The Economic Freedom Index

In principle, any aspect of social wellbeing is measurable. Whether it works for or against the good of society, if the aspect deserves scientific study, then a measurement system can, and should, be devised for it. Examples are the Human Development Index, made by the United Nations Development Program, and the Corruption Perceptions Index, by the advocacy group Transparency International. Last year I wrote on the Democracy Index,  by the Economic Intelligence Unit, a consulting firm linked to Economist magazine (Opinion, 11/15/14).

This time, let us look at the Economic Freedom Index, which is used in the 2015 Economic Freedom of the World (EFW) Report, published by the Fraser Institute, an academic think tank based in Vancouver, Canada.  At the very outset, let me disclose being a founding member of the Foundation for Economic Freedom, an advocacy group for freedom of choice.  Yes, I was a student of Milton Friedman, author of “Freedom to Choose,” at the University of Chicago, 50 years ago.

The EFW index tries to measure how well the policies and institutions of countries are supportive of economic freedom.  It sees the cornerstones of economic freedom as personal (rather than governmental) choice, voluntary exchange coordinated by markets, freedom to enter and compete in markets, and protection of persons and their property from aggression by others.

Economic freedom—when individuals are permitted to choose for themselves and to engage in voluntary transactions that do not harm others—has value in itself, aside from the material and social wealth it tends to enhance. In addition, a high degree of economic freedom signifies a high capacity for a country to benefit from a network of economic cooperation, such as the Apec.

The EFW index is scored from 0 to 10, denoting no freedom and full freedom, respectively.  It considers five subject-areas: 1) size of government (in general, the smaller the better); 2) legal system and property rights; 3) sound money;
4) freedom to trade internationally; and
5) regulation of credit, labor and business.  The five areas have 42 underlying indicators in all.

Economic freedom across countries. The new EFW report, using 2013 as reference year, covers 157 “countries.”  On top of the list are No. 1 Hong Kong, 8.97 and No. 2 Singapore, 8.52.  At the bottom is No. 157 Venezuela, 3.23. Based on these numbers, economic freedom in the world, as of 2013, ranged between a high of 90 percent and a low of 32 percent

If countries are ranked into four groups, among those in the first quartile are No. 15 Taiwan, 7.76; No. 16 United States, 7.73; No. 26 Japan, 7.52; and No. 39 South Korea, 7.38, the lower bound of the quartile.  One can say that economic freedom in the top quartile is 74 percent and up.

Among those in the second quartile are six Asean countries: No. 52 Cambodia, 7.26; No. 58 Malaysia, 7.22; No. 67 Philippines, 7.14; and No. 76 Indonesia, 7.01. (I think the underlying numbers overrate the Philippines on size of government, and underrate it on sound money; but these are offsetting so I won’t quibble.)  The lower bound of the quartile—i.e., median economic freedom—is No. 78. Bosnia and Herzegovina, 6.98. Thus, economic freedom in the second quartile of countries is between 69.8 and 73 percent.

Among those in the third quartile are No. 99 Russia, 6.69; No. 103 Thailand, 6.63; No. 109 Vietnam, 6.46; No. 111 China, 6.44; and  No. 127 Timor Leste, 6.27. The “China” here presumably excludes Hong Kong.  Economic freedom in this quartile is between 64 and 69.7 percent.

Among those in the fourth quartile is No. 146 Myanmar (Burma), 5.56. (But economic
freedom should improve in Myanmar, if the power of the military was reduced by the last election. For Brunei and Laos, there are no figures.)

Economic freedom in the Philippines across time. For the Philippines in particular, the EFW report has index numbers every five years from 1970 to 2005, followed by every year from 2005 to 2013.

From 1970 to 1985 the four EFW numbers were 5.29, 5.22, 5.33, and 5.07, or an average of 5.22.  Economic freedom in the time of Ferdinand Marcos was much lower than in the times of all his successors, as we shall see.

In 1990 the EFW index was at 5.79. Thus, economic freedom rose by over 6 percentage points from the time of Ferdinand Marcos to the time of Corazon Aquino.

In 1995 the EFW index was at 7.30, the all-time high for the Philippines to date.  There was a very great improvement in economic freedom, by 15 percentage points, from the time of Corazon Aquino to the time of Fidel V. Ramos. It was double the improvement from Marcos’ time to Cory’s time.  This jibes well with the fame of FVR as the one who succeeded in busting the telecom monopoly.

In 2000 the EFW index was at 6.27. That means a great setback of 10 percentage points in economic freedom from the time of FVR to the time of Joseph Estrada.

During the five years of 2005-09, the EFW indexes were 7.00, 7.03, 6.92, 6.82 and 6.78.  That means an initial 7 point recovery after five years of the administration of Gloria Macapagal Arroyo, but a 2 point decline later on.  The average EFW index in GMA’s time was 6.91.

In the four years of 2010-2013, the EFW index went to 7.09, 7.27, 6.83 and 7.07, giving an average of 7.06 in the time of Benigno Aquino III. It is 3 points above the end of GMA’s time, but still 2 points short of the achievement under FVR.

Economic freedom is not static.  It cannot be taken for granted.  It deserves annual measurement at least.
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