The 2015 Index of Economic Freedom assesses economic policy developments in 186 economies in six regions around the world. The Index grades and ranks economies based on their performance in 10 key policy areas affecting overall economic freedom, which are grouped into categories that evaluate the rule of law, respect for the principle of limited government, regulatory efficiency, and the domestic and international openness of markets. The 2015 Index, the 21st annual edition, evaluates economic conditions and policy developments between July 1, 2013, and June 30, 2014.
Global Progress in Economic Freedom
The 2015 Index judges the world economy as a whole to be “moderately free.” Average economic freedom has increased for the third year in a row. Although the pace of advancement has slowed sharply in comparison to last year’s 0.7-point improvement, economic freedom has still advanced by 0.1 point to 60.4 in the 2015 Index. That represents a 2.8-point overall improvement from the inception of the Index in 1995. (See Chart 1.)
Of the 178 economies graded in the 2015 Index, only five have sustained very high freedom scores of 80 or more, putting them in the ranks of the economically “free.” The next 30 countries have been rated as “mostly free” economies recording scores between 70 and 80. With scores of 60 to 70, 55 countries have earned scores that place them in the “moderately free” category. Thus, a total of 90 economies, or about 50 percent of all nations and territories graded in the 2015 Index, provide institutional environments in which individuals and private enterprises benefit from at least a moderate degree of economic freedom in the pursuit of greater prosperity and success.
On the opposite side of the spectrum, nearly half of the remaining countries graded in the Index—88 economies—have registered economic freedom scores below 60. Of those, 62 economies are considered “mostly unfree” (scores of 50–60), and 26 are clearly “repressed” (below 50).
Despite the global progress recorded over the 21-year history of the Index, the number of people living without economic freedom remains disturbingly high: 4.5 billion, or about 65 percent of the world’s population. More than half of these people live in just two countries, China and India, where advancement toward greater economic freedom has been both limited and uneven. In the two most populous economies, structural reforms in a few key sectors have sometimes boosted growth, but the governments have failed to institutionalize open environments that promote broad-based and sustained improvements in the economic well-being of the population as a whole.
As shown in “The Ten Economic Freedoms: A Global Look” on the next page, on a worldwide basis, this year’s increase in economic freedom has been driven by improvements in trade freedom, monetary freedom, and freedom from corruption, for which global ratings have advanced by close to one point or more on average. Average scores for most other economic freedoms, including business freedom, property rights, labor freedom, investment freedom, and financial freedom, have registered small declines.
The loss of economic freedom was most pronounced in the area of respect for limited government. A score drop of 1.0 point in the category measuring control of government spending reflects the continuation of countercyclical or interventionist stimulus policies in some countries, though there is scant evidence that such policies are boosting growth or restoring employment.
Gains and Losses
In the 2015 Index, 101 countries, the majority of which are less developed or emerging economies, showed advances in economic freedom over the past year. Remarkably, 37 countries, including Taiwan, Lithuania, Georgia, Colombia, Israel, Cabo Verde, Montenegro, and Côte d’Ivoire, achieved their highest economic freedom scores ever in the 2015 Index.
While four countries (Singapore, Finland, Madagascar, and Suriname) recorded no score change, declines in economic freedom have occurred in 73 countries. Eleven countries, including Venezuela, Equatorial Guinea, Argentina, Bolivia, Algeria, Greece, and El Salvador, recorded their lowest economic freedom scores ever.
Sub-Saharan Africa is home to six of the 10 most improved countries. São Tomé and Príncipe, Democratic Republic of Congo, Togo, Senegal, Burundi, and Zimbabwe all recorded score gains of two points or more. On the other hand, Europe has the most countries (Slovenia, Ukraine, Armenia, and Greece) recording serious declines, followed by Sub-Saharan Africa (Equatorial Guinea, Botswana, and the Gambia) and Middle East/North Africa (Algeria and Yemen).
