economic freedom index1

8/7/2019 Economic Freedom Index1

1/28

Economic Freedom Index

- Jasprit Duggal (PG-10-70)

-Vishal Jadhav (PG-10-77)-Ralph Soans (PG-10-103)


2/28

Economic Freedom

Economic freedom is the fundamental right of everyhuman to control his or her own labor and property.

In an economically free society-

Individuals are free to work, produce, consume, andinvest in any way they please, with that freedom bothprotected by the state and unconstrained by the state.

Governments allow labor, capital and goods to move

freely, and refrain from coercion or constraint of libertybeyond the extent necessary to protect and maintainliberty itself.


3/28


Its stated objective is to measure the degree

of economic freedom in the world's nations

(183 countries).

The Heritage Foundation and the Wall Street

Journal created the Index of Economic

Freedom.

Introduced in 1995.

Hong Kong tops: Since 1995.


4/28


The Index has a scale of 0-100 for each

country.

According to the points the countries aredivided in the following categories-

Free Mostly free Moderately

free

Mostly

unfree

Repressed N/A

100-80 79.9-70 69.9-60 59.9-50 49.9-0 Not ranked


5/28

Economic Freedom Matters

Higher per Capita Economic Growth

Poverty Reduction Enhanced Standard of Living

Increased Investment


6/28

6

Index of Economic Freedom

Economic Freedom is Key to Prosperity

Sources: Terry Miller and Kim R. Holmes, 2010 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc.,

2010), at www.heritage.org/index; World Bank, World Development Indicator Online, www.worldbank.org/data

Correlation:0.672 = 0.45

$-

$15,

$30,000

$45,000

$60,000

20 40 60 80 100

onomi reedom

GDP erCa ita in onstant 2000 U $


7/28

7

Economic Freedom Reduces Poverty

Sources: Terry Miller and Kim R. Holmes, 2010 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2010), at

www.heritage.org/index; Human Development Reports, United Nations Human Development Programme, at http://hdr.undp.org/en/reports/



8/28

8

ndex of Economic Freedom

The Greater Economic Freedom, The Higher Standard of Living


2010), at www.heritage.org/index; World Bank, World Development Indicator Online, www.worldbank.org/data

$28,091

$23,253

$6,819

$1,478 $1,796

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Free M s l Free M era el Free M s l U ree e resse

c m c Free m

D erCa a (i c s a 2000U $)


9/28

9


Economic Freedom Attracts Foreign Direct Investment


2010), at www.heritage.org/index; World Bank, 2008 Freedom of the Press Word Rating


10/28

Ten components of Economic

Freedom Index1 Business freedom

2 Trade freedom

3 Fiscal freedom4 Government Spending

5 Monetary freedom

6 Investment freedom

7 Financial freedom

8 Property rights

9 Freedom from corruption

10 Labor freedom


11/28

Business freedom

Ability to start, operate, and close a business that represents the overall burden ofregulation as well as the efficiency of government in the reg-ulatory process

Score is based on 10 factors, all weighted equally, using data from the WorldBanks Doing Business study

Obtaining a licenseprocedures (number)

Obtaining a licensetime (days)

Obtaining a licensecost (% of income per capita)

Starting a businessprocedures (number)

Starting a businesstime (days)

Starting a businesscost (% of income per capita)

Starting a businessminimum capital (% of income per capita)

Closing a businesstime (years)

Closing a businesscost (% of estate)

Closing a businessrecovery rate (cents on the dollar)


12/28

Calculation

Factor Scorei = 50 X factor average

-----------------------------

Factori

Factor average : World average

Factori: Units

Ratio of factor average < 2 Factor score between 0-100


13/28

Trade freedom

Measure of the absence of tariff and non-tariff

barriers that affect imports and exports of

goods and services

The trade freedom score is based on two

inputs:

1) The trade-weighted average tariff rate and

2) Non-tariff barriers (NTBs)


14/28

Calculation

Trade freedom

i=

Tariffmax Tariffi---------------------------- x 100 NTBiTariffmax Tariffmin

Lower the tariff rate: Higher the factor score

20-NTBs are used extensively across many goodsand services and/or act to effectively impede asignificant amount of international trade.

0-NTBs are not used to limit international trade.


15/28

Fiscal freedom

Measure of the tax burden imposed by

government.

