The rankings in the 2016 Index of Economic Freedom are based on evaluations of economic conditions and policy developments between July 1, 2014, and June 30, 2015. Many countries had to deal with difficult political and security issues during that period, and the global economy was still recovering from widespread financial crisis and recession. It is encouraging that despite such challenges, global economic freedom continued to advance. According to the 2016 Index:
- Economic freedom improved worldwide for the fourth year in a row, with the average score up by three-tenths of a point from the previous year.
- The global average economic freedom score of 60.7 is the highest ever recorded in the 22-year history of the Index.
- The world average is now more than three points higher than in the first edition of the Index in 1995.
As shown in “The Ten Economic Freedoms: A Global Look” on page 63, on a worldwide basis, this year’s increase in economic freedom has been driven by improvements in half of the 10 economic freedoms.
- Investment freedom improved by one point on average, while ratings for the control of public spending and freedom from corruption were higher by an average of 0.8 point and 0.7 point, respectively. Both monetary freedom and trade freedom also recorded slight improvements.
- Overall gains were held back by a significant loss of labor freedom. The average global labor freedom score fell by 1.6 points, reflecting still-stagnant employment conditions around the world and pointing to a pressing need to enhance the flexibility of labor markets in many countries. The average property rights score also declined slightly, while no score changes were recorded in fiscal freedom, business freedom, or financial freedom.
The global distribution of economic freedom is largely bell-shaped but tilted toward lower ratings. Of the 178 economies ranked in the 2016 Index:
- Five (Hong Kong, Singapore, New Zealand, Switzerland, and Australia) earned the designation of “free” with scores above 80.
- Another 33 countries, with scores between 70 and 80, are considered “mostly free.” The 38 countries in these two groups, which were joined this year by Botswana, the Bahamas, and Latvia, have institutional environments in which individuals and private enterprises enjoy a substantial degree of economic freedom in the pursuit of greater opportunity and prosperity.
- The largest portion of the countries graded—116 economies—have freedom scores between 50 and 70. Of those, 54 economies are considered “moderately free” (scores of 60–70), and 62 are “mostly unfree” (scores of 50–60). Twenty-four countries have “repressed” economies with scores below 50.
The 2016 Index has recorded a number of achievements or realignments in the rankings. Some of the most notable are:
- The United Kingdom replaced Mauritius as the tenth freest economy, so the world’s top 10 freest economies now consist of four Asia–Pacific economies (Hong Kong, Singapore, New Zealand, and Australia); four European economies (Switzerland, Ireland, Estonia, and the United Kingdom); and one country each from North America (Canada) and the South and Central America/Caribbean region (Chile). No African or Middle Eastern country cracked the top 10.
- Ninety-seven countries, the majority of which are less developed, gained greater economic freedom over the past year; 32 countries, including Burma, Germany, India, Israel, Lithuania, the Philippines, Poland, and Vietnam, achieved their highest economic freedom scores ever in the 2016 Index; and 12 of these 32 countries, including Angola, Cabo Verde, Sierra Leone, and Togo, come from Sub-Saharan Africa.
- Score improvements in eight countries were significant enough to merit upgrades in the countries’ economic freedom status in the Index. Notably, Latvia became a “mostly free” economy for the first time, while Botswana and the Bahamas regained that status. Two Sub-Saharan African countries, Côte d’Ivoire and Seychelles, have advanced into the ranks of the “moderately free,” and three countries (Algeria, Lesotho, and Micronesia) have moved out of the status of economically “repressed.”
- Declining economic freedom was reported in 74 countries, including 19 advanced economies such as the United States, Japan, and Sweden. Six countries recorded no score change.
Among the six regions, average levels of economic freedom vary widely. North America and Europe continue to record the highest average economic freedom scores among the regions: 72.9 and 66.9, respectively. Despite the ongoing economic and political turmoil in a number of countries in the Middle East and North Africa, the region as a whole still achieved an average economic freedom score slightly above 60 due to high ratings of economic freedom in Bahrain, the United Arab Emirates, and Qatar, reinforced by improved scores in Israel, Egypt, and Morocco. Average economic freedom scores in the South and Central America/Caribbean region, the Asia–Pacific region, and Sub-Saharan Africa continue to be below 60.
