What Is Economic Freedom? 4 Pillars of Economic Freedom

Economic freedom is the ability of people within a society to control how they earn and spend their money, which directly affects a country’s economic growth. In an economically free society, governments allow for a free market where citizens can work, consume, and invest in whatever way they choose, including providing legal protections such as private property rights, the right to pursue individual entrepreneurship, and free trade.

Levels of economic freedom are measured by two annual report indexes that list rankings of financial freedom by country. The larger of the two is the Index of Economic Freedom, produced by economists at The Heritage Foundation, a think tank in Washington, DC. The second is the Economic Freedom of the World Index (also known as the EFW Index), run by the Fraser Institute, a think tank in Canada.

According to the Heritage Foundation’s Index of Economic Freedom methodology, you can calculate a country’s economic freedom score by examining four categories or pillars of economic freedom. Within the broader four categories are twelve economic freedoms, each graded on a scale of zero to 100. A country’s freedom score is an average of these twelve numerical grades.

1. 1. Government size: This pillar includes fiscal health, which covers debt as a percentage of GDP and deficit, analyzing a country’s ability to manage its budget. The other economic freedoms under this pillar include government spending, which measures how and where a country spends funds, and tax burden, which measures tax burden as a percentage of GDP and marginal tax rates on individual and corporate income.
2. 2. Regulatory efficiency: This pillar includes three economic freedoms related to business, labor, and money. Business freedom measures cost and freedom to operate a business across multiple factors, including licensing and procedures. Labor freedom includes quantifying labor rights, employment opportunities, and wages. Lastly, monetary freedom analyzes price stability and inflation rates.
3. 3. Rule of law: This pillar includes government integrity, which measures public trust in the government and against political corruption, such as bribery, embezzlement, and extortion. Judicial effectiveness covers judicial fairness, especially around property rights. Lastly, property rights cover the level of legal protection of private property rights, including enforcement and physical and intellectual property rights.
4. 4. Open markets: Financial, investment, and trade freedom falls under this pillar. Financial freedom covers the efficiency and independence of banks from governmental control. Investment freedom measures freedom of investment for individuals and companies, while trade freedom measures the effect of tariffs on imports and exports.

There is a positive correlation between economic freedom and a country’s overall prosperity and growth rate due to economic development. Free countries with market economies tend to have a greater wealth per capita, cleaner environments, higher life expectancy, and less poverty.

The Economic Freedom score has improved for 117 countries since 1995, primarily in emerging market economies.

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