Economic Freedom Index (2022): What is it & why was Singapore ranked first?

Freedom is such a slippery term, isn’t it? While Singapore is ranked #160 in the world for press freedom, in between Sudan and Somalia, on the Index of Economic Freedom we’re apparently #1, with Switzerland coming at #2.

Usually, when Singapore tops any ranking tables (world’s most powerful passport, top PISA scores, and so on), it gets plastered all over the news and sets local online forums ablaze. But this time, nobody really cared. In fact, the few who bothered to comment were not brimming with pride but wondering why we were placed ahead of Switzerland.

So, what is the Economic Freedom Index, anyway? And should we care about it?

What is the Economic Freedom Index?

As its name suggests, the Economic Freedom index ranks countries according to how economically-free their societies are. (Scroll down to see the list of factors taken into account when compiling the index.) It is published annually by The Heritage Foundation and The Wall Street Journal.

In an economically free society, people have the freedom to work, produce, consume and invest in whatever way they want. There is free movement of labour, capital and goods. The government does not force or limit people’s freedom to work or consume in a certain way.

Huh? You may be saying. Isn’t that true of most societies? Well, to understand what it means to have economic freedom, let’s look at countries that don’t have it.

Near the bottom of the list is China, which ranks 158^th out of 177. This might seem strange, because despite being a communist country, China’s economic growth has made it a sort of gold mine for daring entrepreneurs, and it also experiences good trade freedom as an export giant.

One reason for the poor ranking is that its legal system is considered ineffective due to weak rule of law and corruption.

For example, if you set up a business in China, there’s nothing stopping people from blatantly ripping off your brand, since intellectual property rights enforcement is non-existent. Homeowners don’t have it great, either. Since the government technically owns all land, if it decides to raze your entire village to the ground in a land grab, you can’t do anything about it.

The Chinese government has also limited freedom in quite a few sectors, as evidenced by the new ban on profit-making tuition and the crackdown on tech companies like Alibaba.

Singapore, by contrast, is probably the most business-friendly country there is. Whether you’re local or foreign, it’s super easy to set up a business here. The legal system is dependable and corruption is low, so you don’t have to worry about bribing government officials to get stuff done. You can buy and sell property and invest without worrying that the government will suddenly pull the rug out from under your feet.

How is the Economic Freedom Index relevant to me?

Economic freedom generally translates to healthier economic growth, higher incomes and a higher standard of living. It’s no coincidence that the most economically free countries all have market economies, while many of the least free economies are tightly controlled by their governments, one example being communist North Korea, which is in last place.

The world’s wealthiest nations are almost all ranked as “free” or “mostly free”. By contrast, in the “moderately free” category, most of the countries are either middle-income and/or developing countries, or developed economies in serious difficulties, like Japan (decline due to ageing population) and Spain (astronomical unemployment).

For a small country like Singapore, having economic freedom is actually a bigger deal than for your run-of-the-mill developed nation. Due to our lack of natural resources and small domestic market, our economy relies heavily on free trade and business-friendliness to keep chugging along. This is something we have in common with Switzerland (#2) and Luxembourg (#5).

(Note, however, that “freedom” is measured in relative terms here. The index lets countries see where they stand in relation to other nations. But whether a nation should aspire to the top index score of 100 is questionable. After all, beyond a certain point, raising the standard of living doesn’t always raise the quality of life for ordinary people.)

How is economic freedom measured?

The Economic Freedom Index assess economic freedom based on the following factors:

• Property rights
• Government integrity
• Judicial effectiveness
• Tax burden
• Government spending
• Fiscal health
• Business freedom
• Labour freedom
• Monetary freedom
• Trade freedom
• Investment freedom

Countries are given a score for each of the above factors, and the overall score determines their ranking on the index.

Economic Freedom Index 2022

Here are the top 10 countries on this year’s Economic Freedom Index.

In total, 177 countries were ranked, and seven countries were left out due to lack of data.

The worst-performing country was, unsurprisingly, North Korea, ranked at 177^th. Venezuela, Cuba, Sudan and Zimbabwe were ranked 176^th, 175^th, 174^th and 173^rd respectively.

What is the freest economy in the world?

That would be Singapore! Yay?

So what gives Singapore the edge over Switzerland?

For one thing, we have a better score for tax burden. Switzerland is known in Europe for its relatively low taxes, but Singapore is actually considered a tax haven due to our low corporate tax rates, generous tax exemptions and concessionary tax rates.

Compared to Switzerland, we also do well in terms of government spending as the government is generally prudent about what goes out of their coffers and keeps public debt low.

We also have a slight edge in terms of labour freedom and trade freedom.

Switzerland beats Singapore in terms of judicial effectiveness and fiscal health, in which they have impeccable scores. Judicial effectiveness is by far our weakest area, according to the index’s data. Not going to say why here… read for yourself what the Economic Freedom Index has to say.

Economic Freedom Index Singapore

Year	Singapore’s ranking	Score
2022	1	84.4
2021	1	89.7
2020	1	89.4
2019	2	89.4
2018	2	88.8
2017	2	88.6
2016	2	87.8
2015	2	89.4
2014	2	89.4
2013	2	88.0

As you can see, from 2013 to 2019, Singapore was ranked #2, rising to the top of the chart from 2020 onwards.

So, in 2013 to 2019, who occupied the #1 spot? Hong Kong, the fallen angel. Since 2021, Hong Kong has been removed from the rankings, letting Singapore take its place. Singapore’s score has actually stayed more or less constant throughout, with a slight dip in 2022 compared to previous years.

In other words, despite moving up to #1 in recent years, Singapore’s level of economic freedom has not really changed much over the past decade.

This article was first published in MoneySmart.