North America and Europe are the only two regions that registered score declines of 1.0 point and 0.1 point, respectively. While average economic freedom for the South and Central America/Caribbean region stayed largely the same as last year with an improvement of 0.1 point, the regional average for the Middle East/North Africa region increased significantly, by a full point. Average economic freedom scores for Sub-Saharan Africa and the Asia–Pacific region continued their recent upward trends, showing improvements of 0.6 point and 0.2 point, respectively, in the 2016 Index.
Despite varying levels of economic freedom across the regions, the fundamental relationship between economic freedom and prosperity holds true worldwide. Chart 4 shows that no matter the region, per capita income levels are consistently higher in countries that are economically freer. The reason for this is clear: Governments that respect and promote economic freedom provide the best environment for experimentation, innovation, and progress, and it is through these that humankind grows in prosperity and well-being.
The North America region has two “mostly free” economies (Canada and the United States) and one “moderately free” economy (Mexico). The North American Free Trade Agreement remains the linchpin of massive trade and investment flows in the North America region.
The region’s increasing economic integration is reflected in converging scores for trade freedom and investment freedom. In 1995, when the first edition of the Index measured these freedoms, the score differences between the United States and Mexico were over 10 points in both categories. Over the past two decades, the trade and investment freedom margins have narrowed to less than three points.
Notable Countries: Canada has led the region in economic freedom since 2010. The United States continues to be mired in the ranks of the “mostly free,” the second-tier economic freedom category into which it dropped in 2010. Worse, with its scores in labor freedom, business freedom, and fiscal freedom notably declining, the economic freedom of the United States plunged 0.8 point to 75.4, matching its lowest score ever.
The Europe region includes 44 ranked countries. Half of the world’s 20 freest countries are in Europe, and the vast majority of the region’s economies are considered at least “moderately free.” Europe now has five “mostly unfree” economies (Croatia, Bosnia and Herzegovina, Moldova, Greece, and Russia) and two “repressed” economies (Ukraine and Belarus).
Taken as a whole, Europe still struggles with a variety of policy barriers to dynamic economic expansion, such as overly protective and costly labor regulations, higher tax burdens, various market-distorting subsidies, and continuing problems in the management of public finance resulting from years of public-sector expansion. In some countries, lingering institutional shortcomings make it difficult to enhance respect for the rule of law. High levels of corruption, exacerbated by relatively inefficient judicial systems, weaken the prospects for dynamic long-term economic development.
Notable Countries: The three Baltic States (Estonia, Lithuania, and Latvia) continue to gain greater economic freedom. Each has advanced its economic freedom every year since 2012. Insulated somewhat from the eurozone crisis and monetary uncertainty in the region, the United Kingdom has demonstrated a high level of economic resilience. Disciplined fiscal adjustments have contributed to restoring the country’s economic dynamism and advancing it to 10th place in the Index. Croatia and Russia have registered the largest score declines in the region. Russia in particular faces bleak prospects for long-term economic growth in the absence of an efficiently functioning legal framework and continued heavy government interference in the private sector through myriad state-owned enterprises.
In the South and Central America/Caribbean region, 29 countries are distributed throughout the rankings in a more bell-shaped way than is found among the countries of any other region. All but eight countries have received an economic freedom score between 50 and 70 in the 2016 Index, and 14 countries fall in the middle economic freedom category of “moderately free.” There is no “free” economy, but four “mostly free” economies (Chile, the Bahamas, Colombia, and Saint Lucia) lead the region.
The stark common reality across the region is that the foundations of well-functioning free-market democracy remain fragile. With widespread corruption and the weak protection of property rights aggravating systemic shortcomings such as regulatory inefficiency and monetary instability caused by various market distortions, the region as a whole has become increasingly vulnerable to deceptive models of populist governance.
Notable Countries: Several notable policy measures undertaken in recent years threaten Chile’s well-established tradition of economic freedom. Along with the introduction of redistributive tax measures, the corporate tax rate has been raised and is slated to rise further in coming years. Ongoing labor reforms have focused on increasing the minimum wage and strengthening union bargaining. Performing far below its potential, Argentina’s economy remains stifled by blatant disregard for the basic foundations of the rule of law and limited government; the country has recorded its lowest economic freedom score ever. In Venezuela, President Nicolás Maduro has pushed government spending to the brink, resulting in harmful increases in inflation and the public debt.
