WASHINGTON/NEW YORK - For over a decade, The Wall Street Journal and The Heritage Foundation, Washington's preeminent think tank, have tracked the march of economic freedom around the world with the influential Index of Economic Freedom.  The 2011 Index of Economic Freedom reports on economic policy developments since the second half of 2009 in 183 economies.

Based on 10 measures that evaluate openness, the rule of law, and competitiveness, the Index ranks economies according to their economic freedom. The principles of economic freedom emphasized in the Index are individual empowerment, non-discrimination, and the promotion of competition.

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, with that freedom both protected by the state and unconstrained by the state. 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.

HOW DO YOU MEASURE ECONOMIC FREEDOM? 
We measure ten components of economic freedom, assigning a grade in each using a scale from 0 to 100, where 100 represents the maximum freedom. The ten component scores are then averaged to give an overall economic freedom score for each country.

The ten components of economic freedom are: (1) Business Freedom; (2) Trade Freedom; (3) Fiscal Freedom; (4) Government Spending; (5) Monetary Freedom; (6) Investment Freedom; (7) Financial Freedom; (8) Property Rights (9) Freedom from Corruption; (10) Labor Freedom.

The Index also has our traditional country pages, so that each freedom in every economy is explained in detail. Every country page includes new charts highlighting the strengths and weaknesses of each economy (http://www.heritage.org/index/Country/Ukraine).

UKRAINE'S ECONOMIC FREEDOM SCORE
Ukraine’s economic freedom score is 45.8, making its economy the 164th freest in the 2011 Index  [out of 183 countries). Ukraine's score is 0.6 point lower than last year, primarily because of declines in government spending and freedom from corruption. Ukraine is ranked last out of 43 countries in the Europe region, and its overall score is lower than the world average. [Counties that scored less than 49.9 are considered as repressed economies by the Index.]

The global economic downturn has erased the gains of years of economic growth. Significant structural reforms included competitive tax rates and membership in the World Trade Organization after a 14-year accession process. With export growth facilitated by these earlier reforms, Ukraine has gradually returned to the path of economic growth since mid-2010.

Nonetheless, structural constraints and political instability continue to undermine private-sector development. State intervention and the ongoing threat of expropriation limit dynamic economic activity.

Ukraine’s underdeveloped financial sector struggles to provide the necessary credit for private-sector development, while the regulatory environment remains opaque and burdensome. Recent large fiscal deficits have strained public finances, forcing Ukraine to confront the challenge of restoring sustainable levels of public spending.

BACKGROUND
Ukraine has been independent since the collapse of the Soviet Union in 1991. In January 2010, Victor Yanukovych of the Party of Regions was elected the country’s fifth president. Since gaining power, Yanukovych has fast-tracked rapprochement with Russia. The government has extended Russia’s Black Sea Fleet’s lease for 25 years from 2017 in exchange for discounted Russian gas, currently worth over $3 billion a year, and parliament has rejected ambitions to join NATO.

Ukraine has well-developed industry, rich agricultural lands, and significant natural resources. It is an important route for oil and gas exports from Russia to Western Europe. The recent economic crisis triggered a significant recession, and GDP contracted by 15 percent in 2009. Ukraine has joined the World Trade Organization and the European Union’s Eastern Partnership.

(1) BUSINESS FREEDOM  47.1  +8.4
Despite progress in regulatory reform, lingering complexity often creates uncertainty in commercial transactions. Overall, the inefficient regulatory framework imposes a significant burden on private enterprise.

(2) TRADE FREEDOM   85.2   +2.6
Ukraine’s weighted average tariff rate was 2.4 percent in 2009. Some export restrictions, services market access barriers, import taxes and fees, import licensing requirements, non-transparent government procurement, complex standards and certification regulations, and weak enforcement of intellectual property rights add to the cost of trade. Customs procedures are improved but can still result in questionable customs valuation. Ten points were deducted from Ukraine’s trade freedom score to account for non-tariff barriers.

