 93.1 91.6 79.7 60 70 30 29 80.9

33 Uruguay 69.33 68.1 71.6 90.8 81.7 73.1 70 30 70 59 79.0

34 Mauritius 68.96 74.5 70.0 87.5 82.0 76.2 70 60 60 42 67.4

35 Georgia 68.70 78.9 61.8 94.2 91.3 77.9 60 70 30 23 99.9

Executive Summary 9


28/424


2007Ra

nk

Country

Econom

icFreedom

2007

BusinessFreedom

TradeFreedom

FiscalFr

eedom

Freedom

from

Government

Moneta

ryFreedom

Investm

ent

Freedom

Financia

lFreedom

PropertyRights

Freedom

from

Corrupt

ion

LaborFreedom

36 Korea, South (ROK) 68.65 83.1 64.2 81.0 81.5 79.0 70 50 70 50 57.7

37 Israel 68.42 69.7 75.2 72.0 60.0 84.2 70 50 70 63 70.1

38 Botswana 68.40 66.6 59.6 82.6 54.5 76.8 70 70 70 59 74.9

39 Bahrain 68.40 80.0 69.6 99.6 56.7 80.1 50 90 60 58 40.0

40 Slovakia 68.37 71.1 76.6 93.0 60.8 76.7 70 80 50 43 62.5

41 Latvia 68.21 76.8 76.6 89.3 69.2 74.1 70 70 50 42 64.1

42 Malta 67.80 70.0 76.6 74.0 42.2 79.2 50 70 90 66 60.0

43 Portugal 66.66 79.6 76.6 79.6 49.6 80.2 70 50 70 65 46.0

44 Hungary 66.15 71.2 76.6 79.2 41.8 76.7 70 60 70 50 66.1

45 France 66.11 86.1 76.6 64.2 32.0 81.3 50 60 70 75 65.9

46 Jamaica 66.05 78.3 60.4 83.4 67.4 70.9 80 60 50 36 74.1

47 Panama 65.87 75.1 66.2 88.7 86.8 85.8 70 60 30 35 61.2

48 Malaysia 65.85 68.6 71.8 87.8 79.8 80.0 40 40 50 51 89.5

49 Mexico 65.80 82.1 72.6 88.1 77.2 77.0 50 60 50 35 66.0

50 Thailand 65.56 76.1 69.2 83.2 91.2 77.6 30 50 50 38 90.4

51 Costa Rica 65.12 63.5 72.4 88.6 92.3 67.1 70 40 50 42 65.4

52 South Africa 64.10 70.8 68.8 79.8 79.3 78.8 50 60 50 45 58.5

53 Jordan 64.02 54.8 64.2 88.8 64.1 83.5 50 60 50 57 67.9

54 Oman 63.94 63.6 73.8 99.0 37.7 79.1 50 50 50 63 73.2

55 Namibia 63.76 76.7 79.0 78.6 70.5 78.6 40 60 30 43 8 1.2

56 Belize 63.71 76.7 57.2 79.8 80.1 73.5 50 50 50 37 82.8

57 Kuwait 63.66 67.9 72.2 99.9 39.2 78.8 50 50 50 47 81.7

58 Slovenia 63.60 74.2 76.6 69.7 56.8 79.0 70 50 50 61 4 8.7

59 Uganda 63.41 54.1 58.8 87.1 86.7 78.3 50 70 30 25 94.0

60 Italy 63.36 73.7 76.6 68.5 46.4 80.8 70 60 50 50 57.6

61 Nicaragua 62.70 59.7 72.4 86.4 85.6 71.2 70 60 30 26 65.7

62 Bulgaria 62.17 66.9 60.8 91.3 65.6 75.7 60 60 30 40 71.5

63 Peru 62.07 65.1 62.6 86.8 92.2 85.7 50 60 40 35 43.3

64 Swaziland 61.58 71.5 59.0 81.5 73.3 76.3 50 50 50 27 77.265 Madagascar 61.43 51.2 72.8 87.2 85.0 70.0 70 50 50 28 50.1

