How Free Is Your Economy? the Index of Economic Freedom (IEF) Published Annually by the US-Based Heritage Foundation and the World Street Journal Ranks Countries in Terms of How Free from State Interventions Their Economies Are. Africa Has Been Doing Better Than Most over the Past Five Years

By Siddiqi, Moin | African Business, June 2006 | Go to article overview

How Free Is Your Economy? the Index of Economic Freedom (IEF) Published Annually by the US-Based Heritage Foundation and the World Street Journal Ranks Countries in Terms of How Free from State Interventions Their Economies Are. Africa Has Been Doing Better Than Most over the Past Five Years


Siddiqi, Moin, African Business


The right-wing US think-tank, The Heritage Foundation, believes strongly that economic freedom provides greater opportunities and prosperity for citizens. It defines economic freedom as "the absence of government coercion or constraint on the production, distribution or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself." The theory is, that in essence, citizens of freer societies are allowed to work, produce, consume and invest according to their personal wishes while enjoying the fruits of their labour by actively participating in productive ventures that yield higher returns i.e. profits. If this analysis is correct and economically liberal societies are more prosperous than those with less freedom, African countries have a vested interest in accelerating deregulation policies.

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Anne Krueger, first deputy managing director of the IMF has also said: "Freedom from government interference can enable market incentives to operate more effectively, to the benefit of all, in a competitive environment."

Since 1995, the Index of Economic Freedom (IEF), co-published annually by The Heritage Foundation and the Wall Street Journal, provides the global business community with an in-depth analysis of institutional factors determining economic freedom and overall prosperity.

Countries in the IEF fall into four broad categories: 'Free' countries (with an average score of 1.99 or less); 'Mostly-Free' countries (with an average score of 2.00 to 2.99); 'Mostly-Unfree' countries (with an average score of 3.00 to 3.99); and 'Repressed' countries scoring an average of 4.00 or higher.

A score of one signifies a business climate or set of policies that underpin economic liberties. Conversely, a score of five signifies a set of policies or heavy bureaucracy that restricts entrepreneurship and undermines a country's optimal potential. Of the 157 countries graded in the 2006 survey, 20 are classified as 'free,' 52 'mostly free,' 73 as 'mostly unfree,' and 12 as 'repressed'. The top ten freer nations of 2006 are Hong Kong, Singapore, Ireland, Luxembourg, Iceland, Britain, Estonia, Denmark, Australia, and the US. At the other end of the liberty spectrum, the ten most 'economically repressed' states are North Korea, Iran, Burma, Zimbabwe, Venezuela, Libya, Belarus, Cuba, Laos and Turkmenistan.

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Determining factors

The 2006 IEF measured the 157 countries, including 45 African countries, against a list of 50 independent variables divided into ten criteria. They were:

The fiscal burden imposed by the state upon its citizens through income tax rates, corporate tax rates and trends in public expenditure as a percentage of GDP. The higher the taxation burdens, the lower a country's score because, it is believed, excess taxation prevents individuals pursuing their goals in the marketplace and deters private consumption.

Similarly, large government spending implies increased demands upon taxpayers' resources, diverting them away from potentially more productive private-sector investments.

Economic interventions by the state, measured by the percentage of GDP contributed by monopolies and state-owned enterprises i.e. total economic output (goods, services and basic infrastructure) provided by the government.

However, most libertarians agree that selective goods and services--what economists call 'public goods', primarily policing and external defence--are better managed by government. But when the state's powers extend beyond the minimal level, it infringes upon individual freedom.

Regulatory burdens on existing and/or new businesses, including health, safety and licensing regulations.

In Hong Kong, the procedure for obtaining a business licence requires filling out a single form with a modest fee. But in parts of Africa, South America and India, the procedure can take a year or more and involves heavy expenses. …

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