(3) FISCAL FREEDOM  77.3   -0.6
Ukraine has relatively low tax rates. The standard income tax rate is 15 percent (gambling income is subject to a 30 percent rate), and the standard corporate tax rate is 25 percent. Insurance companies and agriculture profits are subject to lower rates. Other taxes include a value-added tax (VAT), a property tax, and an inheritance tax. In the most recent year, overall tax revenue as a percentage of GDP was 37.7 percent.

(4) GOVERNMENT SPENDING 32.9 -8.2
In the most recent year, total government expenditures, including consumption and transfer payments, increased to 47.3 percent of GDP. The poorly managed state-owned gas company, Naftogaz, is a drag on the fiscal balance and a threat to overall stability.

(5) MONETARY FREEDOM  63.2 +2.0
Inflation has been extremely high, averaging 17.9 percent between 2007 and 2009. The executive branch can set minimum prices for goods and services, and the government influences prices through regulation and state-owned enterprises and utilities. Ten points were deducted from Ukraine’s monetary freedom score to account for measures that distort domestic prices.

(6) INVESTMENT FREEDOM  20.0  no change
Ukraine’s bureaucratic legal and regulatory requirements discourage foreign investment. The law provides equal treatment for foreign and domestic investors in most sectors of the economy. Contracts are not always upheld by the legal system, and privatization has slowed. Resident and non-resident foreign exchange accounts may be subject to restrictions and government approval. Payments and transfers are subject to various requirements and quantitative limits. Some capital transactions are subject to controls and licenses. Foreign investors may not own farmland.

(7) FINANCIAL FREEDOM 30.0  no change
Ukraine’s financial system is underdeveloped, and the country remains primarily a cash-based economy. Restructuring of banking has proceeded slowly, and the more than 150 small banks often suffer from insufficient capital. Foreign banks and insurance companies are permitted to open branch offices.

Over 180 banks are currently registered, including 49 with foreign equity participation. Reflecting the lack of efficiency and depth in the financial system, the development of a domestic capital market is still at a rudimentary stage.

A liquidity crisis and an increase in non-performing loans related to the global financial crisis have led to a large bailout package from the International Monetary Fund. The government has also taken controlling stakes in three of five banks in financial trouble. Legislative changes in late 2009 have required conversion of foreign currency investments into local currency and undermined the free flow of capital.

(8) PROPERTY RIGHTS 30.0  no change
Protection of property rights is weak. The judiciary is subject to executive branch and criminal pressure, and corruption is significant. Contracts are not well enforced, and expropriation is possible. Initiatives to develop a mortgage market have resulted in a strong increase in the number of mortgages and have laid the legislative and administrative groundwork for a functioning real estate market. Ukraine is a major transshipment point, storage location, and market for illegal optical media produced in Russia and elsewhere.

(9) FREEDOM FROM CORRUPTION 22.0  -3.0
Corruption is perceived as widespread. Ukraine ranks 146th out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009, a sharp drop for the second year in a row. Corruption pervades all levels of society and government and all spheres of economic activity and is a major obstacle to foreign investment. Low public-sector salaries fuel corruption in such local bodies as the highway police and tax administration, as well as in the education system.

(10) LABOR FREEDOM 50.0  -7.7
Ukraine’s labor codes remain outdated and inadequate. The non-salary cost of employing a worker is very high, and dismissing an employee is difficult. More modern regulations have been under consideration, but they have not been implemented.

HIGHLIGHTS FROM THE 2011 INDEX OF ECONOMIC FREEDOM

• The global average economic freedom score for the 2011 Index is 59.7, a 0.3 point increase from last year. (See Chart 1.)(www.heritage.org/index) Despite the challenging global economic environment, the forces of economic freedom around the world have been resilient and even increasing.

  In fact, economic freedom has taken an upturn in the majority of the economies that are assessed in the 2011 Index. Those gains are particularly welcome and significant given the fact that the biggest improvements have been achieved in developing and emerging economies where poverty reduction is a top priority. (See Table 1.)

