Introduction

More than a decade ago, Michael Walker, the Executive Director of The Fraser Institute in Vancouver, Canada, and Nobel laureate Milton Friedman organized a series of conferences with the objective of clearly defining and measuring economic freedom. They were able to attract some of the world's leading economists including Gary Becker, Douglass North, Peter Bauer, and Assar Lindbeck to participate in the series and provide input for the study. These conferences eventually led to the publishing of Economic Freedom of the World: 1975-1995 (written by James Gwartney, Robert Lawson, and Walter Block) and the organizing of the Economic Freedom Network, a group of institutes in some 50 different countries seeking to develop the best possible measure of economic freedom. [See Michael Walker, ed., Freedom, Democracy, and Economic Welfare, (Vancouver: Fraser Institute, 1988); Walter Block, ed., Economic Freedom: Toward a Theory of Measurement, (Vancouver: Fraser Institute, 1991); Stephen Easton and Michael Walker, eds., Rating Global Economic Freedom, (Vancouver: Fraser Institute, 1992); James Gwartney, Robert Lawson and Walter Block, Economic Freedom of the World: 1975-1995, (Vancouver: Fraser Institute, 1996); and James Gwartney and Robert Lawson, Economic Freedom of the World, 1997 Report, (Vancouver: Fraser Institute, 1997). These publications provide the foundation for this work.]

In his foreword to Economic Freedom of the World: 1975-1995, Milton Friedman indicated that the indexes presented in that publication had brought the quest for an objective measure of economic freedom to a "temporary conclusion." Amplifying this statement, Professor Friedman indicated subsequent studies would "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." The measures developed in this publication are indicative of this evolutionary process. They reflect improved knowledge about how to measure economic freedom and the development of a more complete data set for the achievement of that purpose. They represent movement to a new level.

The core ingredients of economic freedom are personal choice, protection of private property, and freedom of exchange. Individuals have economic freedom when: (a) property acquired without the use of force, fraud, or theft is protected from physical invasions by others and (b) such property can be freely used, exchanged, or given to another as long as the owner's actions do not violate the identical rights of others. Like a compass, this concept of economic freedom has directed our work.

From the very beginning, our goal was the development of an objective measure of economic freedom rather than an index based on subjective assessments and "judgment calls." Therefore, the foundation of our index is objective components that reflect the presence (or absence) of economic freedom--components that can be derived for a large number of countries from regularly published sources. This will make it possible both to calculate the index for earlier time periods and to update it regularly. We also wanted to combine the components into a summary index in a sound, objective manner. The measures presented in this report are an additional step in this direction. They are more comprehensive, based on more complete data and the use of statistical procedures more value-free, than any prior measure of economic freedom. Still, they are transparent. It is easy to see precisely how the various indexes are constructed, the data they reflect, and the factors underlying rating differences across countries and time periods.

I	Size of Government: Consumption, Transfers, and Subsidies			[11.0%]
	A	General Government Consumption Expenditures as a Percent of Total Consumption		(.500)
	B	Transfers and Subsidies as a Percent of GDP		(.500)
II	Structure of the Economy and Use of Markets (Production and allocation via government and political mandates rather than private enterprises and markets )			[14.2%]
	A	Government Enterprises and Investment as a Share of the Economy		(.327)
	B	Price Controls: Extent to Which Businesses Are Free to Set Their Own Prices		(.335)
	C	Top Marginal Tax Rate (and income threshold at which it applies)		(.250)
	D	The Use of Conscripts to Obtain Military Personnel		(.088)
III	Monetary Policy and Price Stability (Protection of money as a store of value and medium of exchange)			[9.2%]
	A	Average Annual Growth Rate of the Money Supply during the Last Five Years minus the Growth Rate of Real GDP during the Last 10 Years		(.349)
	B	Standard Deviation of the Annual Inflation Rate during the Last Five Years		(.326)
	C	Annual Inflation Rate during the Most Recent Year		(.325)
IV	Freedom to Use Alternative Currencies (Freedom of access to alternative currencies)			[14.6%]
	A	Freedom of Citizens to Own Foreign Currency Bank Accounts Domestically		(.335)
	B	Freedom of Citizens to Maintain Foreign Currency Bank Accounts Abroad		(.357)
	C	Freedom to Convert Domestic Currency to Foreign Currencies in Order to Engage in Current and Capital Account Transactions		(.308)
V	Legal Structure and Property Rights (Security of property rights and viability of contracts)			[16.6%]
	A	Legal Security of Private Ownership Rights (Risk of confiscation)		(.345)
	B	Viability of Contracts (Risk of contract repudiation by the government)		(.339)
	C	Rule of Law: Legal Institutions, Including Access to a Nondiscriminatory Judiciary, that Are Supportive of Rule of Law Principles		(.317)
VI	International Exchange: Freedom to Trade with Foreigners			[17.1%]
	A	Taxes on International Trade
		i	Revenue from Taxes on International Trade as a Percent of Exports plus Imports	(.214)
		ii	Mean Tariff Rate	(.227)
		iii	Standard Deviation of Tariff Rates	(.117)
	B	Non-tariff Regulatory Trade Barriers
		i	Percent of International Trade Covered by Non-tariff Trade Restraints	(.198)
		ii	Actual Size of Trade Sector Compared to the Expected Size	(.105)
	C	Difference between the Official Exchange Rate and the Black Market Rate		(.139)
VII	Freedom of Exchange in Capital and Financial Markets			[17.2%]
	A	Ownership of Banks: Percent of Deposits Held in Privately Owned Banks		(.271)
	B	Extension of Credit: Percent of Credit Extended to Private Sector		(.212)
	C	Interest Rate Controls and Regulations that Lead to Negative Interest Rates		(.247)
	D	Restrictions on the Freedom of Citizens to Engage in Capital Transactions with Foreigners		(.271)
Note: The numbers in the brackets, e.g. [11.0%], indicate the percentage weight allocated to each area when the weighted summary rating was derived. The numbers in parentheses, e.g. (.500), indicate the weights used to derive the area rating. These weights are derived by principal component analysis.