INDEX OF ECONOMIC FREEDOM(IEF) VS. UNEMPLOYMENT RATE

1. INDEX OF ECONOMIC FREEDOM(IEF) VS. UNEMPLOYMENT RATE 06010938 TAM Shui Lik 06016295 TSANG Ho Fung 06017819 YAU Suet Man 06018548 CHAN Kit Ying 06019641 SUEN Lok Man

2. What is Index of Economic Freedom (IEF)? • a series of 10 economic measurements created by the Wall Street Journal and The Heritage Foundation to measure the degree of economic freedom in the world's nations • theoretical analysis of the factors that most influence the institutional setting of economic growth. • to develop a systematic, empirical measurement of economic freedom in countries throughout the world

3. History of the IEF • Created by the Heritage Foundation and the Wall Street Journal in 1995 • based on economic theories like Adam Smith'sThe Wealth of Nations • explaining that "basic institutions that protect the liberty of individuals to pursue their own economic interests result in greater prosperity for the larger society

4. Index of Economic Freedom (2008) • The 2008 Index of Economic Freedom covers 162 countries across 10 specific freedoms. View scores and rankings for any country, along with detailed data and background analysis.

5. METHODOLOGY: MEASURING THE 10 ECONOMIC FREEDOMS • Overall economic freedom, defined by multiple rights and liberties, can be quantified as an index of less abstract components. • The index we conceive uses 10 specific freedoms, some as composites of even further detailed and quantifiable components.

6. WEIGHING • All factors are weighted equally • Each factor is graded according to an unique scale • The scale run from 0 to 100 • Overall score base on the simple average of the 10 individual factor scores

7. 5 BROAD CATEGORIES OF ECONOMIC FREEDOM

8. 10 broad factors of economic freedom • Business Freedom • Trade Freedom • Fiscal Freedom • Government Size • Monetary Freedom • Investment Freedom • Financial Freedom • Property Rights • Freedom from Corruption • Labor Freedom

9. 1. Business Freedom • It is a quantitative measure of the ability to start, operate, and close a business that represented the overall burden as well as the efficiency of government regulations. • The score is based on 10 components, all weighted equally, based on objective data from the World Bank’s Doing Business study. Each component is converted to a 100 percent scale using the above equation

10. 2.Trade Freedom • Trade restrictions can take the form of taxes on imports and exports (known as tariffs), quotas or outright bans on trade, and regulatory barriers. The degree to which government hinders access to and the free flow of foreign commerce can have a direct bearing on the ability of individuals to pursue their economic goals. • Methodology.The trade freedom score is based two inputs: 1.The trade-weighted average tariff rate 2. Non-tariff barriers (NTBs)

11. 3.Fiscal Freedom • Fiscal freedom is a quantitative measure of these burdens in which lower taxation translates as a higher level of fiscal freedom. The Index methodology includes the top marginal tax rates on individual and corporate income, as well as a measure of total tax revenue as a portion of gross domestic product (GDP). • Methodology. Fiscal freedom is composed of three quantitative components in equal measure: 1.The top tax rate on individual income, 2.The top tax rate on corporate income 3.Total tax revenue as a percentage of GDP

12. 4.Government Size • The burden of excessive government is a central issue in economic freedom, both in terms of generating revenue and in terms of expenditure. • The government’s appetite for private resources affects both economic freedom and economic growth. • Methodology. Scoring of the freedom from government factor is based on two components: 1.Government expenditures as a percentage of GDP 2.Revenues generated by state-owned enterprises (SOEs) and property as a percentage of total government revenue.

13. 5.Monetary Freedom • It is to market economics what free speech to democracy. Free people need a steady and reliable currency as a medium of exchange and store of value • Methodology The score for the monetary freedom factor is based on two components: 1.The weighted average inflation rate for the most recent three years 2.Price controls

14. 6. Investment Freedom • Restrictions on foreign investment limit the inflow of capital and thus limit economic freedom. By contrast, little or no restriction of foreign investment enhances economic freedom because foreign in-vestment provides funds for economic expansion • Methodology. This factor scrutinizes each country’s policies toward foreign investment, as well as its policies toward capital flows internally, in order to determine its overall investment climate. • Rank from 100% (the most) without trade restriction to 0%(the least) with heavy government intervention

15. 7. Financial Freedom • Heavy bank regulation reduces opportunities and restricts economic freedom; therefore, the more a government restricts its banking sector, the lower its economic freedom score will be. • Methodology The financial freedom factor measures the relative openness of each country’s banking and financial system. description of the country’s financial climate and assign it an overall score between 0%(Negligible government influence) and 100 %(Repressive)

16. 8. Property Rights • Secure property rights give citizens the confidence to undertake commercial activities, save their income, and make long-term plans because they know that their income and savings are safe from expropriation, so as to have a fully functioning free-market economy. • Methodology • the degree to which a country’s laws protect private property rights • assesses the likelihood that private property will be expropriated within the judiciary • 100%—Private property is guaranteed by the government. 0%—Private property is outlawed, and all property belongs to the state.

17. 9. FREEDOM FROM CORRUPTION • Corruption infects all parts of an economy unless the market is allowed to develop transparency and effective policing. a higher level of corruption equates to a greater corrosion of economic freedom • Methodology. This factor relies on Transparency International’s Corruption Perceptions Index (CPI), to determine the freedom from corruption scores of countries that are also listed in the Index of Economic Freedom. • The CPI is based on a 10-point scale: • 10 indicates very little corruption & 1 indicates a very corrupt government.

