The concept of economic freedom serves as a key framework for assessing the extent to which individuals and businesses have the freedom to make economic decisions. In countries with low economic freedoms, governments impose coercion and restrictions on freedoms, limiting choices for individuals and companies, which can ultimately hinder prosperity, writes Visualcapitalist.
The Heritage Foundation recently released a new Economic Freedom Index to showcase the level of economic freedom in each country around the world by examining factors such as property rights, tax burdens, labor freedom…
Countries in this index are rated from 0 to 100, with those scoring above 80 characterized as free economies, 70 to 79.9 as mostly free, 60-69.9 as moderately free, 50-50.9 as mostly unfree, and 0-49.9 as repressed.
Measuring Economic Freedom
This ranking uses four broad categories with three key indicators each, both qualitative and quantitative, to measure economic freedom.
Rule of Law: property rights, judicial effectiveness, government integrity
Size of Government: tax burdens, fiscal health, government spending
Regulatory Efficiency: labor freedom, monetary freedom, business freedom
Open Markets: financial freedom, trade freedom, investment freedom
These 12 indicators are equally weighted and scored from 0-100. The overall score is then determined from the average of the 12 indicators. Looking at these indicators, only four countries in the world have a score of 80 or higher: Ireland, Singapore, Switzerland, and Taiwan, placing them in the category of fully economically free states.
Now let’s look at things from a regional perspective.
Europe
From a regional perspective, Europe is the strongest in economic freedoms. It may be somewhat surprising that Germany, as a European power, ranks only 10th on the continent with a score of 73.7. Such a poor result is due to government spending, which is rated the lowest (28.3/100), as government spending has averaged 49 percent of GDP over the last three years.
Ireland, for instance, ranks third in the world, with particularly high scores in categories such as property rights and judicial effectiveness. The country also has no minimum capital requirement—which is typically a matter of banking regulation and corporate law that determines how much capital an organization must have—making it attractive for companies to open their offices there.
As for Croatia, it ranks a distant 46th with a score of 66.4. This result places it behind neighboring Slovenia, which is in 37th place with a score of 68.5. Bosnia and Herzegovina is ranked 63rd with a score of 62.9, while Serbia is 58th with a score of 63.5.
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Africa
Africa is currently the continent with the least economic freedoms in the world, but it is also the region with the greatest potential for economic growth. This is supported by the fact that this continent is experiencing the highest population growth, and thus the labor force, with Africa expected to see an increase of 2.5 billion people by the end of the century.
The lowest-rated country in Africa is Sudan, a country under additional pressure due to widespread civil conflicts. Historically, economic development has been limited by widespread corruption and a lack of institutional capacity. In contrast, Botswana has recorded the highest score in continental Africa (64.9), ranking higher than countries like France and Italy.
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North and South America
The United States ranks 3rd regionally and 25th overall—with a score of 70.6. The report attributes the categorization of the U.S. as ‘mostly free’ to issues such as inflation, rising national debt, and uncontrolled deficit spending. Public debt currently exceeds 128 percent of GDP.
In South America, Chile ranks first, positioned above many other economic powers such as the U.S., UK, and Japan.
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Asia and Oceania
China is among the lowest-rated in East Asia and Oceania, ranking only 154th in the world and categorized in this index as a repressed economy. The ruling Chinese Communist Party routinely exerts direct control over economic activity. China’s protectionist stance towards foreign investments and numerous trade tariffs imposed by other nations also play a role.
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Middle East
In India, where public debt is around 84 percent of GDP, fiscal health is the category with the lowest ratings. Additionally, a large part of the economy remains quite informal; a significant portion of people work in jobs without tax deductions, recorded income, or formal contracts that protect them, raising questions about labor freedoms.
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It may come as no surprise that the United Arab Emirates has the highest score in the Middle East. The UAE has implemented various measures and initiatives, such as tax exemptions, free trade zones, simplified business registration processes, and flexible regulatory frameworks to encourage entrepreneurship and foreign direct investment. Additionally, the highest tax rates for individuals and corporations in the country are 0 percent.
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