Question

What is the Economic Freedom Index and how does it measure the strength of property rights?

Answer 1

An index of economic freedom measures jurisdictions against each other in terms of trade freedom, tax burden, judicial effectiveness, and so on. These factors may be weighted according to their influence on economic freedom and compiled into a single score that allows for a ranking. The ranking can be done on a country basis or can look at wider regions or smaller sub-national units like states.An index of economic freedom scores and ranks countries according to criteria that the creators of the index judge as being relevant. Not all economists will agree on the criteria, of course.Indexes of economic freedom score free-market economies at the high end of the spectrum.There is a strong correlation between the index of economic freedom ranking of a country and the income their citizens enjoy.The most widely referenced index of economic freedom is produced by the Heritage Foundation, a conservative American think tank. The Fraser Institute, a Canadian think tank, also publishes a well-known index of economic freedom.The Heritage Foundation's Index of Economic Freedom has pointed out some important correlations that should encourage nations to try to improve their scores over time. The most important is the observation that people living in countries categorized as free or mostly free enjoy higher incomes than those living in lower scoring nations. The disparity between the best and worst nations is more than six times, meaning someone in an economically free nation makes six times more than someone in an economically repressed nation. Related to this income gap, there is also a correlation between economic freedom and GDP growth, as well as higher standard of living and a general rule of law for citizens.

The property rights component is an assessment of the ability of individuals to accumulate private property, secured by clear laws that are fully enforced by the state. It measures the degree to which a country’s laws protect private property rights and the degree to which its government enforces those laws. It also assesses the likelihood that private property will be expropriated and analyzes the independence of the judiciary, the existence of corruption within the judiciary, and the ability of individuals and businesses to enforce contracts.The more certain the legal protection of property, the higher a country’s score; similarly, the greater the chances of government expropriation of property, the lower a country’s score. Countries that fall between two categories may receive an intermediate score.Prosperity and property rights are inextricably linked. The importance of having well‐​defined and strongly protected property rights is now widely recognized among economists and policymakers. A private property system gives individuals the exclusive right to use their resources as they see fit. That dominion over what is theirs leads property users to take full account of all the benefits and costs of employing those resources in a particular manner. The process of weighing costs and benefits produces what economists call efficient outcomes. That translates into higher standards of living for all.