66 Albania 61.38 56.1 63.2 91.5 77.7 80.7 60 70 30 24 60.6

67 Romania 61.26 70.9 74.0 91.7 74.9 69.7 50 60 30 30 61.4

68 Guatemala 61.25 54.1 70.2 86.5 96.4 72.2 50 60 30 25 68.0

69 Tunisia 60.99 78.3 61.8 80.8 82.1 80.0 30 30 50 49 67.9

70 Brazil 60.89 53.3 64.8 88.6 88.8 72.6 50 40 50 37 63.8



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2007Ra

nk

Country

Econom

icFreedom

2007

BusinessFreedom

TradeFreedom

FiscalFr

eedom

Freedom

from

Government

Moneta

ryFreedom

Investm

ent

Freedom

Financia

lFreedom

PropertyRights

Freedom

from

Corrupt

ion

LaborFreedom

71 Macedonia 60.84 60.9 73.4 90.0 67.8 91.1 50 60 30 27 58.1

72 Qatar 60.73 60.0 71.4 99.9 54.6 72.4 30 50 50 59 60.0

73 Colombia 60.54 71.4 6 1.4 82.4 87.0 70.2 50 60 30 40 53.0

74 United Arab Emirates 60.39 49.2 70.0 99.9 60.3 75.3 30 40 40 62 77.2

75 Kazakhstan 60.35 66.5 64.2 87.6 85.9 72.9 30 60 30 26 80.5

76 Honduras 60.32 56.6 69.2 87.8 82.9 71.5 50 70 30 26 59.2

77 Lebanon 60.27 56.2 67.4 95.9 64.3 83.5 30 70 30 31 74.4

78 Mongolia 60.12 73.1 70.0 81.0 56.9 74.3 60 60 30 30 65.9

79 Kyrgyzstan 59.87 61.4 71.4 9 5.1 76.3 7 7.1 40 50 30 23 74.4

80 Fiji 59.80 70.4 61.8 86.3 74.3 74.7 30 60 30 40 70.5

81 Moldova 59.47 70.0 74.4 90.4 71.7 68.0 30 50 50 29 61.2

82 Kenya 59.41 58.9 65.0 85.9 83.6 74.4 50 50 40 21 65.2

83 Turkey 59.33 67.4 76.0 79.4 69.9 70.2 50 50 50 35 45.4

84 Sri Lanka 59.30 69.2 66.6 85.7 85.7 69.8 30 40 50 32 63.9

85 Saudi Arabia 59.10 52.9 65.4 99.6 46.1 80.1 30 40 50 34 92.9

86 Senegal 58.79 56.4 61.6 73.9 85.9 82.9 50 50 50 32 45.2

87 Poland 58.77 56.1 76.6 79.1 55.3 80.3 50 50 50 34 56.2

88 Cape Verde 58.41 50.5 31.2 78.0 77.7 84.2 50 50 70 30 62.5

89 Pakistan 58.20 70.9 53.6 82.0 89.3 72.0 50 40 30 21 73.2

90 Guyana 58.16 57.0 57.0 78.5 66.1 74.0 50 60 4 0 25 74.1

91 Ghana 58.15 54.9 58.0 88.4 72.0 70.0 50 50 50 40 48.2

92 Zambia 57.91 63.6 60.8 80.4 81.9 57.8 50 50 40 26 68.6

93 Gambia 57.65 59.0 54.6 81.4 76.4 67.2 50 60 30 27 70.9

94 Greece 57.65 70.2 76.6 74.5 45.3 78.3 50 40 50 43 48.5

95 Argentina 57.47 65.5 61.4 82.3 89.6 71.3 50 40 30 28 56.6

96 Morocco 57.43 74.3 51.0 75.5 76.3 83.3 70 40 30 32 41.9

97 Philippines 57.35 54.2 74.8 84.0 91.4 73.4 30 50 30 25 60.7

98 Tajikistan 56.91 53.2 66.0 93.2 86.8 67.2 3 0 40 30 21 81.7

99 Paraguay 56.81 47.0 67.4 97.8 79.8 78.4 50 60 30 21 3 6.7100 Dominican Republic 56.75 57.6 63.8 86.5 91.5 63.2 50 40 30 30 54.9

