For over two decades, the Index of Economic Freedom has tracked the growth of economic freedom in countries. The Heritage Foundation, in partnership with The Wall Street Journal, releases this index annually. The 2016 index was released on February 1 and Singapore was ranked 2nd out of a total of 186 countries. In fact, there were only 5 countries who achieved the “free economy” status.

This post highlights the findings of the Index and explains how Singapore secured its high ranking.

The Index of Economic Freedom

The Index is a data-oriented analysis of various economic and social metrics for all countries and it aims to measure the economic freedom that exists in each country. The assessment is not just limited to mere country rankings, but is a detailed analysis of the factors that promote economic freedom in a country and contribute to the growth of its economy.

Put simply, a country is economically free when its economy operates without government intervention or manipulation by an economic authority. In a free economy, economic actors are able to choose what to produce, who to sell it to, and how best to use their resources. In a capitalist system, greater economic freedom leads to more efficient allocation of resources and has a direct correlation with the prosperity of the economy.

The key aspects on which the Index ranks countries are as follows:

  • Freedom to establish and operate an enterprise
  • Liberty to trade across borders
  • Stability of prices and overall monetary freedom
  • Expenditure by the government in the economy
  • Assessment of property rights (which are determined by the legal system of the country)
  • Flow of capital and investment
  • Corruption-free business environment
  • Freedom of labor

On nearly all of these factors, Singapore scored very well. Specifically, Singapore’s high ranking attributes to the country’s:

  • Strict enforcement of business contracts and efficient functioning of its commercial courts
  • Robust regime for intellectual property rights
  • Openness to foreign investment, trade, and finance in its economy
  • Business and political environment that is free from corruption

Singapore operates an economic system that relies on minimal government interference. As a result, entrepreneurs can set up their business freely in any sector of their choice. The country also benefits from the ease with which foreign firms can set up operations in the country; these firms bring with them capital, talent, technology and accessibility to the export markets. Singapore is not only the 2nd freest economy in the world but also offers significant other advantages for businesses.

The 2016 Index pointed out that even though there is freedom of trade and a very efficient regulatory system in Singapore, its fiscal freedom leaves scope for improvement. Fiscal freedom evaluates the extent to which businesses and individuals are permitted by the government to control their income and wealth. Fiscal burden is imposed by the government in the form of taxes – the higher the taxes, the lower the net personal reward to an individual from her efforts. The Index calculates the tax burden as the total revenues of the government from various taxes imposed, as a percentage of total GDP and it assesses the level of fiscal freedom in a country on the basis of the following three main components:

  • Standard income tax rate
  • Corporate tax rate
  • Total tax burden

Since the only area where the Index raised any concern about Singapore was in the area of fiscal freedom, it is useful to compare Singapore on this metric with Hong Kong – the country that was ranked 1st by the Index. The standard tax rate in Singapore in 2015 was 20 percent, whereas in Hong Kong the tax rate was 15 percent. While the corporate tax rate in Singapore was 17 percent, the tax rate was 16.5 percent in Hong Kong. However, it is interesting to note that the total tax burden in Singapore was lower at 13.8 percent of GDP in comparison to Hong Kong where the total tax burden was 15.7 percent of GDP. Thus, despite the lower overall tax burden in Singapore, the fiscal freedom of the economy scored lower, since the index weighs all three components equally to evaluate the freedom.

2016 Index – Key Findings

The 2016 Index of Economic Freedom examines the policies of 186 countries. A few interesting trends that emerge from this comprehensive analysis are as follows:

  • On an average, the world is becoming freer. The average economic freedom score recorded this year is the highest since the inception of the Index. Most countries realize that a free-market structure leads to improved well-being of their citizens and leads to greater poverty alleviation in the long run.
  • Economies that achieved “free” or “mostly free” ratings have high-income levels in comparison to the “repressed” economies.
  • The free economies have increased innovation and more efficient allocation of resources since they capitalize on the faster resource and labor movement that are possible within a free-market structure.
  • People living in free economies are healthy and live a longer life.
  • Free societies are more open to new and innovative ideas, products and are able to achieve higher levels of social progress.
  • The index recorded an improvement in investment, monetary and trade freedom across the globe.
  • The labor market freedom scored low and employment conditions remained stagnant. Perhaps this is due to the continued after-effects of the global recession and troubles with Europe’s economies.
  • Only five countries were classified as “free” out of a total of 186 countries.

To summarize, the data accumulated by the Index concludes that a free economy correlates strongly with faster economic development of a country. Countries having a higher economic freedom prosper both socially and economically. Freer economies are in a better position to utilize their resources and provide individuals with richer life experiences and better opportunities for a productive, happy life. Singapore’s high ranking therefore, bodes well for the future of the country.