The first chapter of the Economic Freedom of the World: 2017 Annual Report introduces economic freedom and how it is measured by the Economic Freedom of the World (EFW) index. Gwartney, Lawson and Hall (2017) state that “Economic freedom is based on the concept of self ownership”(p.1), which is important because “economically free individuals will be permitted to decide for themselves rather than having options imposed on them by the political process or the use of violence, theft, or fraud by others”(p.1). The authors explain that the EFW index intends to “measure the degree to which the institutions and policies of countries are consistent with economic freedom”(p.2) and that it is divided into 5 categories (Size of Government, Legal System and Property Rights, Sound Money, Freedom to Trade Internationally, Regulation) of averaged component ratings that form a summary rating across individual countries (p.3). The most recent version of the index has been modified so as to include “cross-country differences in legal rights according to gender”(p.6), which is crucial to the process of acknowledging that civil and economic rights are withheld from women in various countries accounted for in the index. This new iteration, which replaced the “chain-linked” methodology of using 2000 as the base year, now uses a panel dataset which approximates missing data by “backcasting” it from more recent years (p.18). This filling in of missing data values allows for the comparison of summary ratings for 159 countries through the past 30 years. According to the authors (2017), “since 1990, the EFW summary rating gap between the less developed economies and the high-income industrial countries fell by 40%”(p.19). In other words, developing countries are experiencing growth in economic freedom at a much faster pace than developed countries, which the authors attribute to gains in the areas of sound money and trade liberalization (p.19).
Analysis of EFW Index
The EFW index does not address any income-related factors in its 5 areas of rating. The index should include behavioral data related to the expenditure of income on basic needs, comparable to the New Human Development Index (Todaro & Smith, 2014), where the NHDI’s composition reflects standard of living through per capita GDP. The EFW index would thus capture the effect of buying basic goods due to a lack of enough income to do otherwise, which is often the case in extremely impoverished countries. According to a graph on The Economist (2015) entitled “How Countries Spend Their Money”, households spend the most on food, housing, clothing, and health (healthcare), which could be considered basic needs. A metric involving per capita income and percentage spent on basic needs varying across poverty levels could show whether people living in different degrees of poverty are spending on necessities just to survive, or are able to “choose how to spend their time and talents”(p.1), hence are economically free. Although it would be very expensive and time-consuming to collect this type of data, it could be insightful for countries with extreme and moderate poverty rates to know what goods and services their poorest regions use and need most. Also, countries could determine which goods and services are most important across different income levels. More developed countries could then offer economic support by pursuing export subsidies for those goods and services. If the effort to liberalize trade between developed and developing countries is successful, specifically by trying to help the lower-income bracket, it will lead to a larger growth in economic freedom for those countries because the degree of poverty will be lessened.