It is believed that institutions play important roles in
determining economic growth and social welfare. However, how to quantify the
quality of the institution is a difficult problem. In a report published by
Fraser Institute, Economic Freedom of the World, Gwartney, Lawson and Hall, it
interprets the quality of institution to the Economic Freedom of the World
(EFW). In this assignment, I will briefly summarize the contents and
compositions of this index, and comment on its contributions.
Economic Freedom of the World is an index measuring how
supportive of the policies and institutions of a country to its economic
freedom. The fundamental of economic freedom is self-ownership. It contains
dimensions including “personal choice, voluntary exchange, open market,
and defined and enforced property rights” (Gwartney, Lawson and Hall,
2017, pp 1).
The difficulty of constructing the EFW index comes from how
to objectively define a “subjective” concept. There are three
important principles in the EFW index. First, objective components are
preferable although there are some economists use subjective measures, such as
survey and value judgments. Secondly, using external sources of data from
authorities to ensure the quality of data. Thirdly, is the perfect transparency.
It implies all information, data methodology and others, which are all publicly
There are five areas included in the EFW index and each one
contains several components. The first area is the size of government. It contains
government transfer, enterprises and investment, consumption and subsidies, tax
rate, and other factors. The second area is legal system and property rights.
This area includes independence of judicial, impartial of courts, property
rights protection, interference of military, legal system integrity, etc. The
third area is Sound money. It includes money growth and inflation, human’s freedom
to own foreign currency bank account. The fourth area is freedom to trade
internationally, which include information about the tariff, trade barriers,
black market exchange rates and also capital controls. The last area is
regulation, it includes the regulations involved in the credit market, labor
market and business matters. Moreover, the EFW index in 2017 also considers the
gender disparity to account for the differences in legal rights between male
The report of 2017 releases the EFW index of 159 countries
in 2015. Hong Kong is on the top of the list, followed by Singapore, New
Zealand and Switzerland. The bottom ones are Congo, Central African Republic
and Venezuela. The rankings of some other countries are: UK (6), Canada (11) ,
USA (11) , Russia(100) and China (112) .
The developed industrial economics rank very high, especially on the legal
system and property rights (area 2), sound money (area 3) and international
trade (area 4). They are not so good on the size of government (area 1) and
regulation (area 5). The situation is opposite for some developing countries.
When we look at the relation between the EFW index and some
human welfare indicators, we see that EFW may be categorized as one of them.
The authors use data comparisons showing the following facts. It is highly
correlated with income per capita, as well as GDP growth rate. Regarding
inequality, although EFW cannot reflect the differences of the income shares of
the poorest 10% across countries, it is correlated with the actual income
earned by the poorest 10%. Moreover, poverty is lower and life expectancy is
higher with more economic freedom. More economic freedom also correlated with
more political rights and civil liberties, less gender inequalities, and more
happiness (UN world happiness index). Because the patterns between EFW and
other welfare indicators are all consistent, I believe the major contribution
of the EFW index is to confirm the impacts of institution quality on human