101 Mozambique 56.55 51.5 60.2 85.5 86.2 75.9 50 50 30 28 48.2

102 Cambodia 56.54 37.1 47.2 94.2 85.1 81.1 50 50 30 23 67.7

103 Tanzania 56.40 44.8 63.6 87.1 8 5.7 74.4 5 0 50 30 29 49.4

104 India 55.60 49.6 51.2 84.8 89.0 77.2 40 30 50 29 55.1

105 Ivory Coast 55.52 48.1 58.6 66.3 86.2 78.6 40 70 30 19 58.4


Executive Summary 11


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2007Ra

nk

Country

Econom

icFreedom

2007

BusinessFreedom

TradeFreedom

FiscalFr

eedom

Freedom

from

Government

Moneta

ryFreedom

Investm

ent

Freedom

Financia

lFreedom

PropertyRights

Freedom

from

Corrupt

ion

LaborFreedom

141 Sierra Leone 48.37 50.5 50.2 82.0 83.8 72.9 30 40 10 24 40.2

142 Syria 48.17 56.6 49.0 88.3 57.5 68.9 30 10 30 34 57.4

143 Bangladesh 47.80 64.3 - 89.4 91.5 68.7 30 2 0 30 17 67.0

144 Venezuela 47.68 48.8 56.2 83.7 69.5 57.6 20 40 30 23 48.0

145 Belarus 47.36 54.5 62.2 87.9 66.9 61.4 20 10 20 26 64.7

146 Burundi 46.77 40.9 50.6 80.0 60.0 68.1 30 30 30 23 55.2

147 Chad 46.38 25.1 54.2 57.7 81.9 77.7 40 50 20 17 40.2

148 Guinea-Bissau 45.71 27.2 52 .8 88.6 59.9 80.7 40 40 20 10 37.9

149 Angola 43.47 33.9 68.0 90.0 38.4 47.7 20 40 20 20 56.7

150 Iran 43.13 54.9 50.4 84.8 59.8 61.3 10 10 10 29 61.2

151 Congo, Republic of 43.00 40.4 44.4 73.2 56.9 77.3 30 30 10 23 44.8

152 Turkmenistan 42 .54 30.0 74.2 94.4 82 .9 65.9 10 10 10 18 30.0

153 Burma 40.14 20.0 71.8 87.9 88.3 65.4 10 10 10 18 20.0

154 Zimbabwe 35.81 42.9 42.6 79.5 83.9 - 10 20 10 26 43.2

155 Libya 34.48 20.0 29.6 87.8 23.5 78.9 30 20 10 25 20.0

156 Cuba 29.68 10.0 60.2 62.8 10.0 65.8 10 10 10 38 20.0

157 Korea, North (DPRK) 3.00 - - - - - 10 - 10 10 -

Source: Tim Kane, Kim R. Holmes, and Mary Anastasia OGrady,2007 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow

Jones & Company, Inc., 2007), at www.heritage.org/index.


Executive Summary 13


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15

Chapter 1

Global Inequality Fades as theGlobal Economy Grows

Xavier Sala-i-Martin

In this age o globalization, countless studies

oer conficting conclusions about overall poverty

rates and income inequality worldwide. All observ-

ers agree that the rapid integration o international

economies is one o the dominant experiences o the

postCold War world.

Many critics have assailed globalization as a

orm o extreme capitalism that is leaving the worlds

poor behind. At a conerence in the all o 2001, or

example, Noam Chomsky declared that Inequality

is soaring through the globalization periodwith-

in countries and across countries.1 To substanti-

ate their claims, however, such anti-globalization

activists rely on the United Nations Development

Programmes Human Development Report or

1999, which claims that:

Gaps in income between the poorest

and richest countries have continued to

widen. In 1960, the 20% o the worlds

1 Virginia Postrel, The Rich Get Rich and PoorGet Poorer. Right? Lets Take Another Look, TheNew York Times, August 15, 2002.

people in the richest countries had 30

times the income o the poorest 20%

in 1997, 74 times as much.2

How could it be true that globalization has

helped rather than hurt the worlds poor?

Xavier Sala-i-Martin, a proessor o economics

at Columbia University, is a renowned expert on

economic growth who in recent years has published

authoritative research on global incomes. Here, in

his own words, he reviews the latest evidence. He

notes that the conusion about growing global in-

equality among individuals is based on a logical

misunderstanding. Comparing countries and com-

paring individuals within those countries is akin to

the classic problem o mixing apples and oranges.The correct analysis is to integrate apples and apple

trees, and that is what Proessor Sala-i-Martin does

with powerul lessons or all o us.

The Editors

2 United Nations Development Programme,Human Development Report 1999, at http://hdr.undp.org/reports/global/1999/en/.


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Looking at the planet as a whole, never in

history has poverty been eradicated so rapidly

as it has been during our lietimes. Moreover,

individual income inequalities have been all-

ing, and this is the irst time they have allen

since the eve o the Industrial Revolution. The

aggregate numbers have never looked better.