18. 10. Labor Freedom • Labor policy has been a key variable in the IEF • Methodology. A composite measure of the ability of workers and businesses to interact without restriction by the state The following components are weighted equally: • Minimum wage, • Rigidity of hours, • Difficulty of firing redundant employees • Cost of firing redundant employees.

19. THE CHANGE OF METHODOLOGY • The Index methodology is consistent with the revisions made in 2007,measuring the same 10 economic freedoms in each economy and using exactly the same underlying data • Rescaling the business freedom scores from 1995–2005 in order to make them comparable as a time series with the new methodology in place for 2006–2008; • Revising last year’s business freedom and labor freedom scoresto reflect revisions to the World Bank Doing Business data;

20. Enhancing the detail and processused to measure non-tariff barriers (NTBs) and extending that approach back to 1995; • Updating the coefficientsused in the equations for two factors—government size and fiscal freedom—to align them with each other and with the other eight freedoms; and • Adding new data from Transparency International for earlier years back to 1997.

21. RANKING IN 2008

23. Top 10 countries in 2008

26. UNEMPLOYMENT What is Unemployment : people aged 16 and over are unemployed if they are: out of work, want a job, have actively sought work in the last four weeks and are available to start work in the next two weeks out of work, have found a job and are waiting to start it in the next two weeks. This definition is used by EU and OECD Source: The Office for National Statistics (ONS)

27. Types of Unemployment : 1.Frictional unemployment: • those searching for jobs or waiting to take jobs soon; • indicates that there is mobility as people change or seek jobs. 2. Cyclical unemployment : • recession phaseof the business cycle

28. 3. Structural unemployment : • changes in the structure of demand for labor • Glass blowers were replaced by bottle-making machines. • Oil-field workers were displaced when oil demand fell in 1980s. • Airline mergers displaced many airline workers in 1980s.

29. The unemployment rate : • Determined by dividing the number of unemployed workers by the total civilian labor force.

30. UNEMPLOYMENT VS. ECONOMIC FREEDOM • Unemployment rate of the top 10 IEF Countries or Regions 2008

31. RELATIONSHIP BETWEEN IEF AND UNEMPLOYMENT • Negatively related • Higher IEF  Lower unemployment rate • Lower IEF Higher unemployment rate

33. Relationship between Unemployment rate and IEF A.) Size of Government and Fiscal Freedom : 1) Large government sector crowds out the private sector  reduces international competitiveness unemployment rate (women and young people)

34. RELATIONSHIP BETWEEN UNEMPLOYMENT RATE AND IEF 2)Large proportion of transfer payment high taxation reduce the profitability of private investment discourage investmentmore unemployment welfare lazier workersunemployment rate  Bigger size of gov’t and lower Fiscal Freedom  lower IEF higher unemployment rate

35. RELATIONSHIP BETWEEN UNEMPLOYMENT RATE AND IEF B.) Property rights Good property rights  reduce uncertainty  encourage investment  strong incentive to be employed  income they earn is legally secured  unemployment rate  Better Property rights  higher IEF  lower Unemployment rate

36. RELATIONSHIP BETWEEN UNEMPLOYMENT RATE AND IEF C.) Business ,Monetary, Investment, Financial and Labor Freedom Higher the freedom  higher the IEF  More the investment lower unemployment rate

37. RELATIONSHIP BETWEEN UNEMPLOYMENT RATE AND IEF D.) Trade Freedom High degree of freedom to trade well development of export sector well development of domestic production low unemployment rate • Higher trade freedom higher IEF lower Unemployment rate

38. EXAMPLES - ARGENTINA

39. EXAMPLES - TURKEY

41. Exceptional case: Under the central planning system, there is no unemployment

42. EVALUATION OF THE INDEX • Criticism • Contribution

43. CRITICISM • Economic Freedom of the World has been used in most of the academic research • Reasons: • Index of Economic Freedomonly goes back to 1995 • it uses more subjective variables

44. Questioned about its methodology 1. Qatar: questioned the rating of their country's economic freedom in 2008. • comparing its middling rating with the high rating they had received from other indicators such as Transparency International and Moody’s. • the methodology had changed twice in the last two years, rendering its report “unreliable” Reference: http://www.bi-me.com/main.php?id=16985&t=1&c=33&cg=4

45. 2. China: • Not only is a higher level of economic freedom clearly associated with a higher level of per capita gross domestic product (GDP), but GDP growth rates also increase as a country’s economic freedom score improves. • the freedom-to-prosperity relationshipis strong. • However, China has grown so much with such a low rate of economic freedom Reference: http://www.heritage.org/Research/TradeandForeignAid/wm1375.cfm

46. 3. Outdated information • the most up-to-date sources are often behind by years. • The policy changes may not reflected in official data, and sometimes the changes are proposed but not made law, or are made law but not enforced.

47. THE FREEDOM-TO-PROSPERITY RELATIONSHIP

48. CONTRIBUTION 1. Allocating funding • The Millennium Challenge Corporation (MCC), which was supposed to be the major Bush administration anti-global poverty innovation by statute selects recipient countries in large part based on measures of their "economic freedom.“ • The MCC actually relies on the Heritage Foundation's Index of Economic Freedom for determining a component (countries' trade openness) of the MCC's economic freedom rating

49. 2. Promotion • Higher ranking means better business atmosphere and more maturity the economy is. • A kind of promotion of the economy • Attract more foreign investment • That is why the index stated that there is a strong freedom-to-prosperity relationship

50. THANK YOU FOR YOUR ATTENTION!~THE END~