Economic Freedom: The Top, the Bottom, and the Reality. I. 1997-2007

TL;DR

This paper compares two indices of economic freedom over 2000-2006, analyzing their statistical distributions and correlations with GDP across 138 countries, revealing different behaviors and regional aspects.

Contribution

It provides a comparative analysis of the EFW and IEF indices, examining their distribution patterns and relationships with GDP over a decade.

Findings

EFW index follows an exponential distribution for top-ranked countries.

IEF index exhibits a transitional behavior between two power laws.

EFW's relationship with GDP remains stable over time.

Abstract

We recall the historically admitted prerequisites of Economic Freedom (EF). We have examined 908 data points for the Economic Freedom of the World (EFW) index and 1884 points for the Index of Economic Freedom (IEF); the studied periods are 2000-2006 and 1997-2007, respectively, thereby following the Berlin wall collapse, and including Sept. 11, 2001. After discussing EFW index and IEF, in order to compare the indices, one needs to study their overlap in time and space. That leaves 138 countries to be examined over a period extending from 2000 to 2006, thus 2 sets of 862 data points. The data analysis pertains to the rank-size law technique. It is examined whether the distributions obey an exponential or a power law. A correlation with the country Gross Domestic Product (GDP), an admittedly major determinant of EF, follows, distinguishing regional aspects, i.e. defining 6 continents. Semi-log plots show that the EFW-rank relationship is exponential for countries of high rank ($\ge 20$); overall the log-log plots point to a behaviour close to a power law. In contrast, for the IEF, the overall ranking has an exponential behaviour; but the log-log plots point to the existence of a transitional point between two different power laws, i.e., near rank 10. Moreover, log-log plots of the EFW index relationship to country GDP is characterised by a power law, with a rather stable exponent ($\gamma \simeq 0.674$) as a function of time. In contrast, log-log plots of the IEF relationship with the country's gross domestic product point to a downward evolutive power law as a function of time. Markedly the two studied indices provide different aspects of EF.