Economic freedom of the world index Chan Wing Kiu 05009634 Cheng Yee Ling 05009642 Wong Chi Ki...
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Transcript of Economic freedom of the world index Chan Wing Kiu 05009634 Cheng Yee Ling 05009642 Wong Chi Ki...
Economic freedom of the world index
Chan Wing Kiu 05009634Cheng Yee Ling 05009642Wong Chi Ki 05015049Yim Kei Yan 05015626
What is Economic Freedom
The key ingredients of economic freedom are : Personal choice Voluntary exchange coordinated by markets Freedom to enter and compete in markets Protection of persons and their property from
aggression by other
Economic Freedom of the World Project
Objective: find a way to measure economic freedom and explore the connection between it and other variables
20 year project Led by Professor Milton Friedman, Rose
Friedman and Michael Walker of The Fraser Institute
Involved 60 of the world’s top scholars
Components of The Economic Freedom of the World Index
1) Size of government :expenditures ,taxes and enterprise
2) Legal Structure and Security of Property Rights
3) Soundness of Money
4) Freedom to trade internationally
5) Regulation of business, labor and capital markets
Based entirely on objective or third party data for 130 countries
Each component and sub-component is placed on a scale from 0 to 10 that reflects the distribution of the underlying data.
The component ratings within each area are averaged to derive ratings for each of the five areas.
In turn , rating is the average of the five area ratings.
1 ) Size of government and taxation
A ) General government consumption spending as a percentage of total consumption
B )Transfers and subsidies as a percentage of GDP
C) Government enterprises and investment as a share of total investment
D )Top marginal tax rate (and income threshold at which it applies)
i) Top marginal income tax rate (and income threshold at which it applies)
Ii) Top marginal income and payroll tax rate (and income threshold at which the top marginal income-tax rate applies)
Size of Government and the Top 10
0 2 4 6 8 10
Score (out of 10)
Luxembourg
Ireland
Canada
United Kingdom
New Zealand
Iceland
Average of Top 10
Switzerland
United States
Singapore
Hong Kong
Source: The Fraser Source: The Fraser Institute.Institute.
Legal Structure and Security of Property Rights
A ) Judicial independence—the judiciary is independent and not subject to interference by the government or parties in disputes
B) Impartial courts—a trusted legal framework exists for private businesses to challenge the legality of government actions or regulation
C) Protection of intellectual property D) Military interference in rule of law and the political
process E) Integrity of the legal system
Legal System and Property Rights and the Top 10
0 2 4 6 8 10
Score (out of 10)
Hong Kong
United States
Singapore
Canada
Average of Top 10
Luxembourg
Switzerland
Ireland
United Kingdom
Iceland
New Zealand
Source: The Fraser Source: The Fraser Institute.Institute.
Access to Sound Money
A) Average annual growth of the money supply in the last five years minus average annual growth of real GDP in the last ten years
B) Standard inflation variability in the last five years
C) Recent inflation rate D) Freedom to own foreign currency bank
accounts domestically and abroad
Sound Money and the Top 10
0 2 4 6 8 10
Score (out of 10)
Iceland
Hong Kong
United Kingdom
Average of Top 10
New Zealand
Canada
Singapore
Luxembourg
Switzerland
Ireland
United States
Source: The Fraser Source: The Fraser Institute.Institute.
Freedom to Trade Internationally
A) Taxes on international trade
i) Revenue from taxes on international trade as a percentage of exports plus imports
ii) Mean tariff rate
iii) Standard deviation of tariff rates B) Regulatory trade barriers
i) Non-tariff trade barriers
ii) Compliance cost of importing and exporting C) Actual size of trade sector compared to expected
size
Freedom to Trade Internationally and the Top 10
D) Difference between official exchange rate and black-market rate
E) International capital market controls
i) Foreign ownership / investment restrictions
ii) Restrictions on the freedom of citizens to engage in capital market exchange with foreigners
—index of capital controls among 13 IMF categories
Freedom to Trade Internationally and the Top 10
0 2 4 6 8 10
Score (out of 10)
Iceland
United States
Switzerland
Canada
United Kingdom
New Zealand
Average of Top 10
Ireland
Luxembourg
Singapore
Hong Kong
Source: The Fraser Source: The Fraser Institute.Institute.
Regulation of Credit, Labor, and Business
A) Credit market regulations i) Ownership of banks—percentage of deposits held
in privately owned banks
ii) Competition—domestic banks face competition from foreign banks
iii) Extension of credit—percentage of credit extended to private sector
Regulation of Credit, Labor, and Business
iv) Avoidance of interest rate controls and regulations that lead to negative real interest rates
v) Interest rate controls—interest rate controls on bank deposits and/or loans are freely determined by the market
Regulation of Credit, Labor, and Business
B) Labor market regulations i) Impact of minimum wage
ii) Hiring and firing practices—hiring and firing practices of companies are determined by private contract
iii) Share of labor force whose wages are set by centralized collective bargaining
Regulation of Credit, Labor, and Business
iv) Unemployment benefits—the unemployment benefits system preserves the incentive to work
v) Use of conscripts to obtain military personnel
Regulation of Credit, Labor, and Business
C Business regulations i) Price controls—extent to which businesses are
free to set their own prices
ii) Burden of regulation
iii) Time with government bureaucracy—senior management spends a substantial amount of time dealing with government bureaucracy
Regulation of Credit, Labor, and Business
iv) Starting a new business—starting a new business is generally easy
V) Irregular payments—irregular, additional payments connected with import and export permits, business licenses, exchange controls, tax assessments, police protection, or loan applications are very rare
Regulations and the Top 10
0 2 4 6 8 10
Score (out of 10)
Ireland
Luxembourg
Singapore
United Kingdom
Switzerland
Average of Top 10
Canada
New Zealand
United States
Hong Kong
Iceland
Source: The Fraser Source: The Fraser Institute.Institute.
