Since its inception in 1995, the Index of Economic Freedom has provided an economic policy road map for countries that aspire to greater economic dynamism and prosperity. The rules are not complicated. As the Index has documented over the past 22 years, lasting prosperity is a result of a persistent commitment to limited government, strong private property rights, openness to global trade and financial flows, and sensible regulation. Together, these interrelated factors have been proven to empower the individual and induce dynamic entrepreneurial activity.
The 2016 Index of Economic Freedom analyzes economic policy developments related to economic freedom in 186 economies.
- Economies rated “free” or “mostly free” enjoy incomes that are over twice the average levels in all other countries and more than four times higher than the incomes of “repressed” economies. Nations with higher degrees of economic freedom prosper because they capitalize more fully on the ability of the free-market system to generate and reinforce dynamic growth through efficient resource allocation, value creation, and innovation.
- In addition to enjoying higher levels of prosperity, people in economically free societies live longer. They have better health. They are able to be better stewards of the environment, and they push forward the frontiers of human achievement in science and technology through innovation.
- It is notable that nations that have focused on improving their competitiveness and opening their societies to new ideas, products, and innovations have done a much better job of achieving the high levels of social progress that their citizens demand. It is not massive redistributions of wealth or government dictates on income levels that produce the most positive social outcomes. Instead, mobility and progress require lower barriers to entry, freedom to engage with the world, and less government control.
- As measured in the 2016 Index, global economic freedom has advanced for the fourth year in a row. The world average economic freedom score for 178 economies across six regions that were numerically rated by the Index recorded an overall average improvement of 0.3 point from the previous year.
- The global average economic freedom score of 60.7 is the highest recorded in the 22-year history of the Index. It is noteworthy that despite recent policy missteps by many countries in responding to the global economic slowdown, the free-market system continues to flourish, accepted by governments around the world as the system most likely to improve the well-being of their populations and eliminate poverty.
- Over the period covered by the 2016 Index (mid-2014 to mid-2015), scores improved in half of the measured 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 improvements.
- The erosion of economic freedom was most pronounced in labor freedom. The average global labor freedom score fell by 1.6 point, reflecting still-stagnant employment conditions around the world as well as the pressing necessity of enhancing the flexibility of labor markets. The average property rights score also declined slightly, while no score changes were recorded in fiscal freedom, business freedom, or financial freedom.
- 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. The next 33 countries, with scores between 70 and 80, are considered “mostly free.” Countries in these groups, joined this year by Botswana, the Bahamas, and Latvia, have created and sustained 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 economic freedom scores between 50 and 70. Of those, 54 economies are considered “moderately free” (scores of 60–70), and 62 are considered “mostly unfree” (scores of 50–60). Twenty-four countries have “repressed” economies with scores below 50.
- Ninety-seven countries, the majority of which are less developed, gained greater economic freedom over the past year; 32 countries, among them Burma, Germany, India, Israel, Lithuania, the Philippines, Poland, and Vietnam, achieved their highest economic freedom scores ever in the 2016 Index. Twelve of these 32 countries are located in 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 “mostly free” 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. Five countries recorded no score change.
Notable developments in the 2016 Index rankings include the following:
- Within the top five freest economies, Switzerland is the only economy whose overall score did not decline in the 2016 Index. Outperforming Australia, the competitive Swiss economy has moved into fourth place, less than a point behind New Zealand.
- With the United Kingdom replacing Mauritius as the 10th freest economy, the world’s top 10 freest economies in the 2016 Index 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).
- The United States continues to be mired in the ranks of the “mostly free,” the second-tier economic freedom category into which the U.S. dropped in 2010. Worse, with 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 three Baltic states—Estonia (9th), Lithuania (13th), and Latvia (36th)—continue to gain economic freedom. Overcoming recessions following the global financial turmoil, these countries have maintained and reinforced their openness to global markets, further reformed their economies, and shrunk the size of their governments. Each has advanced its economic freedom every year since 2012.
- Progress among the so-called BRICS nations (Brazil, Russia, India, China, and South Africa) has stalled, except in India, which improved by 1.6 points. Russia plunged 10 places in the rankings to 153rd, with its score deteriorating by 1.5 points. The rankings of the other BRICS countries—South Africa, Brazil, and China—declined to 80th, 122nd, and 144th, respectively.