Robert Lawson

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The Concept and Measurement of Economic Freedom

• Robert Lawson
• Professor of Economics and
• George H. Moor Chair
• Capital University

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The Concept and Measurement of Economic Freedom

• What is the concept of economic freedom?
• How can it be measured?
• What are the results of the measurements?
• Does economic freedom, as measured, matter?
• Background reading
• Gwartney and Lawson, Economic Freedom of the
  World 2005 Annual Report (Vancouver Fraser
  Institute).
• Gwartney and Lawson, The concept and measurement
  of economic freedom, European Journal of
  Political Economy 19, 2003.

3
History of the project

• Michael Walker v. Paul Johnson debate at Mont
  Pelerin Society meeting about Orwells 1984.
• Are we becoming more or less free?
• Economically?
• Politically?
• Civilly?
• 6 Liberty Fund/Fraser conferences set up from
  1986-1992 by Milton Friedman and Michael Walker
  to ask scholars to try to define and measure
  economic freedom.

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What is Economic Freedom?

• Our conception of economic freedom is based on
  negative rights not positive rights.
• Freedom is defined to be the absence from
  man-made interferences with the exercise of our
  property rights.
• Freedom is not defined as the ability to do
  things.
• Amartya Sen would prefer this conception.
• But it is indistinguishable from power/wealth in
  our view.

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What is Economic Freedom?

• Economic freedom is complex and multidimensional,
  but it can be measured
• Individual choice
• Freedom to trade, domestically and abroad.
• Freedom to enter and compete in markets.
• Security of Property/Rule of Law
• No country perfectly conforms to the free-market
  idealall economies are mixed economies.
• Related to but distinct from political freedom
  and civil liberty for which measures already
  exist.

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Measurement Methodology

• We collect data on 127 countries using 38
  different components (grouped into five broad
  areas).
• 0-10 ratings are constructed to measure the
  degree to which the country conforms to the
  free-market ideal.
• Third-Party data from World Bank, IMF, Global
  Competitiveness Report, IMD, etc.
• Objective data
• Survey data
• No ratings represent the judgments of the
  authors

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5 Areas of Economic Freedom of the World (EFW)
Index

• Size of Government Expenditures, Taxes, and
  Enterprises
• Legal Structure and Security of Property Rights
• Access to Sound Money
• Freedom to Exchange with Foreigners
• Regulation of Credit, Labor, and Business

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Area 1 Size of Government

• A. Government Consumption ( of C)
• B. Transfers Subsidies ( of GDP)
• C. Government Investment ( of I) Government
  Enterprises
• D. Marginal Tax Rates (top rate threshold-2
  sub-components)

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Area 2 Legal Structure and Security of Property
Rights

• A. Judicial Independence (GCR)
• B. Impartial Courts (GCR)
• C. Protection of Intellectual Property (GCR)
• D. Military Interference (ICRG)
• E. Integrity of Legal System (ICRG)

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Area 3 Access to Sound Money

• A. Money Growth (minus economic growth)
• B. Inflation Variability (st. dev. of inflation)
• C. Inflation Rate (recent annual rate)
• D. Freedom to Own Foreign Currency Bank Accounts
  Domestically and Abroad

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Area 4 Freedom to Exchange with Foreigners

• A. Taxes on International Trade (3
  sub-components)
• B. Regulatory Trade Barriers (2 sub-components)
• C. Trade Sector Size (actual compared with
  expected)
• D. Black Market Exchange Rates
• E. Capital Market Controls (2 sub-components)

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Area 5 Regulation

• A. Credit Market Regulations (5 sub-components)
• B. Labor Market Regulations (5 sub-components)
• C. Business Regulations (5 sub-components)

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What are the freest economies in the world?
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Economic Freedom Ratings of Selected Countries
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Economic Freedom Ratings of Selected Islamic
Countries
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Countries with biggest changes since 1995.
Source Exhibit 1.4 (Chain-Linked Index)
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Economic Freedom and Income
EFW Index, 1980-2000
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Economic Freedom and Growth
EFW Index, 1980-2000
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Economic Freedom Investment as a Share of GDP
EFW Index, 1980-2000
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How does economic freedom influence the quality
of life?
EFW Index, 2003
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How does economic freedom influence the quality
of life?
EFW Index, 2003
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How does economic freedom influence the quality
of life?
EFW Index, 2003
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How does economic freedom influence the quality
of life?
EFW Index, 2003
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How does economic freedom influence the quality
of life?
EFW Index, 2003
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How does economic freedom influence the quality
of life?
EFW Index, 2003
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How does economic freedom influence the quality
of life?
EFW Index, 2003
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How does economic freedom influence the quality
of life?
EFW Index, 2003
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How does economic freedom influence the quality
of life?
EFW Index, 2003
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EF Empirical Research

• The economic freedom index has been used and
  cited in over 200 academic articles to study
• Income and growth
• Income distribution/Poverty
• Productivity
• Happiness
• Employment/Unemployment
• Stock returns
• Housing price risk
• Biodiversity loss
• Corruption/Governance
• Political freedom/Civil Liberties/Democracy

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