The document summarizes the 2012 Economic Freedom of the World annual report. It discusses the origins and methodology of the EFW index, which measures economic freedom across 5 areas in 144 countries from 1970-2010. The report finds that countries with higher economic freedom ratings have higher GDP growth, income levels, and life expectancy as well as lower corruption and infant mortality. The US economic freedom rating declined from 2000-2010, which may lower future growth rates according to the report's estimates.

1. Economic Freedom
of the World:
2012 Annual Report
James Gwartney, Florida State University
Robert Lawson, Southern Methodist University
Joshua Hall, Beloit College

2. Historical Roots of Economic
Freedom 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

4. 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.

5. 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

6. 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

8. Economic Freedom Ratings, 2010
Top Nations plus U.K., U.S., Japan
10.0
8.96 8.76
9.0 8.40 8.29
8.03 8.02
7.81 7.75 7.68
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Source: EFW 2012, Exhibit 1.2.

9. 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
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Source: EFW 2012, Exhibit 1.2.

10. 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
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Source: EFW 2012, Exhibit 1.2.

11. Economic Freedom Ratings, 2010
Select Latin American Nations
10.0
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
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Source: EFW 2012, Exhibit 1.2. For more information on Latin America, see Chapter 3.

12. Economic Freedom, 1980-2010*
Canada v. U.S.
9.0
8.7
8.5
8.5 8.4 8.4 8.3
8.2
8.1 8.1
8.1 8.1 8.1
8.0 7.9 United States
7.8 7.8
7.7
7.7 Canada
7.5
7.0
1980 1985 1990 1995 2000 2005 2009 2010
Source: EFW 2012, pp. 52, 166.
*Chain-linked data.

16. 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.

17. 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 Quartile
Source: EFW 2012, Exhibit 1.7.

18. Economic Freedom and
Growth
Source: EFW 2012, Exhibit 1.8.

19. Economic Freedom and Income
Level of Poorest 10%
Source: EFW 2012, Exhibit 1.10.

20. Economic Freedom and Life
Expectancy
Source: EFW 2012, Exhibit 1.11.

21. 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 Quartile
Source: World Bank World Development Indicators 2011.

22. 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 Quartile
Source: Corruption Perceptions Index (2011), Transparency International
Note: Higher rating indicates less corruption