For nearly three decades, the Heritage Foundation has published its annual Index of Economic Freedom in partnership with the Wall Street Journal. The index draws its inspiration from economist Adam Smith and references his book "The Wealth of Nations" to try and measure his theories concerning "liberty, prosperity, and economic freedom." Below are the top five countries from its influential 2021 ranking.
- The Index of Economic Freedom is published every year by the Heritage Foundation, in partnership with the Wall Street Journal.
- There are other indexes for economic freedom, published by various think tanks and academic institutions.
- The IEF assigns each country a score between 0 and 100, based on various metrics relating to property rights, trade freedom, and governmental effectiveness.
- Only five countries were considered "free" in 2021, with scores above 80. They were Singapore, New Zealand, Australia, Switzerland, and Ireland.
- Hong Kong was omitted from the 2021 index for the first time because the territory's economic policy is largely set in Beijing.
Singapore attained a total score of 89.7, making it the most economically-free place on earth for the second consecutive year. The multilingual city-state scored especially high marks for property rights, trade freedom, and government spending, gaining 0.3 from its score the previous year.
The study also cited Singapore's efficient government, which keeps costs low as well as low taxes for the companies residing inside its borders. The country encourages open trade and also ranks highly in terms of offering investment and financial freedom. The government is highly involved in "guiding economic development" in a way that does not excessively interfere with the free market economy at this point in time.
With a score of 83.9, New Zealand is ranked as the second-freest country, largely thanks to high scores in government integrity. However, the country lost 0.2 points from the 2020 rankings, due to minor declines in property rights and trade freedoms.
The former British colony stood out for its outstanding response to the coronavirus crisis, which claimed only 25 lives during the first year of the pandemic. According to the Heritage Foundation, New Zealand could improve its freedom score by lowering taxes and reducing spending. However, the reelection of the center-left government in 2020 makes that unlikely.
Formerly ranked one of the most economically free areas of the world, Hong Kong was not given a ranking in the 2021 index, due to increased involvement in economic decisions by Beijing.
Australia accrued a total 2021 score of 83.1, landing in third place on the esteemed annual ranking. This was due to high scores in judicial effectiveness, financial freedom, and government integrity, although the country lost 0.2 points from the previous year.
However, Australia has a comparatively low mark in the area of government spending, where it scored only 58.1. This is largely due to the country's top tax rate of 45%, and public spending that accounts for 37% of GDP. As a largely conservative institution, the Heritage Foundation regards taxation as an infringement of economic freedom.
Switzerland received a score of 81.9, a fall of 0.1 points from the year before but nevertheless moving up one spot from the 2020 rankings. In the latest edition of the index, Switzerland is the freest country in Europe and the fourth-freest overall. In the latest version of the rankings, the Heritage Foundation stated that economic freedom is "well established and institutionalized in Switzerland," with comparatively high scores in fiscal health, financial freedom, and government integrity.
In almost every other category, Switzerland scored at least 70 points out of 100, a comparatively strong showing even compared to other free countries. The lowest marking was for Switzerland's tax burden, giving a score of 67.6 out of 100.
The Heritage Foundation is not the only body attempting to rank countries by economic freedom. The Fraser institute's Economic Freedom of the World Report has a similar goal, although some of their results are different.
Ireland moved into the top five for the first time in 2021, largely due to the removal of Hong Kong from the index. Ireland's overall score was 81.4, an increase of 0.5 points from the prior year thanks to an increase in judicial effectiveness.
The country had particularly high scores in investment freedom and fiscal health. The lowest score was in financial freedom, with only 70 points out of 100.
The Bottom Line
According to the Heritage Foundation's rankings, the above countries are the only five to truly be considered "free." The next class of ranking only qualifies as "mostly free," and though it still represents an esteemed grouping of countries, to be considered free requires a sustained commitment by the underlying governments to fight for keeping their economies open, as efficient and as free from corruption as possible.
What Does It Mean to Be Economically Free?
The Heritage Foundation's Index of Economic Freedom is based on twelve different metrics, related to freedom to trade and do business, taxation, the number of government regulations and trade barriers, and other limits on economic activity. As the foundation explains, economic freedom means that "individuals are free to work, produce, consume, and invest in any way they please... [and] governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself."
How Economically Free Is the United States?
The United States has a score of 74.8 on the Heritage Foundation's economic freedom index, making it the 20th most free country overall. This was the country's lowest score ever, though it still ranks as "mostly free." According to the foundation, the low mark is the result of "excessive government spending, unsustainable levels of debt, and intrusive regulation of the health care and financial sectors."
Which Countries Are the Least Economically Free?
Based on the Heritage Foundation's 2021 index, the countries with the lowest scores for economic freedom were Cuba (28.1), Venezuela (24.7), and North Korea (5.2). Each of these countries are characterized by strict limitations on private enterprise, high trade barriers, and heavy intervention in the economy by government actors. An additional six countries–including Libya, Syria, and Somalia–were not given rankings.