The Summary Ratings

As Exhibit 1 illustrates, the index comprises 25 components designed to identify the consistency of institutional arrangements and policies with economic freedom in seven major areas. The seven areas covered by the index are: (I) size of government, (II) economic structure and use of markets, (III) monetary policy and price stability, (IV) freedom to use alternative currencies, (V) legal structure and security of private ownership, (VI) freedom to trade with foreigners, and (VII) freedom of exchange in capital markets.

Areas I and II are indicators of reliance on markets rather than the political process (large government expenditures, state-operated enterprises, price controls, and discriminatory taxes) to allocate resources and determine the distribution of income. Areas III and IV reflect the availability of sound money. Area V focuses on the legal security of property rights and the enforcement of contracts. Area VI indicates the consistency of policies with free trade. Area VII is a measure of the degree to which markets are used to allocate capital. Reliance on markets, sound money, legal protection of property rights, free trade, and market allocation of capital are important elements of economic freedom captured by the index. Of course, we recognize that economic freedom is heterogeneous and highly complex. No single statistic will be able fully and accurately to capture its many facets. However, the index outlined in Exhibit 1 does encompass key ingredients of the concept.

Our work on the measurement of economic freedom is an ongoing project. This publication should be viewed as an interim report. Work on a still more comprehensive index is continuing. The required data are being assembled for the integration of an eighth area--labour market regulation--into the index. This measure will be extended historically back to 1975 in next year's report. Detailed Country Reports providing both comprehensive statistics and descriptive analysis by country will also be included in the next edition.

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Last Modified: Wednesday, October 20, 1999.