Thus, the fiscal freedom component iscomposed of three quantitative factors:

1)The top tax rate on individual income

2) The top tax rate on corporate income, and3) Total tax revenue as a percentage of GDP.


16/28

Calculation

Fiscal freedomij

= 100- a x (Factorij

)2

Fiscal Freedomij : Fiscal freedom in country iforfactor j.

is a coefficient set equal to 0.03

In the 2010 Index, Bulgaria has a flat rate of 10percent for both individual and corporate tax rates,which yields a score of 97 for each of the two factors.Bulgarias overall tax revenue as a portion of GDP is34.2 percent, yielding a revenue factor score of 64.9.

When the three factors are averaged together,Bulgarias overall fiscal freedom score becomes 86.3


17/28

Government Spending

Considers the level of government

expenditures as a percentage of GDP .

GEi = 100 a X (Expendituresi)2

Expendituresi: Between 0 and 100

is a coefficient to control for variation

among scores (set at 0.03) Lower the expenditure: Higher the factor

score.


18/28

Monetary freedom

A measure of price stability.

Inflation and price controls distort market

activity . The score for the monetary freedom factor is

based on two factors:

1) The weighted average inflation rate for themost recent three years and

2) Price controls.


19/28

Calculation

Monetary freedomi =

100 - a x root of (Wtd avg inflationi) PC penaltyi

Price control (PC) penalty is an assigned value of 0-20

points based on the extent of price controls.

coefficient is set to equal 6.333.

Inflation is the absolute value of the annual inflation

rate in country during the yeara as measured by theconsumer price index.


20/28

Investment Freedom

In an economically free country, there would be no

constraints on the flow of investment capital.

In practice, most countries have a variety of restrictions on

investment.

Investment restrictions:

-NATIONAL TREATMENT OF FOREIGN INVESTMENT.

-FOREIGN INVESTMENT CODE.

-RESTRICTIO

NSO

N LANDO

WNERSHIP.-SECTORAL INVESTMENT RESTRICTION.

-CAPITAL CONTROLS.


21/28

Financial Freedom

Financial freedom is a measure of banking security as well as

a measure of independence from government control.

State govt. intervention in banks & other financial freedom. Difficulty of opening and operating financial services (for both

domestic and foreign individuals)

Government influence on the allocation of credit.


22/28

Property freedom

It measures the degree to which a countrys lawsprotect private property rights and the degree to

which its government enforces those laws.

The more certain the legal protection of property,

the higher a countrys score; similarly, the greater the

chances of government expropriation of property,

the lower a countrys score.


23/28

Freedom from Corruption

Corruption erodes economic freedom by introducing

insecurity and uncertainty into economic

relationships.

The score for this component is derived primarilyfrom Transparency International's Corruption

Perceptions Index (CPI) for 2008, which measures the

level of corruption in 180 countries.


24/28

LABOR FREEDOM The labor freedom component is a quantitative measure that looks

into various aspects of the legal and regulatory framework of a

country's labor market.

Ratio of minimum wage to the average value added per worker,

Hindrance to hiring additional workers,

Rigidity of hours,

Difficulty of firing redundant employees,

Legally mandated notice period, and

Mandatory severance pay.

In constructing the labor freedom score, each of the six factors is

converted to a scale of 0 to100 based on the following equation:

Factor Score = 50 x factor average / Factor


25/28

Economic Freedom Index 2010

FACTORS Hong Kong India

Rank 1st 124th

Business Freedom 6 Days 30 Days

Income tax Rate 2 to 17% or 15 flat 33.99%

Inflation 3.5% 7.7%

Transparency Corruption

Perceptions Index

12th 85th

Foreign Investments Possible in all Sectors Not Possible in all Sectors


26/28

Reasons For India's Low EFI

High Corruption

High Inflation

High Income Tax Rate Recently Opened Economy as Compared to

other nations


27/28

India slips 10 Places in Global

Prosperity Index- ET (28th Oct)

Index presents a broad view of wealth,

prospects and Happiness.

India Ranks 88th

Reasons

Low access to education and health

Way Below in global avg of Entrepreneurshipand Opportunity Cost

At Bottom level of Social Capital Index


28/28

Site: http://www.heritage.org/index/

economic freedom index1

Documents