Looking at the world distribution o income

(WDI), the world is a better place.

Poverty and inequality are, o course, di-

icult to measure because o the arduousness

o collecting data, the ambiguity o the dei-

nition o poverty, and debate concerning the

proper unit o measures o both poverty and

inequality. However, the mounting empirical

evidence points to signiicant improvements

in these two dimensions over the past two to

three decades.Although this is certainly good news, the

analysis presented in this discussion also shows

that, alongside these positive global trends, the

continued deterioration o the economic situa-

tion o Arican countries is pushing up our mea-

sures o poverty rates and head counts in that

continent. The positive economic income growth

experienced by billions o Asian citizens, along

with the negative growth experienced by the

majority o Aricans, has turned poverty, which

used to be an essentially Asian phenomenon,

into an essentially Arican problem.

MEASURING POVERTY

The empirical literature on cross-coun-

try convergence shows that the dispersion o

incomes per capita across countries tends to

increase over time, a phenomenon that Rob-

ert Barro and I have called -divergence.3

Countries are useul units i we want to test

growth theories because many o the policies

or institutions considered by the theories are

country-wide.

I we are interested in whether poor peoplesstandards o living improve more rapidly than

rich peoples, however, then the correct unit is

a person rather than a country: The evolution

3 Robert J. Barro and Xavier Sala-i-Martin,Convergence,Journal o Political Economy, Vol.100, No. 2 (April 1992), pp. 223251.

o Chinas per capita income is more important

than the evolution o Lesothos because China

has a lot more people. In act, China has almost

twice as many citizens as all Arican countries

combined, even though Arica has around

35 independent states. There is no reason to

downweight the well-being o a Chinese peas-

ant relative to a Senegalese armer just because

Chinas population is larger than Senegals. The

country analysis o the traditional convergence

literature does not help to answer such ques-

tions as how many people in the world live in

poverty, how poverty rates have changed over

the past ew decades, or whether inequalities

across citizens are growing over time.

A better measure o the evolution o personal

inequality is the population-weighted variance

o the log o income per capita, as opposed to thesimple variance o the log o income per capita,

which gives the same weight to all countries

regardless o population. The striking result is

that the weighted variance does not increase

monotonically over time. As shown by T. Paul

Schultz and by Steve Dowrick and Muhammad

Akmal,4 the weighted variance increases or

most o the 1960s and 1970s but peaks in 1978.

Ater that, the weighted variance declines, and

this is rooted in the act that China, with 20 per-

cent o the worlds population, has experienced

large increases in per capita income. This eectwas reinorced in the 1990s when India, with

another 1 billion inhabitants, started its process

o rapid growth.

Using population-weighted distributions o

per capita income (rom national accounts) is a

step in the right direction, but it is not suicient

to provide accurate estimates o concepts like

poverty rates or indexes o income inequality.

These measures still miss within-country disper-

sion, a actor that needs to be included i sensible

estimates o the WDI are to be constructed.

4 T. Paul Schultz, Inequality and theDistribution o Personal Income in the World: HowIt Is Changing and Why,Journal o PopulationEconomics, Vol. 11, No. 3 (1998), pp. 307344; SteveDowrick and Muhammad Akmal, ContradictoryTrends in Global Income Inequality: A Tale oTwo Biases, mimeographed, Australian NationalUniversity, March 2003.


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By using population weights, researchers

recognize that dierent countries have dier-

ent population sizes, but this alone is insu-

icient because it still implicitly assumes that

all citizens o a country have the same level o

income. This can yield misleading results. I the

per capita income in a country were a couple

o dollars above the poverty line, or example,

researchers would conclude that no poor citi-

zens lived in that country. Similarly, they would

tend to ind dramatic declines in poverty rates

as the income per capita o very populated

countries grew rom a ew dollars below to a

ew dollars above the poverty line. Additional-

ly, in terms o inequality, population-weighted

indexes o inequality could show a decline in

overall global inequality, while the true indi-

vidual inequalities could be rising i within-country inequalities increased suiciently.

Incorporating inormation about within-

country income dispersion is problematic, how-

ever, because such inormation is not readily

availablebut there is hope. Klaus Deininger

and Lyn Squire, or example, collected data rom

a large number o microeconomic surveys con-

ducted in a variety o countries over a period

o 30 years,5 and the United Nations Universi-

tys World Institute or Development Research

(UNU-WIDER) keeps an update o this collec-

tion. Although these surveys contain a largeamount o inormation about the distribution

o income (or expenditure) within many coun-

tries, however, they are still incomplete. Surveys

do not exist or a number o economies, and or

the countries or which surveys do exist, many

years are missing. Nevertheless, this inorma-

tion can and should be used to complement the

population-weighted national accounts and to

construct estimates o the WDI.

