Climbing the Economic Freedom Table

The next time Treasurer Peter Costello feels the need to defend his credentials as an economic reformer he will surely turn to the Index of Economic Freedom prepared by the Heritage Foundation and the Wall Street Journal.

Under his stewardship of economic policy Australia has steadily progressed up the table which measures and ranks 161 countries across 10 specific freedoms – things like tax rates and property rights. In the just released 2007 rankings Australia comes in number three with an overall score of 82.7. Back in 1995 when Labor was in charge, Australia was ranked eighth on a lowly 73.8.

The index’s objective is to provide an empirical measurement of economic freedom in countries throughout the world, specifically to measure how close each country comes to the ideal of providing “the liberty of individuals to pursue their own economic interests” to enhance prosperity for the larger society. Here is this year’s Top 10:

Australia’s steady improvement during the Costello years is shown below.

2007: 82.7

2006: 81.5

2005: 78.8

2004: 78.1

2003: 77.6

2002: 77.6

2001: 77.4

2000: 77.1

1999: 76.4

1998: 75.8

1997: 73.2

1996: 73.7

1995: 73.8

Those interested in whether an index like this serves any practical purpose should look at the “investible” index of economic freedom that Liberty Investment , headed by Stefan Spath and John Kirkscey, has just created.

Spath and Kirkscey back tested the performance of an Index of Economic Freedom Portfolio, constructed by Chicago-based First Trust, consisting of country funds and the top foreign stocks of countries that the Heritage/Wall Street Journal Index designates as “free.”

Over the 11 years between 1995 and 2006, the Index of Economic Freedom Portfolio would have outperformed world stocks by close to 2 to 1. While the MSCI World Stock index rose 140% over these 11 years, the (back tested) IEFP rose a whopping 254%.