Heritage Foundation Index — Is There Any Relation Between Freedom and Wealth?
Can Heritage Foundation Economic Freedom Index really predicts wealthy?
The Data Set and The Tools
- Here you can access the dataset.
- For specific informations about the data set follow this link.
- For the purpose of this analysis I’ll use Anaconda’s Jupyter Notebook 6.1.4. To check the codes of the following project, follow my GitHub’s account.
Heritage Foundation Economic Freedom Index
What is economic freedom?
Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, 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.
We measure economic freedom based on 12 quantitative and qualitative factors, grouped into four broad categories, or pillars, of economic freedom:
- Rule of Law (property rights, government integrity, judicial effectiveness)
- Government Size (government spending, tax burden, fiscal health)
- Regulatory Efficiency (business freedom, labor freedom, monetary freedom)
- Open Markets (trade freedom, investment freedom, financial freedom)
Each of the twelve economic freedoms within these categories is graded on a scale of 0 to 100. A country’s overall score is derived by averaging these twelve economic freedoms, with equal weight being given to each.
Diving Into the Data Set
The entire Data Set is 184 rows by 34 columns, thus there are 184 countries. We can divide the columns in two main parts, the Heritage’s Index and the Macroeconomics Indicators
Part 1 - Heritage's Index
CountryID
Country Name
WEBNAME
Region
World Rank
Region Rank
2021 Score
Property Rights
Judical Effectiveness
Government Integrity
Tax Burden
Gov't Spending
Fiscal Health
Business Freedom
Labor Freedom
Monetary Freedom
Trade Freedom
Investment Freedom
Financial Freedom Part 2 - Macroeconomics
Tariff Rate (%)
Income Tax Rate (%)
Corporate Tax Rate (%)
Tax Burden % of GDP
Gov't Expenditure % of GDP
Country
Population (Millions)
GDP (Billions, PPP)
GDP Growth Rate (%)
5 Year GDP Growth Rate (%)
GDP per Capita (PPP)
Unemployment (%)
Inflation (%)
FDI Inflow (Millions)
Public Debt (% of GDP)
The following columns were deleted: CountryID, WEBNAME and Country. Therefore our Data Set is 184x31 and “Country Name” was set as Index.
Missing Data
After the inicial analysis of the Data Set, it’s time to check missing data, and we do have some.
The followings countries have one or more missing data from its rows:
Cuba, Dominica, Iraq, Kiribati, North Korea, Libya, Liechtenstein, Seychelles, Somalia, Syria and Yeman, totalizing 11 countries. So we ripped them off from the Data Set and store them into a new variable for later analysis.
Now our Data Set is 173 rows by 31 columns, including the index column “Country Name” and it’s finally ready for our analysis.
- There was no need to convert any data type.
Diving into the Data!
The Data Set are not grouped by the standart continents, but by it’s own region classification, the following data frame shows the Heritage’s classification of the regions and the number of coutries in it. These data was stored in a new variable as a dictionary for later analysis.
Now it’s time to return the average position of Countries in the “World Rank” grouped by it’s region to verify what’s the freest region:
Region Average Rank Position
Europe 44.4
Middle East and North Africa 85.8
Americas 89.7
Asia-Pacific 92.6
Sub-Saharan Africa 125.6The last data series tell us some import information about regions and freedom that we should look deeper.
In average, the countries in Europe are almost 2 times more freer than the second (Middle East and North Africa) and almost 3 times more freer than Sub-Saharan Africa countries. The American, Asian-Pacific and sub-Saharan Africa countries perform worst than the avarege rank of 87.
The first thing that calls our attention is that American countries perform worst when compared to Middle East and North African coutries. Later on we’ll check on it.
Getting back to track… our goal is to find out if there is correlation between Economic Freedom and Wealth, so let’s check if there is correlation in the Region’s Rank and GDP per Capita(PPP) averages.
According to Table 1, by the averages, we can infer that there is correlation between Economic Freedom and GDP per Capita. But averages alone, doesn’t tell us the whole history.
Exploring the correlation between GDP per Capita and Economic Freedom.
Our averages tell us that there might be correlation between the variables, but before we assume it as a true fact we need to dive deep into data.
This graph show us each country as a dot, and each country is set in the corner of its GDP Per Capita (PPP) and its World Rank position in the Heritage’s Index.
The World Rank is in the X axis and GDP Per Capita is in the Y axis. Therefore the higher in the Y axis (GDP per Capita) the wealthier the country is. And in the X axis, World Rank, the close to zero, the freer the country is.
In another words, the closer to 0 in X axis and the higher in the Y axis is what we are looking for.
