The Heritage Foundation Index of Economic Freedom versus the Austrian Index of Economic Freedom

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Table of Contents

Chapter 1: Introduction3

Background of the study3

Problem Statement5

Purpose of the Study5

Significance of the Study5

Rationale of the Study6

Chapter 2: Literature Review8

Chapter 3: Methodology14

Introduction14

Research Design15

Literature Search15

Keywords15

Works Cited16

Chapter 1: Introduction

Background of the study

The notion of economic freedom is not new in economic theory. The concept of economic freedom provides a basis for arguing that differences in institutions explain differences in economic performance across nations. Several schools of thought, like neo-institutional economics and public choice, examine the link between economic freedom and economic performance. (Barro: 45-61) Examining economic freedom in a country means examining government regulations, black market activities, rent-seeking activities, and the enforcement of private property rights. These country characteristics are even used in econometric studies as proxies for economic freedom . The importance of this concept has given rise to several attempts to quantify economic freedom. (de Soto: 105-109)

Recently, three indices; the Fraser Institute index of Gwartney, Lawson, and Block (1996), the Freedom House index in the work edited by Messick (1996), and the Heritage Foundation-Wall Street Journal index of Johnson, Holmes, and Kirkpatrick (1998) have been developed to measure economic freedom. Out of these three indices, the Heritage Foundation Index is considered to be the best and in actual a fault index for measuring economic feedom for all countries. (Gwartney: 163-190)

In the 16th Index of Economic Freedom, released today, Australia's economy was ranked the third most free behind Hong Kong and Singapore among 179 countries graded in the Index. Australia scored 82.6, out of an ideal 100, which also equated to third out of 41 countries in the Asia-Pacific region. According to the Index, released annually by The Wall Street Journal and Washington think tank The Heritage Foundation, Australia's economy weathered the financial crisis better than many other advanced economies because of its sound macroeconomic policies and well-implemented structural reforms.

The Index shows that the global recession did less damage in countries that moved to a higher category of economic freedom and was worse in countries that moved lower. (Easton: 235-239)

The Index measures economic freedom within 10 specific categories of freedom: labour, business, trade, fiscal, government spending, monetary, investment, financial, property rights and freedom from corruption. The Index showed Australia to be well equipped in terms of structural strengths, with monetary stability and openness to global trade facilitating a competitive financial and investment environment.

It also revealed a strong legal system that protects property rights, minimal corruption and noted both foreign and domestically owned businesses could enjoy considerable flexibility under licensing and regulatory schemes and in their employment practices. The average economic freedom score for the 2010 Index decreased from 2009 to 59.4 (on a scale where 100 represents the ideal). Of the 179 countries graded in this year's index, only seven scored 80 or higher - the rating necessary to qualify as having a “free” economy. According to the editors of the Index, economic freedom correlates with poverty reduction, a variety of desirable social indicators, democratic governance, ...