Canada Ranked the Sixth Most Economically Free Country in the World
Results of freedom index released worldwide
Release Date: 12 January 1996
The Fraser Institute, in conjunction with research institutes in 10 other countries, has
released the first comprehensive economic freedom index, rating more than 100 countries
over the years 1975 to 1995.
Economic Freedom of the World: 1975-1995 is the product of 10 years' work involving 61
researchers in 11 countries, including many of the world's leading economists. The study
measures the extent to which the citizens of a country are free to engage in different
economic activities.
Nobel Laureate Milton Friedman said of Economic Freedom of the World: "This
measurement of economic freedom is an enormous improvement over anything that has appeared
so far. We are all in debt to the authors for the persistence and hard work that has gone
into this comprehensive analysis."
The index, which ranks Canada 6th out of 103 nations, is based on 17 separate measurable
components, including:
• Ability to hold foreign currency;
• Capital mobility;
• Ability to trade with foreigners;
• Marginal rate of taxation;
• The extent of transfers and subsidies;
• Whether there are exchange controls and controls on credit markets;
• Whether the government employs conscription to raise an army;
• The fraction of the economy consumed by the public sector;
• The extent of variation in the rate of inflation; and
• The extent to which the government employs inflation taxes.
The countries which exhibited more economic freedom than Canada were: Hong Kong, the
United States, New Zealand, Singapore and Switzerland.
The index published today is different from other indices in that it is based on strictly
measurable aspects of each nation's economy. It is also the first index which measures the
influence of economic freedom on growth over an extended period of time.
According to The Fraser Institute's executive director, Dr. Michael Walker, those
countries which had an increase in their economic freedom experienced higher rates of
economic growth. "Countries like Japan, Singapore and Chile - which experienced a
one-unit increase in freedom between 1980 and 1990 - had increases in their per capita GDP
averaging more than three percent annually," said Dr. Walker. "Conversely,
countries such as Algeria, Tanzania, Venezuela and Nicaragua - which had the largest
reductions in economic freedom - had shrinkage in their levels of per capita income."
Countries scoring "A" on the economic freedom index had average incomes of
$15,834, while those scoring "F" had an average income of $3,180. "This
study indicates the extent to which a country's economic freedom is related to its level
of income," noted Walker.
The implication is that we must endeavour to increase economic freedom in Canada and
demand that those countries to whom we give foreign aid accord their citizens these same
fundamental rights. "It costs nothing to permit citizens to engage in economic
activity," Dr. Walker said, "but it costs a country plenty in terms of foregone
growth when they are not permitted to do so."
The report on Canada was a good-news bad-news mixture. The good news is that Canada's
rating has been steady and persistently high throughout the last two decades. We also had
the third highest per capita GDP in 1994. However, the study highlighted three areas of
"obvious weakness" for Canada: (1) our large government consumption sector - 20%
of GDP is allocated by the political process rather than markets; (2) our large and
growing transfer sector; and (3) our high marginal tax rates, particularly in B.C., Nova
Scotia, Ontario, and Quebec.
The most encouraging aspect of the report is that the world's level of economic freedom is
gradually increasing. In only three of fourteen areas of measurement has there been a
reduction in freedom since 1975. These include: the extent of government consumption, the
extent of subsidies and transfers, and the relative size of the international trade
sector.
For a copy of Economic Freedom of the World: 1975-1995, please contact David Hanley at
(604) 688-0221, ext. 582.
Contact: Dr. Michael Walker, Executive Director, The Fraser Institute, (604) 688-0221,
ext. 545.
F O R E W O R D
Freedom is a big word, and economic freedom not much smaller. To talk about economic
freedom is easy; to measure it, to make fine distinctions, assign numbers to its
attributes, and combine them into one overall magnitude-that is a very different and much
more difficult task, as we found out when we started on this quest some thirteen years ago
(see Michael Walker's introduction).
James Gwartney, Robert Lawson, and Walter Block deserve great credit for having brought
this quest to so satisfactory a temporary conclusion-I say temporary because this study of
economic freedom for more than 100 countries provides a cornucopia for students of the
relation between economic freedom, political freedom, and civil freedom, and for further
explorations of the relation between economic freedom and the level and rate of economic
growth. The resulting studies will surely make revised editions necessary, both to bring
the indexes of economic freedom up to date and to incorporate the additional understanding
that will be generated.
For many of us, freedom-economic, political, civil-is an end in itself not a means to
other ends-it is what makes life worthwhile. We would prefer to live in a free country
even if it did not provide us and our fellow citizens with a higher standard of life than
an alternative regime. But I am firmly persuaded that a free society could never survive
under such circumstances. A free society is a delicate balance, constantly under attack,
even by many who profess to be its partisans. I believe that free societies have arisen
and persisted only because economic freedom is so much more productive economically than
other methods of controlling economic activity.
