Index of Economic Freedom

Based on Wikipedia: Index of Economic Freedom

Every year, a number gets assigned to nearly every country on Earth that purports to measure something both invisible and immensely consequential: how free people are to buy, sell, work, and invest as they choose. This number comes from the Index of Economic Freedom, and whether you find it illuminating or infuriating says a lot about how you think economies actually work.

The Scorecard of Capitalism

The Heritage Foundation, a conservative think tank based in Washington, D.C., launched the Index of Economic Freedom in 1995 in partnership with The Wall Street Journal. The idea was straightforward, at least in theory: create a standardized way to measure how much governments get out of the way of economic activity.

The philosophical inspiration comes from Adam Smith, the eighteenth-century Scottish economist whose book The Wealth of Nations is often considered the founding text of modern economics. Smith argued that when individuals pursue their own economic interests, an "invisible hand" guides them to benefit society as a whole. A baker doesn't bake bread out of charity; he bakes it to make money. But in doing so, he feeds his neighbors.

The Heritage Foundation took this insight and asked: what conditions allow this invisible hand to operate? Their answer involves twelve distinct factors, grouped into four categories.

The Four Pillars of Economic Freedom

The first pillar is rule of law. This includes property rights—can you actually own things and trust that no one will take them from you without due process? It also covers judicial effectiveness (do courts work?) and government integrity (are officials corrupt?).

The second pillar is government size. This measures the tax burden on citizens and how much the government spends relative to the economy. The assumption here is controversial: that smaller government generally means more economic freedom. Critics would point out that government spending on education or infrastructure might actually enhance economic opportunity, but the Index treats it primarily as a constraint.

The third pillar is regulatory efficiency. How easy is it to start a business? To hire and fire workers? Are prices set by markets or by government decree?

The fourth pillar is open markets. Can goods flow freely across borders? Can money move in and out of the country? Are foreign investors welcome?

Each country gets a score from zero to one hundred on each component, and these get combined into an overall rating. A score above eighty means you're "free." Below fifty means you're "repressed." Most countries fall somewhere in the middle, in categories with names like "moderately free" or "mostly unfree."

The Champions and the Challengers

For twenty-five consecutive years, from 1995 to 2019, one territory held the top spot: Hong Kong.

This tiny city on China's southern coast, with its towering skyscrapers packed onto a few islands and a sliver of mainland peninsula, seemed to prove the Index's thesis. Hong Kong had low taxes, minimal regulation, open borders to trade and investment, and strong property rights inherited from its century as a British colony. It also had extraordinary prosperity—one of the highest per capita incomes in the world.

But here's where the story gets complicated.

Hong Kong was never a democracy. Under British rule, its governors were appointed by London. After the 1997 handover to China, its leaders were selected by a committee dominated by Beijing. The Index measures economic freedom, not political freedom—and Hong Kong demonstrated that these can be separated. You could be extraordinarily free to start a business while having virtually no say in who governed you.

Then came 2020. After massive pro-democracy protests swept Hong Kong, China's central government imposed a sweeping national security law that criminalized dissent. The Heritage Foundation responded by removing Hong Kong from the Index entirely in 2021, arguing that recent developments "demonstrated unambiguously" that economic policies were now controlled from Beijing.

Singapore, another Asian city-state with limited democracy but extensive economic freedom, became the new number one.

What the Numbers Claim to Show

The Heritage Foundation has consistently argued that economic freedom produces prosperity. They point to a striking pattern in their data: countries in the top twenty percent of the Index have, on average, twice the per capita income of those in the second tier. They have five times the income of countries in the bottom tier.

Researchers affiliated with the Cato Institute, a libertarian think tank, have found correlations between economic freedom and self-reported happiness. The logic makes intuitive sense: people like having choices. They like being able to start businesses, change jobs, and keep what they earn.