2006 Overall Economic Freedom Index and the Top 10
0 2 4 6 8 10
Score (out of 10)
Iceland
Luxembourg
Canada
Ireland
United Kingdom
Average of Top 10
New Zealand
Switzerland
United States
Singapore
Hong Kong
Source: The Fraser Source: The Fraser Institute.Institute.
Why is Economic Freedom Important?
Economic freedom is fundamental human right, without them there can be no political freedom or civil freedoms
They are a prerequisite for growth and development
They are a prerequisite for broader human development
Economic Freedom in the World, 2002 and per-Capita Income
Economic freedom of the world 2002
Log per capital income,
2002
Per Capita Income and Economic Freedom Quartile
$0
$5,000
$10,000
$15,000
$20,000
$25,000
GD
P P
er
Cap
ita
(pp
p),
2003
Least FreeQuartile
3rd Quartile 2nd Quartile Most FreeQuartile
Least Free …………… Most FreeLeast Free …………… Most FreeSources: The Fraser Institute; The World Bank, World Development Sources: The Fraser Institute; The World Bank, World Development Indicators CD-ROM, 2005.Indicators CD-ROM, 2005.
Growth in Real GDP Per Capita and Economic Freedom Quartile
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
GD
P P
er
Ca
pit
a %
Gro
wth
,
19
94
-20
03
Least FreeQuartile
3rd Quartile 2nd Quartile Most FreeQuartileLeast Free ……………..….. Most FreeLeast Free ……………..….. Most Free
Sources: The Fraser Institute; The World Bank, World Development Indicators Sources: The Fraser Institute; The World Bank, World Development Indicators CD-ROM, 2005.CD-ROM, 2005.
How do economic freedom related to economic development?
Why do planners fail so badly? In a world of great uncertainty and unpredictability, economic freedom succeeds for the following reasons.
Reasons for the successful of economic freedom
1. Economic freedom fosters competition and weeds out themany failures.
2. Economic freedom give rise of market mechanism.
Reasons for the successful of economic freedom
3. Economic freedom ruthlessly reallocates resources away from what is failing towards what is succeeding.
4. Economic freedom makes it possible to increase the scale of a successful activity rapidly and by a huge magnitude.
Reasons for the successful of economic freedom
5. Economic freedom makes possible sophisticated contracts that allow individuals and firms to deal with uncertainty.
Correlation between EFI and unemployment
1. Size of Government: 1) High tax ( low economic freedom) ->low incentive to work -> high unemployment rate
2) Large proportion of transfer payment
->Low incentive to work -> high unemployment rate
Correlation between EFI and unemployment
2. Legal Structure and Security of Property Right1) Well PPR increase confidence to invest fruit of labor is protected reduce Unemployment
2) Good legal structure -> reduce uncertainty ->encourage investment -> low unemployment rate
Correlation between EFI and unemployment
3. Access to Sound Money 1)Sound money is essential to PPR -> reduce uncertainty -> encourage investment -> low unemployment rate2)inflation distort relative price alter the fundamental term of long term contract difficult for future planning erode the value of property held in monetary instrument
Correlation between EFI and unemployment
4. Freedom to trade internationally 1)High degree of freedom to trade -> well development of export sector -> well development of domestic production -> low unemployment rate
Correlation between EFI and unemployment
5. Regulation of credit, labor and business 1)credit example: limiting no. of banks lower the ability for banks to loan lower investment -> higher unemployment rate
2)labor example: Minimum wages exists of unemployment
Better way- let market determines labor wages
Correlation between EFI and unemployment
5. Regulation of credit, labor and business 3)business burden of regulation lower the incentives for investment lower the ease to enter market high unemployment rate
Economic Freedom and Unemployment
0.0
3.0
6.0
9.0
12.0
15.0
To
tal U
ne
mp
loy
me
nt
(% o
fto
tal l
ab
or
forc
e),
20
00
-20
02
Least FreeQuartile
3rd Quartile 2nd Quartile Most FreeQuartile
Least Free ……………..….. Most FreeLeast Free ……………..….. Most Free
Sources: The Fraser Institute; The World Bank, World Development Sources: The Fraser Institute; The World Bank, World Development Indicators CD-ROM, 2005.Indicators CD-ROM, 2005.
Conclusion
economic freedom is not easy to achieve principles such as private property,
freedom of choice of occupation, protection against state expropriation, freedom of entry and competition in markets, prices determined by markets are difficult to implement the principles in practice
End of our presentation Thank You
Q&A Section
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