MEASURING THE WORLD

DISTRIBUTION OF INCOMEI construct a WDI by estimating an annual

income distribution or each o 138 countries

and then integrating these country distributions

5 Klaus Deininger and Lyn Squire, A New DataSet Measuring Income Inequality, World BankEconomic Review, Vol. 10 (1996), pp. 565591.

or all levels o income.6 The starting point o

the analysis is the population-weighted income

per capita, which we will use as the mean o

each countrys distribution. As a measure o

income, I use the purchasing power parity

adjusted GDP per capita rom the Penn World

Tables.7 One could anchor the country distribu-

tions to other measures o average income, such

as the mean income rom surveys. I choose not

to do so or a variety o reasons, including (but

not limited to) the lack o survey data or many

countries and time periods. Since surveys are

not available every year, i one used the mean

income o those surveys to anchor the mean o

the distribution, then one would have to ore-

cast the means or missing years. National

accounts data, on the other hand, are reported

by the Penn World Tables or all countries dur-ing our sample period.

The mean o the distribution can be comple-

mented by adding within-country inormation

on income distribution contained in microeco-

nomic income surveys reported by Deininger

and Squire8 and extended with UNU-WIDER

compilation. Non-parametric kernel density

analysis is used to determine annual income

distribution data or the various countries.

Once a distribution o income has been esti-

mated or each country/year, I construct an

annual world distribution o income by inte-grating all o the country distributions.9 Charts

1 and 2 report the estimates o the density unc-

tion or some o the largest countries as well as

WDI or 1970 and 2000, respectively. For con-

venience, the charts also include a vertical line

representing the equivalent annual income o

$1 per day, a widely used measure o poverty

that will be discussed below.

6 Xavier Sala-i-Martin, The World Distributiono Income: Falling Poverty andConvergence,

Period, Quarterly Journal o Economics, Vol. 121,No. 2 (May 2006), pp. 351397.7 Allan Heston, Robert Summers, and BettinaAten, Penn World Table Version 6.1, Center orInternational Comparisons at the University oPennsylvania, December 2002.8 Deininger and Squire, A New Data SetMeasuring Income Inequality.9 Sala-i-Martin, The World Distribution oIncome.

Chapter 1 17


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An interesting aspect o the charts is that

one can visually appreciate that a substantial

part o individual income inequality across

the world comes rom dierences in per capita

incomes across countries rather than dier-

ences within countries. In other words, the

distance between country distributions (say,

the dierence between the mean o the United

States and China) seems to be much larger thanthe dierences between rich and poor Ameri-

cans or rich and poor Chinese.

A quick comparison o Chart 1 and Chart 2

reveals the ollowing eatures. First, the WDI

has shited to the right. This, o course, relects

the act that per capita GDP is much larger in

2000 than in 1970. Second, it is not visually

evident whether the WDI is more dispersed in

1970 than in 2000. Third, i we analyze the rea-

sons or the WDIs change in shape, we observe

that a major change occurs in China, whose dis-

tribution both shits dramatically to the right(China is getting richer) and increases in dis-

persion (China is becoming more unequal).

To see the evolution o the WDI over time,

Chart 3 plots together the global distributions

(without individual country unctions) or

1970, 1980, 1990, and 2000. It is now apparent

that the distribution shits rightward, implying

that the incomes o the majority o the worlds

citizens increased over time. It is also clear that

the raction o the overall area that lies to the

let o the poverty line declines, which indi-

cates a reduction in poverty rates, and that

the absolute area to the let o the poverty line

also diminishes, which indicates an overall

reduction in the number o poor citizens in the

world. Again, the chart does not show clearlywhether world income inequality increased

or decreased, so precise measures o income

inequality will have to be used i we want to

discuss the evolution o inequality over the last

three decades.

DEFINING POVERTY

Once we have a good estimate o the WDI,

we can use it to estimate poverty rates and head

counts. The irst problem we encounter, how-

ever, is deining what we mean by poverty. For

a long time, analysts identiied poverty withthe lack o physical means or survival. Thus,

some attempted to deine

2007 economic freedom

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