One particularly provocative claim came from Cato researchers who argued that economic freedom was fifty-four times more effective than democracy at preventing violent conflict between nations. The reasoning goes something like this: countries that trade extensively with each other have powerful incentives not to fight. War disrupts commerce. Economic interdependence creates peace.

The Skeptics Strike Back

Not everyone finds the Index convincing.

Jeffrey Sachs, an economist at Columbia University famous for his work on global poverty, published a critique in 2005. He plotted countries' Index scores against their actual economic growth rates between 1995 and 2003. The result? No clear correlation.

Switzerland, that picture of Alpine prosperity and economic freedom, had sluggish growth. Uruguay, another high scorer, wasn't setting any records either. Meanwhile, China—which the Index ranked as quite unfree, at 107th out of 178 countries in 2019—was experiencing the most dramatic economic expansion in human history. Hundreds of millions of Chinese citizens were lifted out of poverty during a period when, according to the Index, their economic freedom was severely constrained.

This presents a puzzle. Either economic freedom doesn't matter as much as the Heritage Foundation claims, or the Index isn't actually measuring economic freedom very well, or perhaps growth and freedom are related in more complicated ways than a simple correlation can capture.

Stefan Karlsson, an economist associated with the Ludwig von Mises Institute (itself a libertarian organization, interestingly enough), criticized the Index in 2005 for what he called the "fuzziness" of its categories. How exactly do you quantify something as complex as judicial effectiveness? Different coders might score the same country differently. The methodology changed at least twice in the mid-2000s, which meant comparing scores across years was problematic.

The United Arab Emirates lodged a formal complaint in 2008, noting that its Index score seemed inconsistent with the favorable ratings it received from other organizations like Transparency International (which measures corruption) and Moody's (which assesses creditworthiness). The UAE called the Index "unreliable."

A Critique from the Left

John Miller, writing in the progressive magazine Dollars & Sense, offered perhaps the most pointed criticism. He argued that the Index doesn't really measure freedom at all—it measures freedom for corporations and entrepreneurs specifically. A country where businesses face few regulations might score high on the Index even if workers have few protections, consumers have little recourse against dangerous products, or communities have no say over whether a factory pollutes their water.

In this view, the Index confuses a particular type of freedom—the freedom of capital—with freedom in general. A worker who can be fired at will might not feel especially "free," even if their country scores highly on labor market flexibility.

Medieval Cities and Modern Debates

Carl Schramm, writing in the 2008 edition of the Index, drew an interesting historical parallel. He compared the flourishing city-states of medieval Italy—Venice, Florence, Genoa—to the booming towns of the nineteenth-century American Midwest. Both, he argued, thrived because of what he called "economic fluidity and institutional adaptiveness."

This is actually a fascinating lens through which to view economic freedom. Venice in its heyday was a commercial republic, its wealth built on trade routes connecting Europe to Asia. It had sophisticated banking, contract law, and protection for merchants. It also had guilds that restricted entry to professions, price controls on essential goods, and a government that actively directed economic development.

Was Venice economically free? By modern Index standards, probably not—too much guild regulation, too much government intervention in markets. But by the standards of its time, it was extraordinarily dynamic, and its institutions enabled commerce to flourish in ways that more rigidly controlled societies couldn't match.

This points to something the Index perhaps misses: economic freedom might be relative rather than absolute. What matters isn't whether a country matches some Platonic ideal of laissez-faire capitalism, but whether its institutions enable productive economic activity relative to the alternatives available at that time and place.

The American Decline

One storyline that emerged from the Index received significant attention in American political debates: the relative decline of the United States in the rankings.

In 2008, the United States ranked seventh. By 2011, it had dropped to ninth, falling behind countries like Denmark and Canada. By 2012, it was tenth.

The Heritage Foundation attributed this decline to increased government spending, particularly in response to the 2008 financial crisis. The bank bailouts, the stimulus package, the expansion of healthcare coverage—all of these increased the size of government relative to the economy and thus, by the Index's methodology, reduced economic freedom.