Score improvements in eight countries, all of which are developing or emerging economies, were significant enough to merit upgrades in their economic freedom status in the Index. Notably, Israel and Malaysia have joined the ranks of the “mostly free,” in Israel’s case for the first time ever and in Malaysia’s case regaining a level of economic freedom it had not experienced since 1996. Three developing countries (Morocco, Serbia, and Vanuatu) have advanced into the ranks of the “moderately free.” Three others (Haiti, São Tomé and Príncipe, and Togo) have escaped the status of economically “repressed.”
Fourteen countries, including Angola, Poland, South Korea, Taiwan, and the United Arab Emirates, have achieved uninterrupted growth in economic freedom over the past five years. Seven of the 14, all developing countries, have recorded notable cumulative score gains of over five points: Zimbabwe, Burma, Comoros, Seychelles, Liberia, the Philippines, and Guinea–Bissau.
Competition for the top spot in the Index rankings has intensified. The 2015 Index has recorded a number of noticeable realignments and achievements within the top 20 global economic freedom rankings.
- Hong Kong has maintained its status as the world’s freest economy, a distinction that it has achieved for 21 consecutive years. However, the gap between that territory and Singapore, the second-freest economy, has almost vanished. Hong Kong’s economic freedom score declined by 0.5 point, with an erosion of the rule of law reflecting an increased level of perceived corruption.
- Along with Hong Kong and Singapore, New Zealand, Australia, and Switzerland are the only economies considered “free” with economic freedom scores above 80 on the 0-to-100 Index grading scale. New Zealand moved up two slots and reclaimed third place in the rankings as a result of committed efforts to cut government spending. Canada remains the world’s sixth-freest economy for the fifth year in a row.
- Chile (seventh) and Mauritius (10th), two reform-minded developing economies, continue to rank among the world’s 10 freest economies. Both have demonstrated persistent commitment to the rule of law, limited government, regulatory efficiency, and open markets.
- Moving up three slots, Estonia has become the world’s eighth-freest economy. The small Baltic nation has rejoined the world’s 10 freest economies for the first time since 2007, overtaking Denmark (11th), Ireland (ninth), and Mauritius.
- The United States continues to be only the 12th-freest economy, seemingly stuck in the ranks of the “mostly free,” the second-tier economic freedom category into which the U.S. dropped in 2010.
- Taiwan and Lithuania, benefitting from uninterrupted score improvements since 2009, have recorded their highest economic freedom scores ever, advancing to 14th and 15th places, respectively, and surpassing Sweden, Finland, Germany, Luxembourg, the Netherlands, and Bahrain.
Regional Trends in Economic Freedom
In the 2015 Index, each of the six regions continues to be represented by at least one country that ranks among the top 20 freest economies. However, as shown in Chart 2, average levels of economic freedom advanced in only half of the regions.
Sub-Saharan Africa (led by São Tomé and Príncipe and Democratic Republic of Congo) and the Asia–Pacific region (led by Maldives and the Philippines) each showed an average score improvement of 0.3 point, and Middle East/North Africa countries (led by Israel and Morocco) gained 0.1 point on average. While average economic freedom for the South and Central America/Caribbean region stayed the same as last year, Europe and North America registered slight declines of 0.1 and 0.2 point, respectively.
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: 73.9 and 67, 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 Egypt, Israel, 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.
Despite varying degrees of economic freedom across the regions, the fundamental relationship between economic freedom and prosperity is readily apparent worldwide. Chart 3 shows that, no matter the region, per capita income levels are consistently higher in countries that are economically freer.
The diversity of the world’s peoples and cultures implies that there will be many paths to economic development and prosperity. The whole idea of economic freedom is to empower people with more opportunity to choose for themselves how to pursue and fulfill their dreams, subject only to the basic rule of law and honest competition from others. The patterns of economic freedom across the six Index regions are, not surprisingly, unique. They reflect the culture and history of each nation and the individuals that inhabit them, not to mention circumstances of geography or endowments of natural resources.
There is no single answer to the particular challenges of development that we face. One thing, however, is sure: 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 U.S.) and one “moderately free” economy (Mexico). Canada has led the region in economic freedom since 2010.
