Executive Summary

• The indexes presented in this report represent a continuation of our efforts to develop an objective measure of economic freedom. The summary indexes of economic freedom presented here are more comprehensive, and they are based on more complete data and the use of statistical procedures more value-free than any prior measure.
• The summary indexes are based on 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 indexes 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.
• Two summary indexes were derived: (1) a weighted summary index based on principal component analysis and (2) an unweighted summary index that assigns equal weight to each of the seven areas. The ratings and rankings derived by the two alternative procedures were similar. Summary ratings were derived for 119 countries in 1997 and 111 in 1990.
• In 1997, both the weighted and unweighted indexes indicated that Hong Kong, Singapore, New Zealand, United States, and United Kingdom were the five freest economies in the world. Other countries ranking in the top 10 were Canada, Argentina, Australia, Ireland, Luxembourg, Netherlands, and Panama. The latter five were tied for eighth place in the weighted summary index. See Exhibits 2 through 5 for the complete presentation of the summary ratings for 1997 and 1990.
• The least free economies in 1997 were Myanmar, Democratic Republic of Congo (formerly Zaire), Guinea-Bissau, Rwanda, Albania, Sierra Leone, Malawi, Ukraine, Algeria, Central African Republic, Madagascar, and Romania.
• While Hong Kong and Singapore were ranked one and two in both 1990 and 1997, there have been some significant changes among top-rated countries. New Zealand's weighted summary rating jumped from 8.3 in 1990 to 9.2 in 1997, pushing its ranking from ninth to third. Japan experienced a slight rating reduction (from 8.4 to 8.3) and its ranking fell from seventh in 1990 to fourteenth in 1997. Switzerland's rating declined from 8.7 to 8.5 between 1990 and 1997; its ranking fell from fourth to thirteenth during the period.
• A number of Latin American countries have achieved dramatic increases in both ratings and rankings during the 1990s. Argentina, El Salvador, and Peru headed the list of major gainers. Based on the weighted index, Argentina's rating rose from 4.8 in 1990 to 8.7 in 1997, pushing its ranking from fifty-ninth to seventh. El Salvador's rating rose from 4.5 to 8.2 between 1990 and 1997, while its ranking jumped from seventy-third to seventeenth. Peru's rating rose from 3.6 in 1990 to 7.6 in 1997; its ranking jumped from ninety-seventh to thirty-ninth. Liberalization of trade and capital markets, greater monetary stability, privatization, and reductions in high marginal tax rates contributed to the rating increases of these countries.
• Dominican Republic, Hungary, Ireland, Mauritius, Panama, Philippines, Poland, Portugal, and the Czech and Slovak Republics (compared to Czechoslovakia in 1990) were among the countries achieving substantially higher ratings (and rankings) in 1997 than in 1990.
• Malaysia, Indonesia, and Venezuela were among those experiencing substantial ranking declines. Between 1990 and 1997, Malaysia's ranking fell from fourteenth to thirty-ninth, Indonesia's from twenty-eighth to forty-seventh, and Venezuela's from forty-third to sixty-fourth. Among the major European economies, the rankings of Germany, France, and Italy drifted lower.
• Principal component analysis was used to combine the component data into area ratings, indicating the degree of economic freedom in the seven major areas of the index. Graphics for Areas I through VII present the country ratings and rankings for each of these areas.

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Last Modified: Wednesday, October 20, 1999.