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Executive Highlight - 2010 Index of Economic Freedom

Executive Highlight - 2010 Index of Economic Freedom

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Published by Jerry Nicolas

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Published by: Jerry Nicolas on Feb 25, 2010
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Executive Highlights
he 2010 Index of Economic Freedom covers
183 countries around the world, ranking

179 of them with an economic freedom score based on 10 measures of economic open- ness, regulatory efficiency, the rule of law, and competitiveness. The basic principles of eco- nomic freedom emphasized in theI n d e x are individual empowerment, equitable treatment, and the promotion of competition.

The results of the 2010I n d e x include the
Four Asia\u2013Pacific economies continue
to lead the world in economic freedom.H o n g

Kong maintains its position as the world\u2019s freest economy, a distinction it has enjoyed for 16 consecutive years. Singapore remains close, ranked as the world\u2019s second freest economy. Australia and New Zealand, ranked 3rd and 4th this year, have solidified their position at the top of the rankings. As in 2009, a total of seven economies have attained \u201cfree\u201d status in theI n d e x rankings, although the composition

of this group has changed a bit, with Switzer- land moving in and the United States drop- ping out.

Every region continues to maintain at least
one of the top 20 freest economies, but there has

been noticeable reshuffling within this highly ranked group. With its economic freedom score dropping by 2.2 points, Iceland\u2019s ranking slid to near the bottom of the top 20, while Switzerland moved up three places to 6th place. The United Kingdom is now out of the top 10. Nine of the 20 freest economies are European, led by Ireland, Switzerland, and Denmark. Six of the top 20 are from the Asia\u2013Pacific region, and two are from North America. The U.S. dropped two spots in the rankings and now trails Canada. The other regions are represented by one country each: Chile (South and Central America/Caribbean region); Mauritius (Sub-Saharan Africa region); and Bahrain (Middle East/North Africa region). Mauritius recorded impressive progress and is now ranked as the world\u2019s 12th freest economy.

2010 Index of Economic Freedom
The positive relation-

ship between economic freedom and prosperity is confirmed yet again in the 2010I n d e x. Gross domes-

tic product per capita is much higher in countries that score well in theIndex. The positive relationship holds true at all levels o\ue000 economic \ue000reedom but becomes even more dra- matic as economic \ue000reedom increases. Chart 1 shows a strong positive relation- ship between the level o\ue000 economic \ue000reedom and GDP per capita.

Economic freedom

improves the overall quality of life, promotes political and social prog- ress, and supports envi- ronmental protection.

The 2010I n d e x provides

strong evidence that economic \ue000reedom has \ue000ar- reaching positive impacts on various aspects o\ue000 human development. Economic \ue000reedom corre- lates with poverty reduction, a variety o\ue000 desir- able social indicators, democratic governance, and environmental sustainability.

With respect to the economic crisis o\ue000 2008\u2013 2009, the evidence in theIndex supports several preliminary conclusions:1

Countries diverged sharply in their
response to the global crisis: Many continued
to promote economic freedom; others did not.

Regrettably, attacks on the \ue000ree market, \ue000ueled by the economic slowdown and the politi- cal appeal o\ue000 quick interventionist remedies,

1. The 2010Index is based primarily on data
covering the period \ue000rom July 2008 through June
2009. It thus captures only the early e\ue000\ue000ects o\ue000 the
global fnancial crisis and recession and some
o\ue000 the policy responses by governments. Future
editions o\ue000 theIndex should provide a more
complete picture.

gained strong momentum in some countries\u2014 and with \ue000ar-reaching e\ue000\ue000ects. Exactly hal\ue000 o\ue000 the major economies curtailed economic \ue000reedom to some degree through various intervention- ist measures. Perhaps more signi\ue000icant \ue000or the long-term progress o\ue000 economic \ue000reedom, the other hal\ue000 did not.

As a result of increasing government

interference in economic activity in many countries, overall progress toward greater economic freedom has been interrupted.The

average economic \ue000reedom score \ue000or the 2010
Index is 59.4, down 0.1 point \ue000rom 2009. This is

only the second time in the history o\ue000 theIndex that average scores \ue000or countries measured in successive years have declined.2

2. The 2009Index expanded its coverage
to 183 countries, including \ue000or the frst time
A\ue000ghanistan, Bhutan, Comoros, Dominica, Eritrea,
Kiribati, Liberia, Liechtenstein, Macau, Maldives,
Micronesia, Papua New Guinea, Saint Lucia, Saint
Vincent and the Grenadines, Samoa, S\u00e3o Tom\u00e9
and Pr\u00edncipe, Seychelles, Timor-Leste, Tonga, and

GDP per Capita, in Constant 2000 U.S. Dollars (Logarithmic Scale)
2010 Index of Economic Freedom Score
Sources: Terry Miller and Kim R. Holmes, 2010 Index of Economic Freedom
(Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2010),
atwww.heritage.org/index; World Bank, World Development Indicators Online, at
http://publications.worldbank.org/WDI (November 10, 2009).
Chart 1
Economic Freedom Promotes Greater Prosperity
Each dot represents a
nation in the Index of
Economic Freedom
Correlation = 0.67
R2 = 0.4489
Executive Highlights
Increased govern-

ment spending did not improve economic crisis performance. In light of

the global financial and economic storm, many advanced economies\u2019 gov- ernments have stepped up spending to promote growth and employment. The early evidence is that such spending has not worked.

Vanuatu. The expansion of
the country coverage resulted
in a noticeable decline of the
overall economic freedom
score for the 2009Index,
compared to the 2008Index,
which covered 161 countries.
For countries covered in both
the 2008 and 2009 editions
of theIndex, average scores

Source: Terry Miller and Kim R. Holmes, 2010 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and
Dow Jones & Company, Inc., 2010), atwww.heritage.org/index.
How the Largest Economies Fared
One-year changes in Index of Economic Freedom scores for the 20 largest economies
Chart 2
in GDP
Each dot
a nation in
the OECD
Correlation = \u20130.071
R2 = 0.005
% Change in Government Expenditure
(2007 to 2008)
Sources: Terry Miller and Kim R. Holmes, 2010 Index of Economic Freedom

(Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc.,
2010), atwww.heritage.org/index; Organisation for Economic Co-operation and
Development, OECD.StatExtract, Quarterly National Accounts: Quarterly Growth
Rates of GDP, volume, athttp://sta ts.oecd.org/index .aspx (November 19, 2009);

Organisation for Economic Co-operation and Development, OECD Economic
Outlook No. 85 Annex Tables, June 2009, ath t t p : / /w w w. o e cd . o rg /d o c u m e n t /
61/0,3343,en_2649_34573_2483901_1_1_1_1,00.html (November 19, 2009);
International Monetary Fund, World Economic Outlook Database, at
(November 19, 2009).
Notes: GDP changes are from Q2 2008 to Q2 2009; figures are based on the 28 OECD
countries for which data are available.
Chart 3
Fiscal Stimulus: No Impact on Growth

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