It did not require the construction of an index of economic freedom for it to be widely
believed that there is a close relation between economic freedom and the level and rate of
economic growth. Theoretical considerations gave reason to expect such a relation, and
little more than casual observation sufficed to show that what theory suggested,
experience documented. We have not in a sense learned any big thing from this book that we
did not know before. What we have done is to acquire a set of data that can be used to
explore just how the relation works, and what are the essential connections, and that will
enable skeptics to test their views objectively.
To achieve these advantages, it was essential that the measure of economic freedom not beg
any questions by depending on outcomes; it was essential that it depend only on objective
characteristics of an economy. This may seem obvious but I assure you that it is not.
After all, the rate of economic growth or the level of living may be an excellent proxy
for economic freedom, just as an auto's maximum speed may be an excellent proxy for the
power of its motor. But any such connections must be demonstrated not assumed or taken for
granted. There is nothing in the way the indexes are calculated that would prevent them
from having no correlation whatsoever with such completely independent numbers as per
capita GDP and the rate of growth of GDP. Yet the actual correlation between the indexes
and the level and rate of economic growth documented in some of the extraordinarily
informative graphs in the book (e.g., Exhibit S-2) is most impressive. No qualitative
verbal description can match the power of that graph.
Milton Friedman
The Hoover Institution
Stanford University
Executive Summary
1.The central elements of economic freedom are personal choice, protection of private
property, and freedom of exchange. The goal of this study is to construct an index that is
(a) a good indicator of economic freedom across countries and (b) based on objective
components that can be updated regularly and used to track future changes in economic
freedom.
2.An index containing 17 components was designed to provide an empirical measure for
economic freedom. The components were grouped into four major areas: I. Money and
Inflation, II. Government Operations and Regulations, III. Takings and Discriminatory
Taxation, and IV. Restrictions on International Exchange. Exhibit 1-1 provides a
description of the specific components of the index. Data were assembled and procedures
adopted to rate countries on a zero to ten scale for each of the components. Chapter 1
indicates the data sources used and explains how the each of the component ratings were
derived. See Appendix II for the tables containing the underlying data and the ratings for
each of the 17 components.
3.Since there is not a single "best way" to weight the components into an
aggregate summary rating, three alternative summary indexes were derived. See Exhibit 1-2
for the component weights used to derive each of the three indexes.
4.Exhibit 2-1 presents the 1993-1995 ratings for each of the 17 components in our index,
as well as area ratings, and the three alternative summary indexes (and the average of the
three). With the exception of the high-income industrial countries, the three alternative
summary ratings yield similar results. In the case of the industrial countries, the
summary index that allocates only a very small weight to the size of government
consumption expenditures and transfers and subsidies as a share of the economy yielded
ratings that were approximately one unit higher than the two other summary ratings.
5.In terms of economic freedom, Hong Kong is the highest rated country in the world. Since
Hong Kong's average for the three alternative ratings in 1993 1995 was significantly
higher than any other country, it was given a lette grade of A+. New Zealand, Singapore,
and United States earned a grade of A. The following ten countries were assigned a grade
of B: Switzerland, United Kingdom, Canada, Australia, Ireland, Japan, Netherlands,
Germany, Belgium, and Malaysia. Exhibit S-1A (Graphic Summary) indicates the average of
the three indexes for each country and their ranking. Exhibit S-1B provides the same
information for the Isl index.
6.At the other end of the spectrum, the following 27 countries earned a grade of F-:
Brazil, Haiti, Nicaragua, Venezuela, Hungary, Iran, Romania, Syria, Nepal, Algeria, Benin,
Burundi, Central African Republic, Congo, Cote d'Ivoire, Madagascar, Morocco, Niger,
Nigeria, Rwanda, Sierra Leone, Tanzania, Togo, Uganda, Zaire, Zambia, and Zimbabwe. The
policies and institutional arrangements of these countries were inconsistent with economic
freedom in almost every area.
7.In addition to the mid-199Os ratings, indexes were also derived for 1975, 1980, 1985,
and 1990. Exhibit 2-2 presents the summary rating Isl for the Top 15, Bottom 15, and
selected middle-rated countries for these years as well as for 1995. Some of the top-rated
countries were able to maintain their high rating throughout the 1975-1995 period, but
there was also a great deal of both upward and downward mobility. Several top-ranked
countries in 1975 and 1985 fell well down the rankings in later years (for example,
Honduras and Venezuela). Correspondingly, several economies with low ratings in 1975,
1980, or 1985 substantially improved their scores in recent years (for example, New
Zealand, Thailand, South Korea, and Costa Rica).