The correlation between PPP and World Rank is 72.62% using the Pandas correlation with “Pearson’s Method”.
A simple analysis in the trend of the graph tell us that there is a correlation, but a closer view will show us much more!
A closer view shows us that most of the countries in the graph are below the US$ 20k PPP, they clearly descrease in number the closer to 0 in the World Rank (X axis) they are. But before we go on, let’s see who they are, the countries who are struggling to overcome the US$ 20k PPP line.
There are 112 Countries with a PPP smaller than US$ 20k, that is, 64.73% of the countries, and the following table shows the percentage of the number of countries below the line of US$ 20k per region:
If you paid attention, the Table 1 and 2 have the same ordenation, so using the actual, we can infer that poverty might be related to lack of economic freedom. But I guess it’s too early for that, there are still some investigations that we can do inside this data set.
As I told in the “Diving Into the Data Set” section, the data set can be divided into 2 parts, the data about Heritage’s Index and the Macroeconomics indicators of each country.
The investigations that we did so far, give us a good idea and a good correlation between economic freedom and wealthness, but there are still many outliers.
Increasing Pressure Warning! Diving Deeper into Heritage’s Index and PPP.
Property Rights x PPP
The comparison of this two variables, do brings us a surprise, let me show you why:
It has almost the same correlation using the same plot of the previous graphic/table, and surprisingly it brought us the correlation of: 78.08% using again, the Pearson Method.
We won’t go further deep into this correlation, it’s time to move on into the next one, because there is a correlation between the variables.
Judical Effectiveness x PPP
Using all the same methods, the correlation between Judical Effectiveness and GDP Per Capita (PPP) is: 72.00%.
We can see that the countries situated below US$ 20k PPP have a Judicial Effectiveness smaller than 50. So we can infer that these countries have a weak legal framework, a slow and low quality process and lack of independence. It also may lead to a weak government integrity and high levels of corruption.
Government Integrity x PPP
There’s a great surprise here. Using all the same methods, the correlation now is: 82.19%.
The more corrupt is the country (closer to 0 in the X Axis “Government Integrity”) the harder is to break the US$ 20k barrier and it proves that corrupt countries tend to be poorer when comparing to the others. I think that we should go a little bit deeper into this.
SURPRISE!
When we filter the 112 countries with a PPP lower than US$ 20k we find “stunning” correlation of:
96.10%
Therefore, if your country ranks high in corruption the chance is 96.10% that your country have a PPP lower than US$ 20k. Scary!
Tax Burden x PPP
I’m actually selecting each one of the columns from the data set from left to right, analysing e writing down my conclusions, but this time I’d like to “give a raise”… I bet that the correlation will be lower than I expected before I started to writing this post.
I’ll present here the analysis and coment further.
First of all, the Tax Burden is a complex indicator of Heritage’s Index, and it doesn’t show de % Tax Burden over GDP as usual, this is a classification of Heritage Foundation. For those who wants to undestand it deeply, please, follow this link.
The correlation of Tax Burden index and PPP is surprisely negative: -19.83%. And when we group by country’s region the correlation is +8.39%. Thus I believe that the sub-indexes that constitutes the Heritage’s Foundation Index, so far, that’s the one who doesn’t have any relation with wealth
*The analysis made in this data set, does not include previous years, so we take the present values. No projection are being made, just an analysis of the present data.
Government Spending x PPP
This ain’t so simple as it seems, first let me show you the analysis:
The correlation is -42.43% using the same method as before, it’s a low correlation. There is a bunch of problems with this index alone. I wanna quote the Heritage’s site for a better understanding of this matter.
But basically, what this graphic is showing us is that, the more the government spends the wealthier is the country.
Because of our objective is to analyse only the correlation in the Heritage’s data set we won’t go any further into this. It would require a lot of data that are not included in this file. Maybe in a near future we can come back with the set of variables necessary to analyse the matter of “Government Spending”.
Fiscal Health x PPP
In Fiscal Health and PPP, there’s also a low correlation, 19.26%, here the data:
So far, that’s the lowest correlation we had. By the averages grouped by region we see that there’s almost no correlation and most of the countries are above the 80 in fiscal health.
So in the matter of Fiscal Health and Wealth, we see almost no correlation.
Business Freedom x PPP
I really betted in a higher correlation than 61.37%.
When I tested correlation with countries alone, as I told before, the correlation was 61.37% but, when I group the countries into their regions, surprise: correlation of 90.86%. Ok, It’s there are 173 coutries in the graphic and only 5 regions in the table.
