Transcript
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Economic Freedom Index
- Jasprit Duggal (PG-10-70)
-Vishal Jadhav (PG-10-77)-Ralph Soans (PG-10-103)
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Economic Freedom
Economic freedom is the fundamental right of everyhuman to control his or her own labor and property.
In an economically free society-
Individuals are free to work, produce, consume, andinvest in any way they please, with that freedom bothprotected by the state and unconstrained by the state.
Governments allow labor, capital and goods to move
freely, and refrain from coercion or constraint of libertybeyond the extent necessary to protect and maintainliberty itself.
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Economic Freedom Index
Its stated objective is to measure the degree
of economic freedom in the world's nations
(183 countries).
The Heritage Foundation and the Wall Street
Journal created the Index of Economic
Freedom.
Introduced in 1995.
Hong Kong tops: Since 1995.
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Economic Freedom Index
The Index has a scale of 0-100 for each
country.
According to the points the countries aredivided in the following categories-
Free Mostly free Moderately
free
Mostly
unfree
Repressed N/A
100-80 79.9-70 69.9-60 59.9-50 49.9-0 Not ranked
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Economic Freedom Matters
Higher per Capita Economic Growth
Poverty Reduction Enhanced Standard of Living
Increased Investment
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Index of Economic Freedom
Economic Freedom is Key to Prosperity
Sources: Terry Miller and Kim R. Holmes, 2010 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc.,
2010), at www.heritage.org/index; World Bank, World Development Indicator Online, www.worldbank.org/data
Correlation:0.672 = 0.45
$-
$15,
$30,000
$45,000
$60,000
20 40 60 80 100
onomi reedom
GDP erCa ita in onstant 2000 U $
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Economic Freedom Reduces Poverty
Sources: Terry Miller and Kim R. Holmes, 2010 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2010), at
www.heritage.org/index; Human Development Reports, United Nations Human Development Programme, at http://hdr.undp.org/en/reports/
Index of Economic Freedom
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ndex of Economic Freedom
The Greater Economic Freedom, The Higher Standard of Living
Sources: Terry Miller and Kim R. Holmes, 2010 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc.,
2010), at www.heritage.org/index; World Bank, World Development Indicator Online, www.worldbank.org/data
$28,091
$23,253
$6,819
$1,478 $1,796
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
Free M s l Free M era el Free M s l U ree e resse
c m c Free m
D erCa a (i c s a 2000U $)
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Index of Economic Freedom
Economic Freedom Attracts Foreign Direct Investment
Sources: Terry Miller and Kim R. Holmes, 2010 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc.,
2010), at www.heritage.org/index; World Bank, 2008 Freedom of the Press Word Rating
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Ten components of Economic
Freedom Index1 Business freedom
2 Trade freedom
3 Fiscal freedom4 Government Spending
5 Monetary freedom
6 Investment freedom
7 Financial freedom
8 Property rights
9 Freedom from corruption
10 Labor freedom
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Business freedom
Ability to start, operate, and close a business that represents the overall burden ofregulation as well as the efficiency of government in the reg-ulatory process
Score is based on 10 factors, all weighted equally, using data from the WorldBanks Doing Business study
Obtaining a licenseprocedures (number)
Obtaining a licensetime (days)
Obtaining a licensecost (% of income per capita)
Starting a businessprocedures (number)
Starting a businesstime (days)
Starting a businesscost (% of income per capita)
Starting a businessminimum capital (% of income per capita)
Closing a businesstime (years)
Closing a businesscost (% of estate)
Closing a businessrecovery rate (cents on the dollar)
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Calculation
Factor Scorei = 50 X factor average
-----------------------------
Factori
Factor average : World average
Factori: Units
Ratio of factor average < 2 Factor score between 0-100
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Trade freedom
Measure of the absence of tariff and non-tariff
barriers that affect imports and exports of
goods and services
The trade freedom score is based on two
inputs:
1) The trade-weighted average tariff rate and
2) Non-tariff barriers (NTBs)
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Calculation
Trade freedom
i=
Tariffmax Tariffi---------------------------- x 100 NTBiTariffmax Tariffmin
Lower the tariff rate: Higher the factor score
20-NTBs are used extensively across many goodsand services and/or act to effectively impede asignificant amount of international trade.