Overall, average economic freedom in the region has registered a slight decline (0.2 point) since last year, with a small improvement in the United States outweighed by declines in Canada and Mexico. The downward spiral in U.S. economic freedom over the previous seven years has come to a halt. In the 2015 Index, the U.S. recorded modest score gains in six of the 10 economic freedoms; however, its score for business freedom has plunged below 90, the lowest level since 2006.
The North American Free Trade Agreement remains the linchpin of massive trade and investment flows in the North America region. This increasing integration is reflected in converging scores for trade freedom and investment freedom in the region. 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. Over the past two decades, the trade and investment freedom margins have narrowed to less than three points.
The Europe region includes 43 countries graded by the Index, the most of any region. Switzerland continues to be the only “free” economy in the region, with a score of 80.5. Nine of the world’s 20 freest countries are in Europe, and the vast majority of the region’s countries are considered at least “moderately free.” Europe has three “mostly unfree” economies (Moldova, Greece, and Russia) and two “repressed” economies (Ukraine and Belarus).
Taken as a whole, the Europe region 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 distortionary subsidies, and continuing problems in public finance management resulting from years of expansion of the public sector.
The result has been stagnant economic growth, which has exacerbated the burden of fiscal deficits and mounting debt. In many countries of the region, decisive policy action is needed to cut spending. Where such actions have been taken, progress is apparent. Three Baltic economies (Estonia, Lithuania, and Latvia) are on the move toward greater economic freedom. Overcoming severe recessions following the global financial turmoil, these young free-market democracies have sustained their openness to global markets and competition, pursued regulatory reform, and shrunk the size of their governments. Each has moved up in the Index rankings every year since 2012, outperforming many older members of the European Union such as Spain, Portugal, France, and Italy.
South and Central America/Caribbean
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 2015 Index, and 14 countries fall in the middle economic freedom category of “moderately free.” There is no “free” economy, but three “mostly free” economies (Chile, Colombia, and Saint Lucia) lead the region. Recording its highest score ever in the 2015 Index, Colombia has solidified its ranking as the second freest in the region. Although Haiti has moved out of the ranks of the “repressed,” five countries (Cuba, Venezuela, Argentina, Bolivia, and Ecuador) persist with poor policy choices that trap their citizens in the lowest category of economic freedom.
Although countries in the region demonstrate a high degree of economic and political diversity, the stark reality in common across the region is that economies are underperforming and stagnating due to the lack or even loss of economic freedom. The foundations of well-functioning free-market democracy remain fragile in the South and Central America/Caribbean region. 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 competing deceptive models of governance based on cronyism and populism.
Over the past year, economic freedom in the South and Central America/Caribbean region has improved in 13 countries while declining in 15. Suriname scored the same as the previous year. The erosion of economic freedom in populous countries such as Brazil and Argentina is particularly troubling, exacerbating poverty and increasing the challenge of fostering broad-based sustainable growth in the future.
Middle East/North Africa
The Middle East/North Africa region continues to be a critical global hot spot for economic, political, and security vulnerabilities. The majority of the Middle East/North Africa region’s 15 economies graded by the Index continue to be only “moderately free” or “mostly unfree,” with Algeria and Iran considered “repressed.” Algeria, Yemen, and Bahrain recorded three of the 10 largest score declines in the 2015 Index, while Egypt and Israel were among the best in improving economic freedom this year.
Since early 2011, many countries in the region have been undergoing socioeconomic upheaval, with outcomes far from certain. The lives of many ordinary people in the region have yet to change for the better. Of the Arab Spring economies, Tunisia and Egypt have shown the most encouraging results over the past year. However, Yemen and Bahrain continue to be on downward paths in terms of economic freedom, and grading of economic freedom for Iraq, Libya, and Syria remains suspended because of ongoing violence and unrest.
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. Taken as a whole, the Middle East/North Africa region’s lack of job opportunities continues to be a serious problem, particularly for younger members of the labor force whose average unemployment rate is close to 25 percent.