A closer look into the graphic will brings us a better idea, we see that most of the countries are below US$ 20k PPP and a rank below +/- 65 in Bussiness Freedom, and after this point, countries are more disperse in the graphic.
There are also some outliers, but that’s a consistent graphic and a good increase in wealth after +/- 65 rank in Bussiness Freedom with less countries below US$ 20k PPP.
So it’s clear that there is a strong correlation between Bussiness Freedom and Wealth.
Labor Freedom x PPP
Not the poorest correlation, but it returns 29.35%.
Again we see, for me as least, a pattern in all the graphics that we saw until now, we have the sub US$ 20k PPP always near the center of the graph and as we run right in the “Labor Freedom” axis more disperse the countries tend to be.
It seems that the labor market regulations imposed by the governments are not main barrier in the way to a wealthier country. However reforms to a freer market labor can be of one the key factors to pave the way to a wealthier nation.
Monetary Freedom x PPP
Before we start, let me explain what really is Monetary Freedom… NO, It’s not the freedom to use bitcoin to buy a coffee. As a whole, Heritage’s describe Monetary Freedom as the stability of the prices.
As I told before, this is an evaluation of prices stability as a whole. The correlation of the countries alone is: 30.32% and when we group them in their regions, the correlation is 95.77%.
This graph shows that almost all countries in the learned the lesson, and they don’t mess around with inflation.
Trade Freedom
“All in”, I guess that this will be the one!
These variable brought us a correlation of 65.17%, and when they are grouped within its region, it brought us a correlation of: 92.87%
Again we see most of the countries “stuck” in the center of the graph, ranging from 60 to almost 80 and bellow the US$ 20k PPP. Above those numbers, in almost all graphic we see until now, there is a signicant increase in the relation so far.
So it’s crystal clear that the freedom to trade is vital to an economy to grow. An open economy to trade not only within, but outside it’s borders can bring benefits to any nation who adopts policies of freedom, instead of protecionism who leads to poverty.
Investment Freedom
Due to some technical problems (overcomed) with Pandas/Jupyter/Python this time the graphic will be diferent.
The correlation this time was below my expectations, but still a good correlation: 53.63%. When we group countries into regions: 63.70%.
After 60 in investment freedom, we clearly see that again the countries tend get wealthier.
Financial Freedom
The freedom consists in the level of governmental interference in the bank system, allocation of credit and openness to foreign competition.
Countries alone, have a 65.23% correlation and when grouped the correlation is: 89.82%.
Conclusion
After some days and some hours of work, tens of thousands of numbers, we do have many things to conclude and other many things to discuss.
Before we start the conclusions, I would like to show some weaknesses in the method used by me.
- First of all, I used the data set of 2021, it’s almost impossible to evaluate any country as a whole using a single year of data.
- Except for the brief analysis with the “Sub US$ 20k PPP”, I didn’t group the countries and analysed it “in groups” for a better undestading.
- I aimed low! My objective was just to correlate 2 variables. And in the real world economy there’s no such thing of 2 variables.
The first one, let’s make a list of the best correlation to the worst, when analysing countries alone:
Government Integrity: 82.19%
Property Rights: 78.08%
Judical Effectiveness: 72.00%
Financial Freedom: 65.23%
Trade Freedom: 65.17%
Investment Freedom: 63.70%
Business Freedom: 61.37%
Monetary Freedom: 30.32%
Labor Freedom: 29.35%
Fiscal Health: 19.26%
Tax Burden: -19.83%
Government Spending: -42.43%
So, if any politician sees this post, he should be worried with integrity, as a whole! As we saw and as we are seeing by the list right above us, trade, investment, labor, bussinesses are very important to make a country wealthier but as we correlate the number, become clear, at least for me that the integrity of the State, as a whole, is the most import.
A efficient, low corruption government with laws that protect rights efficiently is the most import, even above economical freedoms as Trade, Bussiness and Investment.
There are other patterns, as countries always ranking higher and low in all axis. The problem with countries with a GDP per Capita lower than US$ 20k, they are always at the middle of the graphic. It raises a lot of question, like: Where are those countries? Their neighbors are poor or rich? What’s the size of the population? They have access to maritime trade? What countries depends on oil prices? And so on…
All the grouped correlations show a higher degree of correlation, it may be caused because of the geographic distance, countries closer to rich countries, tends to be richier and the poor ones, tends to be even poorer, ‘cos trading overseas can be expensive for them.
As we see, Heritage’s Index is relevant to the debate about economics and freedom and all of it’s sub-indexes and variable should be considered when a legislator in planning a reform in his country.
There are good correlations who gives us a clear “north” and it solely depends on us to mind that freedom is a friend when you want to make your country wealthier.