The Middle East/North Africa region continues to be a critical global hot spot with economic, political, and security vulnerabilities. Structural and institutional problems abound throughout the region, and private-sector growth continues to lag far behind levels needed to provide adequate jobs for growing populations. The majority of the Middle East/North Africa region’s 14 economies graded by the Index continue to be only “moderately free” or “mostly unfree,” with Iran becoming the only “repressed” economy in the region.
Since early 2011, many countries in the region have been undergoing socioeconomic upheaval, and the outcomes of continuing turmoil are far from certain. The lives of many ordinary people in the region have yet to change for the better. Among the Arab Spring economies, Tunisia and Egypt have shown some encouraging results in recent years. However, grading of economic freedom for Iraq, Libya, Syria, and Yemen has had to be suspended because of ongoing and worsening civil unrest.
Notable Countries: Economic freedom in the United Arab Emirates has advanced for the eighth year in a row. With a transparent and favorable business climate and a high degree of political stability, the UAE has created a dynamic entrepreneurial environment for international investors. Improvements in key policy areas such as the management of public finance and the overall investment framework have propelled Israel further into the ranks of the “mostly free.” The intensifying civil war in Yemen has destroyed infrastructure, displaced over a million people, and resulted in an acute humanitarian crisis.
Economic freedom has advanced in the Asia–Pacific region for three years in a row. The cumulative score gain since 2013 is 1.6 points. In the 2016 Index, the scores of 22 countries in the region have improved, while those of 19 have worsened.
The Asia–Pacific area continues to have by far the largest number of the world’s “free” economies. Hong Kong, Singapore, New Zealand, and Australia lead the Index. Nonetheless, the region is marked by sharp disparities in levels of economic freedom, with five of the world’s 20 freest economies but also seven of the 20 least free countries. Over 60 percent of the 42 ranked countries in the Asia–Pacific region score between 40 and 60 on the economic freedom scale, remaining either “mostly unfree” or “repressed.”
Notable Countries: The economy of the Philippines has enjoyed growth in economic freedom every year since 2012. The government has pursued legislative reforms to enhance the entrepreneurial environment and develop a more vibrant private sector to encourage broader-based job creation. Vietnam has recorded the region’s biggest score improvement. Gradually transforming itself into a more open, market-oriented economy, the country has benefited from integration into the global commercial system. Reforms have included partial privatization of state-owned enterprises, liberalization of the trade and investment regimes, and modernization of the financial sector. Over the past year, China’s economy has undergone a period of financial market volatility and economic slowdown. Deep-seated structural problems, including continued overreliance on public investment and exports for growth, a state-controlled financial sector, and regulatory inefficiency, have become more acute.
Unlike other regions that have a wider and more diverse range of economic freedom scores, Sub-Saharan Africa continues to show variations only within the lower bands of economic freedom. There is no “free” economy in the region, and Mauritius continues to lead the region as a “moderately free” economy. A majority of 46 nations are ranked either “mostly unfree” or “repressed.” In fact, eight of the world’s 24 “repressed” economies are in Sub-Saharan Africa.
Despite turmoil in commodity markets, Sub-Saharan Africa continues to be one of the world’s fastest-growing regions. Together with the Asia–Pacific region, it has experienced the most widespread increases in economic freedom over the past year. In the 2016 Index, economic freedom has advanced in 65 percent of Sub-Saharan Africa’s economies. However, the region as a whole continues to underperform in following through on policy changes that would encourage the emergence of a more dynamic private sector. Limited diversification has resulted in less broad-based growth, with exports often concentrated in sectors with little scope for sustained productivity increases.
Notable Countries: Mauritius continues to be a regional leader in economic freedom, but its economic freedom has been on a declining path since 2013. In the 2016 Index, the small island economy dropped out of the list of the world’s 10 freest economies for the first time since the 2012 Index. Over the past five years, Côte d’Ivoire has made a notable economic transition from fragility to relative stability. Recent reform measures include strengthening the management of public finance and structural reforms to foster a more dynamic private sector. Nigeria’s high economic growth in recent years has not translated into real gains for most Nigerians. The pace of job creation has been impeded by bureaucratic rigidity and corruption in the economy, leading to increasing frustration among underemployed youth. Equally troubling is that South Africa is increasingly hampered by social instability exacerbated by frequent violent strikes and a lack of employment opportunity. Policies to sustain dynamic flows of investment have been derailed in some cases.