Undoubtedly, mounting economic problems will not be solved simply by holding elections or allowing greater expressions of dissent. Existing policies and practices continue to restrict economic freedom. Over the past year, business freedom, the lack of which contributed to igniting Arab Spring protests, has declined in 11 of the 18 countries in the region. Equally troublesome is that costly subsidies on energy and food, which place a considerable burden on budgets and stand in the way of sound sustainable economic development, are still on the rise as many governments in the region continue to rely on lavish subsides to quell social and political unrest.
For two years in a row, the Asia–Pacific region has outperformed the other five regions in terms of advancing economic freedom. Since 2013, the region as a whole has recorded a cumulative score gain of close to 1.5 points. 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 six of the world’s 20 freest economies but also seven of the 20 least free countries. Over 60 percent of the 41 countries in the Asia–Pacific region score between 40 and 60 on the economic freedom scale, remaining either “mostly unfree” or “repressed.”
Despite the stark divergences, the region on the whole continues to demonstrate an impressive degree of economic resilience and dynamism. Asia is home to the world’s largest economies and a number of fast-growing emerging economies. As indicated by the region’s high level of trade freedom, Asia–Pacific economies have been capitalizing on the freer flow of goods and services both around the world and within the region. Facilitating vibrant commercial engagement beyond borders and amplifying economic development, trade agreements have proliferated in the Asia–Pacific region over the past decade. There are now some 40 completed intraregional trade agreements and over 100 agreements with countries outside the region.
In the 2015 Index, the Asia–Pacific region has recorded some notable changes in economic freedom. The scores of 27 countries have improved, and those of 14 have worsened. Of those that have improved, seven countries, including Taiwan, Vietnam, and Laos, have achieved their highest economic freedom score ever in the 2015 Index. Four countries (Taiwan, South Korea, the Philippines, and Burma) have achieved five consecutive years of advancing economic freedom.
On the other hand, Hong Kong’s economic freedom score has tumbled to the territory’s second lowest rating since 2007. Although Hong Kong continues strongly to maintain the features of an economically free society, the city’s waning institutional uniqueness has placed it at a critical crossroads. The current failure to deliver promised meaningful electoral reform has galvanized greater pro-democracy sentiments in Hong Kong and undermined trust and confidence in the government.
Unlike other regions that have a more diverse and a wider 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, nine of the world’s 26 “repressed” economies are in Sub-Saharan Africa.
Nevertheless, together with the Asia–Pacific region, Sub-Saharan African has experienced the most widespread increases in economic freedom over the past year. In the 2015 Index, economic freedom has advanced in 59 percent of the economies of the Sub-Saharan Africa region. Most impressively, six of the top 10 largest score improvements in the 2015 Index have occurred in countries in this region. São Tomé and Príncipe, Democratic Republic of Congo, Togo, Senegal, Burundi, and Zimbabwe have all recorded score gains of two points or more. Liberia and Sierra Leone, two post-conflict countries currently confronting challenges of containing Ebola, have continued to move up from the ranks of the economically “repressed.” Also encouraging is that six countries in the region, including Angola, Comoros, Guinea–Bissau, and Seychelles, have registered sustained growth in economic freedom throughout the past five years.
Many countries in the region have substantial growth momentum. The positive economic results achieved through advancing economic freedom have created valuable impetus for additional institutional reforms that are needed to ensure long-term economic development. However, the region as a whole continues to underperform in following through on policy changes that will help the emergence of a more dynamic private sector.
Despite sustained high growth over the past decade, structural transformation remains patchy in many African countries. Limited diversification has resulted in less broad-based growth, with exports often concentrated in sectors with little scope for sustained productivity increases. More critically, uneven economic playing fields, exacerbated by the weak rule of law, continue to leave those who lack connections with only limited prospects for a brighter future. It remains to be seen whether the region’s political leaders have the political will to undertake the fundamental economic reforms that are needed to translate narratives of “Africa Rising” into reality.