8.The five countries that improved their economic freedom rating the most during the
1975-1990 period were: Chile, Jamaica, Iceland, Malaysia, and Pakistan. See Exhibit 3-1
for more a complete list of countries that improved substantially during the 1975-1990
period. The five countries for which the economic freedom rating declined the most during
the 1975-1990 period were: Nicaragua, Somalia, Iran, Honduras, and Venezuela. See Exhibit
3-2 for a more complete list of these entries
9.The summary indexes indicate that there was little change in the average economic
freedom rating for the more than 100 countries of our study during the 1975- 1985 period.
However, since 1985 there is evidence of an increase in economic freedom. The average
summary ratings of both industrial and less developed countries rose during the last
decade. The primary factors contributing to this improvement were: greater price level
stability, greater freedom to maintain foreign currency bank deposits, improved credit
market policies, lower top marginal tax rates, reductions in taxes (tariffs) on
international trade, liberalization of exchange rate controls, and relaxation of
restrictions on the movements of capital. See Exhibits 3-6 and 3-7 for details. Also see
Exhibit S-7 in the Graphic Summary.
10.Economic theory indicates that economic freedom will enhance the gains from trade and
entrepreneurship. Therefore, if economic freedom is measured properly, a positive impact
on economic growth is the expected result. The data are consistent with this view. As
Exhibit 4-lA shows, the 14 countries that earned a summary rating grade of either A or B
in 1993-1995, achieved an average annual growth rate in per capita real GDP of 2.4% during
1980-1994 and 2.6% during 1985-1994. In contrast, the average annual growth of per capita
real GDP for the 27 countries with a summary rating of F- in 1993-1995 was minus 1.3
percent during 1980-1994 and minus 1.6 percent for the 1985-1994 period. Twenty-one of the
27 experienced declines in real per capita GDP during 1980-1994. See Exhibits 4- I B for
additional details. Also see Exhibit S-2 in the Graphic Summary for evidence that
differences in economic freedom (and the accompanying grade level) exert a positive impact
on both income levels and growth rates.
11.Since increases in economic freedom and maintenance of a high level of freedom will
positively influence growth, countries that achieve and sustain high levels of economic
freedom over a lengthy time period will tend to be high-income countries. The six
countries (Hong Kong, Switzerland, Singapore, United States, Canada, and Germany) with
persistently high ratings throughout the 1975- 1995 period were all in the Top Ten in
terms of 1994 per capita GDP. No country with a persistently high economic freedom rating
during the two decades failed to achieve a high level of income. In contrast, no country
with a persistently low rating was able to achieve even middle income status. See Exhibit
4-2 and Exhibit S-3 in the Graphic Summary for additional details.
12.The countries with the largest increases in economic freedom during the period,
achieved impressive growth rates. As Exhibit 4-3 shows, the 15 countries (actually there
are 17 because of a tie) with the most improvement in the index of economic freedom during
the 1975-1990 period experienced an average growth rate in per capita GDP of 2.7 percent
during 1980-1990 (and 3.1% during 1985 1994). All 17 of the countries in the most improved
category experienced Positive growth rates. In contrast, the average real per capita GDP
declined at an annual rate of 0.6% in the 15 countries (there were also 16 in this group
due to a tie) for which the index of economic freedom fell the most during the same
period. Eleven of the 16 countries with the largest declines in economic freedom
experienced declines in real per capita GDP during 1980-1994. See Exhibit 4- 4 and Graphic
Exhibit S-5 for additional details.
13.Countries that achieved a one unit increase in the Isl economic freedom rating between
1975 and 1985 and maintained that increase during the next decade grew at a average rate
of 3.5% during 1985-1994. Mauritius, Pakistan, Japan, Chile, Jamaica, Singapore, Portugal,
United Kingdom and Turkey comprised this category. In contrast, the growth rates of the
countries where economic freedom declined during 1975-1985 were persistently negative. The
pattern was similar for the countries that achieved and sustained increases in economic
freedom between 1980 and 1990 compared to those experiencing declines in freedom. See
Exhibits 4-5 and 4-6 for additional details. Also see Exhibits S-4C and S-4D in the
Graphics Summary section.
14.Chapter 5 presents detailed data for both economic freedom ratings and recent
indicators of economic performance for many of the countries included in our study.
Click here to view Part 1: The Economic Freedom Ratings for the Components and Various
Area and Summary Indexes: 1975, 1980, 1985, 1990 and 1993-95.
Click here to view Part 2: Recent Economic Indicators