The Economic Freedom Index: A Review

Abstract

The economic freedom index (EFI) is one of several cross-country yardsticks that incorporate dimensions of progress and well-being that go beyond what conventional economic indicators tell us. It is a composite of 21 indicators that include “personal choice, protection of private property, and freedom of exchange.” It is one of the few measures where the Philippines ranks higher than most of its neighbors; the Philippines was in fact 29th among 123 countries rated for 1999, while neighboring Taiwan was only 38th, South Korea 43rd, Thailand 53rd, Malaysia 57th, and Indonesia 72nd.

This paper begins with a review of the methodological considerations in index construction such as the use of value weights and linear versus nonlinear aggregation techniques. Outcomes for the Philippines in each of the EFI’s seven areas of concern (together with their respective components) are then closely examined in terms of the validity and timeliness of the data used and the relevance of the indicators themselves in measuring “economic freedom.” It is found that the ranking of the Philippines would even improve if the raw data on some concerns were updated. The review ends with a brief discussion of the “more comprehensive” economic freedom index and notes that the most significant and perhaps most controversial among the new index components is that on labor market flexibility, where non-enforcement of minimum wage legislation is considered a plus, while non-enforcement of all other laws is considered a minus.

JEL classification: A12, A13, D60