A comment on "measuring economic freedom: A comparison of two major sources".

Author:Murphy, Ryan H.
  1. Introduction

    Does economic freedom enhance or diminish human well-being? Economists disagree about whether governments should intervene in economies to tax, subsidize, redistribute, and regulate. Our ability to empirically test the overall impact of economic freedom on outcomes associated with well-being is essential for resolving this disagreement. But measures of economic freedom must be trustworthy for these tests to be useful and persuasive. Ram (2014) finds evidence that the two major indexes measuring economic freedom, the Fraser Institute's Economic Freedom of the World Annual Report (Gwartney, Lawson, and Hall 2013) and the Heritage Foundation's Index of Economic Freedom (Miller, Holmes, and Kim 2014), are unreliable. He demonstrates that the two indexes diverge in several countries. Ram also shows that the freedom indexes diverge when used to explain the United Nations Development Programme's Human Development Index (HDI).

    The Fraser and Heritage indexes are a subgenre of indexes measuring institutional quality across countries. These indexes are more closely correlated to each other than they are to indexes with other definitions of institutional quality. In fact, they are more closely related to one another than are the two indexes measuring free political institutions. Given the high correlation between the two economic freedom indexes, these two indexes are closely related, regardless of the exceptions Ram identifies.

    Furthermore, the Fraser and Heritage indexes do not diverge more than the measures of free political institutions when used to explain the HDI. However, the Fraser index performs better than the Heritage index both when they are used in regressions by themselves and when all measures of institutional quality are used as independent variables together. The apparent inconsistency Ram finds may thus better be interpreted as limitations of the Heritage index. Regardless, the freedom indexes are no worse than the other measures in terms of similarity, so why has Ram singled out the economic freedom measures?

    A broader perspective of indexes suggests that Ram has identified imperfections in social scientists' ability to measure the quality of institutions, but this imperfection has little to do with measures of economic freedom per se. Perhaps these diagnostics, when generalized, convey the limitations of the Heritage index specifically. Ram's central conclusion, that "researchers, policy-makers and other users are urged to exercise caution in drawing strong conclusions on the basis of ratings from either source," is unsupported in light of these other comparisons.

  2. Measures of Economic Freedom versus Other Measures of Institutional Quality

    The preeminent importance of institutions for economic outcomes is well understood (Rodrik, Subramanian, and Trebbi 2004). The index produced by the Fraser Institute,...

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