0-NTBs are not used to limit international trade.
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Fiscal freedom
Measure of the tax burden imposed by
government.
Thus, the fiscal freedom component iscomposed of three quantitative factors:
1)The top tax rate on individual income
2) The top tax rate on corporate income, and3) Total tax revenue as a percentage of GDP.
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Calculation
Fiscal freedomij
= 100- a x (Factorij
)2
Fiscal Freedomij : Fiscal freedom in country iforfactor j.
is a coefficient set equal to 0.03
In the 2010 Index, Bulgaria has a flat rate of 10percent for both individual and corporate tax rates,which yields a score of 97 for each of the two factors.Bulgarias overall tax revenue as a portion of GDP is34.2 percent, yielding a revenue factor score of 64.9.
When the three factors are averaged together,Bulgarias overall fiscal freedom score becomes 86.3
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Government Spending
Considers the level of government
expenditures as a percentage of GDP .
GEi = 100 a X (Expendituresi)2
Expendituresi: Between 0 and 100
is a coefficient to control for variation
among scores (set at 0.03) Lower the expenditure: Higher the factor
score.
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Monetary freedom
A measure of price stability.
Inflation and price controls distort market
activity . The score for the monetary freedom factor is
based on two factors:
1) The weighted average inflation rate for themost recent three years and
2) Price controls.
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Calculation
Monetary freedomi =
100 - a x root of (Wtd avg inflationi) PC penaltyi
Price control (PC) penalty is an assigned value of 0-20
points based on the extent of price controls.
coefficient is set to equal 6.333.
Inflation is the absolute value of the annual inflation
rate in country during the yeara as measured by theconsumer price index.
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Investment Freedom
In an economically free country, there would be no
constraints on the flow of investment capital.
In practice, most countries have a variety of restrictions on
investment.
Investment restrictions:
-NATIONAL TREATMENT OF FOREIGN INVESTMENT.
-FOREIGN INVESTMENT CODE.
-RESTRICTIO
NSO
N LANDO
WNERSHIP.-SECTORAL INVESTMENT RESTRICTION.
-CAPITAL CONTROLS.
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Financial Freedom
Financial freedom is a measure of banking security as well as
a measure of independence from government control.
State govt. intervention in banks & other financial freedom. Difficulty of opening and operating financial services (for both
domestic and foreign individuals)
Government influence on the allocation of credit.
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Property freedom
It measures the degree to which a countrys lawsprotect private property rights and the degree to
which its government enforces those laws.
The more certain the legal protection of property,
the higher a countrys score; similarly, the greater the
chances of government expropriation of property,
the lower a countrys score.
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Freedom from Corruption
Corruption erodes economic freedom by introducing
insecurity and uncertainty into economic
relationships.
The score for this component is derived primarilyfrom Transparency International's Corruption
Perceptions Index (CPI) for 2008, which measures the
level of corruption in 180 countries.
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LABOR FREEDOM The labor freedom component is a quantitative measure that looks
into various aspects of the legal and regulatory framework of a
country's labor market.
Ratio of minimum wage to the average value added per worker,
Hindrance to hiring additional workers,
Rigidity of hours,
Difficulty of firing redundant employees,
Legally mandated notice period, and
Mandatory severance pay.
In constructing the labor freedom score, each of the six factors is
converted to a scale of 0 to100 based on the following equation:
Factor Score = 50 x factor average / Factor
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Economic Freedom Index 2010
FACTORS Hong Kong India
Rank 1st 124th
Business Freedom 6 Days 30 Days
Income tax Rate 2 to 17% or 15 flat 33.99%
Inflation 3.5% 7.7%
Transparency Corruption
Perceptions Index
12th 85th
Foreign Investments Possible in all Sectors Not Possible in all Sectors
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Reasons For India's Low EFI
High Corruption
High Inflation
High Income Tax Rate Recently Opened Economy as Compared to
other nations
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India slips 10 Places in Global
Prosperity Index- ET (28th Oct)
Index presents a broad view of wealth,
prospects and Happiness.
India Ranks 88th
Reasons
Low access to education and health
Way Below in global avg of Entrepreneurshipand Opportunity Cost
At Bottom level of Social Capital Index
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Site: http://www.heritage.org/index/
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