This created an interesting political dynamic. Conservatives could point to the falling ranking as evidence that America was losing its way, abandoning the free-market principles that made it prosperous. Progressives could counter that the ranking reflected a deliberate ideological choice by the Heritage Foundation—that it was essentially designed to penalize the kind of government programs they favored.

The United States never cracked the top five. Countries like New Zealand, Australia, and Switzerland consistently scored higher, suggesting that the "land of the free" wasn't necessarily the most economically free by these particular measures.

A Correlation, At Least

Despite all the criticisms, the Index does correlate with something meaningful. Freedom House, an organization that measures political freedom and civil liberties, found a statistically significant relationship between their scores and the Index. Countries that respect political rights tend to also have more open economies.

This makes sense from multiple directions. Perhaps economic freedom and political freedom spring from the same institutional roots—rule of law, limits on government power, respect for individual rights. Perhaps economic prosperity generated by open markets creates a middle class that demands political participation. Perhaps democratic governments, accountable to voters, tend to create more transparent and less corrupt economic systems.

Or perhaps the causation runs the other way entirely, and wealthy democracies simply have the luxury of maintaining the kinds of institutions the Index rewards.

The Real-World Influence

Whatever its methodological limitations, the Index has real-world influence. In 2007, the Millennium Challenge Account—a U.S. government foreign aid program—began using Index scores to help determine which countries would receive funding. Countries that scored poorly might find themselves ineligible for certain types of American assistance.

This raises the stakes considerably. When an index affects billions of dollars in aid, the question of whether it accurately measures what it claims to measure becomes more than academic. A country that believes it's been unfairly rated—like the UAE in 2008—isn't just defending its reputation; it's potentially defending its access to resources.

What Does Freedom Really Mean?

The deeper question the Index raises is philosophical: what do we actually mean by economic freedom?

The Heritage Foundation's definition is clear: freedom from government constraint. In their view, economic freedom exists when individuals can work, produce, consume, and invest "in any way they please," and when governments "refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself."

But this is only one way to think about freedom. Isaiah Berlin, the twentieth-century political philosopher, famously distinguished between "negative liberty" (freedom from external constraints) and "positive liberty" (freedom to achieve one's potential). The Index measures negative liberty almost exclusively.

Consider a worker in a country with no minimum wage laws. By Index standards, this represents labor market freedom—employers and employees can negotiate wages without government interference. But if that worker has no realistic alternative to accepting poverty wages, how free are they really? The absence of government constraint doesn't automatically create meaningful choice.

This isn't to say the Index is wrong—it's measuring something real and important. But it's measuring a particular conception of freedom, one that emerges from a specific philosophical and political tradition. Other traditions might weight different factors differently.

The View from 2024

Three decades after its creation, the Index of Economic Freedom remains influential and controversial in roughly equal measure. It provides a consistent methodology for comparing countries over time, which has value even if you disagree with the assumptions underlying that methodology. It forces concrete questions: how much does this country tax? How hard is it to start a business? Can you get your case heard in court?

At the same time, the world has changed in ways that complicate the Index's framework. The 2008 financial crisis suggested that markets left entirely to themselves can create catastrophic instability. The rise of China demonstrated that authoritarian governments can, at least for extended periods, generate extraordinary growth. The COVID-19 pandemic showed that government capacity—the ability to coordinate responses, distribute vaccines, support affected workers—matters enormously for economic outcomes.

Perhaps the Index captures one important dimension of what makes economies work, while missing others. Perhaps freedom is necessary but not sufficient. Perhaps different countries, at different stages of development, need different institutional arrangements.

The debate continues, annually renewed each time the Heritage Foundation releases its latest rankings. And whether you find those rankings illuminating or misleading, they force a question worth asking: what conditions allow human beings to flourish economically, and how would we know if we'd achieved them?