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Cengage Webinar: Economic Freedom Of the World

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From the March 1, 2013, Economic Freedom of the World Index co-author, James Gwartney explains how he, Milton Friedman and other leading economists developed this index and how that measure is now widely used in scholarly research to address topics ranging from economic growth and development to the determinants of peaceful relations among nations.

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Cengage Webinar: Economic Freedom Of the World

  1. 1. Economic Freedom of the World: 2012 Annual ReportJames Gwartney, Florida State UniversityRobert Lawson, Southern Methodist UniversityJoshua Hall, Beloit College
  2. 2. Historical Roots of EconomicFreedom of the World (EFW) Index• Outgrowth of 1984 MPS panel discussion on “Was George Orwell right?”• Series of Frasier Institute conferences (1986 – 1993) hosted by Milton Friedman and Michael Walker• Participants included Gary Becker, Douglass North, Peter Bauer, Bill Niskanen, and Gordon Tullock• Sole purpose of conferences was to define and develop a measure economic freedom
  3. 3. Why will freer economies be more prosperous?• Growth is the result of gains from trade, entrepreneurship, and investment.• In a market economy, profit and loss provide people with a strong incentive to engage in productive activities and refrain from counterproductive ones• Politically-directed economies do not have anything like profit and loss. Political allocation will lead to favoritism, cronyism and lots of counterproductive activities.
  4. 4. Methodology• 144 countries• 42 variables grouped into 5 areas• Time Series: 1970, 75, 80, 85, 90, 95, and 2000-2010• 0-10 rating scale with 10 indicating more economic freedom• Data-driven index – World Bank – IMF – World Economic Forum – WTO• Transparency throughout
  5. 5. The Five Areas of EFW Index 1. Size of Government 2. Legal System and Protection of Property Rights 3. Access to Sound Money 4. Freedom to Trade Internationally 5. Regulation of Capital, Labor, and Business
  6. 6. Economic Freedom Ratings, 2010 Top Nations plus U.K., U.S., Japan10.0 8.96 8.76 9.0 8.40 8.29 8.03 8.02 7.81 7.75 7.68 8.0 7.0 6.0 5.0 4.0 3.0 ) h) nd nd lia h) g e da … h or on 6t 9t la ala 2t tra na ap (1 K er (1 (1 Ca us Ze ng itz g es n om A on pa Si Sw ew at H gd St Ja N in ted K ni ted U ni U Source: EFW 2012, Exhibit 1.2.
  7. 7. Economic Freedom Ratings, 2010 Select Nations 10.0 9.0 7.75 8.0 7.57 7.40 6.81 6.79 7.0 6.49 6.37 6.37 6.25 6.0 5.0 4.0 3.0 ) h) h) h) h) h) t) d) ) th th 1s 8t 6t 5t 1t 7t 2n 05 97 (8 (2 (1 10 11 (4 (8 (1 ( a( a( ly y es ce ia e il an Ita ec at ss az in an di m St Ru re Ch In Br Fr er G ted GniU Source: EFW 2012, Exhibit 1.2.
  8. 8. Economic Freedom Ratings, 2010 Scandinavian Nations plus U.S.10.0 9.0 7.93 7.79 7.75 8.0 7.63 7.60 7.0 6.0 5.0 4.0 3.0 h) h) h) ) h) th 5t 6t 3t 7t (8 (1 (1 (2 (2 d k es y an en ar wa at nl ed m St or Fi Sw en N ted D ni U Source: EFW 2012, Exhibit 1.2.
  9. 9. Economic Freedom Ratings, 2010 Select Latin American Nations10.0 9.0 7.85 8.0 7.61 7.46 7.36 7.0 6.39 5.81 5.80 6.0 5.0 3.98 4.0 3.0 ) ) ) h) ) h) ) th th th d) … th h 1t 6t 25 03 44 4n 34 6t (1 (2 (1 (1 12 (1 (4 a( ile ru r( a la ia m ca tin Pe Ch liv ue do na Ri en ez Bo Pa ua sta rg en Ec Co A VSource: EFW 2012, Exhibit 1.2. For more information on Latin America, see Chapter 3.
  10. 10. Economic Freedom, 1980-2010* Canada v. U.S.9.0 8.7 8.58.5 8.4 8.4 8.3 8.2 8.1 8.1 8.1 8.1 8.18.0 7.9 United States 7.8 7.8 7.7 7.7 Canada7.57.0 1980 1985 1990 1995 2000 2005 2009 2010Source: EFW 2012, pp. 52, 166.*Chain-linked data.
  11. 11. Forecasting Growth• According to our empirical estimates, a decline in the EFW index is associated with a reduction in average annual per capita GDP growth.• The decline in the U.S.’s EFW rating between 2000 and 2010 was 0.89 units.• We estimate the annual U.S. growth rate will be 1.25 – 1.75 percentage points lower during 2000-2020.• Growth during 1980-2000 was 2.2%. Therefore, we estimate that during 2000-2020 the annual growth rate will be 0.45 - 0.95%. – Interestingly, actual growth from 2000-2010 was 0.7%.Source: Gwartney et al. 2006. “Institutions and the Impact of Investment on Growth.” Kyklos 59(2): 255- 273.
  12. 12. Economic Freedom and Income 40,000 $37,691 35,000 30,000 25,000 20,000 $16,957 15,000 10,000 $6,596 $5,188 5,000 0 Least Free 3rd Quartile 2nd Most Free Quartile Quartile QuartileSource: EFW 2012, Exhibit 1.7.
  13. 13. Economic Freedom and GrowthSource: EFW 2012, Exhibit 1.8.
  14. 14. Economic Freedom and Income Level of Poorest 10%Source: EFW 2012, Exhibit 1.10.
  15. 15. Economic Freedom and Life ExpectancySource: EFW 2012, Exhibit 1.11.
  16. 16. Economic Freedom and Infant Mortality Rate 70.0 60.6 60.0 50.0 40.0 30.0 21.2 20.0 17.2 10.0 5.8 0.0 Least Free 3rd 2nd Most Free Quartile Quartile Quartile QuartileSource: World Bank World Development Indicators 2011.
  17. 17. Economic Freedom and Corruption 8.0 6.91 7.0 6.0 5.0 4.34 4.0 3.35 3.0 2.50 2.0 1.0 0.0 Least Free 3rd 2nd Most Free Quartile Quartile Quartile QuartileSource: Corruption Perceptions Index (2011), Transparency InternationalNote: Higher rating indicates less corruption

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