• The scores of 117 economies are better, the scores of 58 are worse, and those of four are unchanged. Of the 117 economies whose scores improved, 102 are developing or emerging economies, many of which are in Sub-Saharan Africa and the South and Central America/Caribbean region.

• All regions except Europe and North America recorded increased levels of economic freedom. The Sub-Saharan Africa region, led by Rwanda, Djibouti, and Cape Verde, achieved the largest score improvement, with countries gaining over half a point on average in the 2011 Index. The South and Central America/Caribbean region gained the second most freedom on average, exactly half a point, owing to significant progress in Colombia and Costa Rica, among others.

  The Middle East and North Africa and Asia–Pacific regions also showed gains, but North America and Europe, despite increases by some countries, experienced a decline in economic freedom and no change, respectively, on average.

• Along with Hong Kong and Singapore, Australia, New Zealand, Switzerland, and Canada have solidified their status as the world’s "free" economies. These top six economies are the only countries to achieve scores above 80 on the 0 to 100 economic freedom grading scale. Hong Kong was able to uphold its status as the world’s freest economy, a position it has held for 17 consecutive years.

  Singapore remains a close second, narrowing the gap with Hong Kong. Australia and New Zealand have maintained their previous rankings of 3rd and 4th in the 2011 Index, while Switzerland climbed up to the 5th spot, overtaking Ireland, which fell to 7th place.

  The relative strength of the "free" economies is no accident. Their strong commitment to all facets of economic freedom has endowed their economies with a high degree of resilience. All are recovering rapidly from the shocks of the global slowdown.

• Every region continues to maintain at least one of the top 20 freest economies. Nine of them are in Europe, six are in the Asia–Pacific region, and two are from North America. The other regions are represented by one country each: Chile (South and Central America/Caribbean region); Mauritius (Sub-Saharan Africa region); and Bahrain (Middle East and North Africa region). Bahrain recorded impressive progress, now becoming the world’s 10th freest economy. Across all the regions, economic freedom is the key to greater opportunity and prosperity. (See Chart 2.)

• Economic freedom is key to overall well-being. The 2011 edition of the Index confirms findings from previous editions regarding the various tangible benefits of living in freer societies. Not only are higher levels of economic freedom associated with higher per capita incomes, but greater economic freedom is also strongly correlated to overall well-being, which takes into account such factors as health, education, security, and personal freedom. (See Chart 3.)

• Policy responses to the global economic turmoil have led to noticeable reshuffling in the top 20 countries in the 2011 Index. Nine of the 20 freest economies are European, led by Switzerland, Ireland, and Denmark. With its economic freedom score declining by 5.5 points, Iceland slid out of the top 20 while Denmark surpassed the U.S. Continuing its downward trend, the U.S. became the 9th freest economy. The United Kingdom is now out of the top 15.

• High levels of government spending in response to the global economic turmoil have not resulted in higher economic growth. In light of the economic crisis, many advanced economies’ governments have stepped up their direct interference in the economy with government spending.

  Though volumes of evidence have highlighted the negative results of massive government spending, in a time of crisis, some have tried the Keynesian policy prescription of stimulating demand with government spending.

  That spending, more than any market factor, has posed the greatest risk to economic dynamism. Relying on government spending in the form of various stimulus packages not only has failed to promote growth and employment, but also has seemed to prolong the crisis by hampering private-sector investment. Bloated government debt has turned the economic slowdown into a fiscal crisis in many countries, with economic stagnation fueling a long-term employment crisis. (See Chart 4.)

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IT'S ECONOMIC FREEDOM THAT WILL SAVE THE EARTH

By Ambassador Terry Miller and Anthony Kim, The Heritage Foundation, Wash, D.C., January 2010

The best way to create sustainable environmental policies around the world is to increase economic growth and the standard of living.

A shadow hung over the Copenhagen Conference last year. The credibility of sophisticated climate science has been tainted by allegations that key scientists and institutions manipulated data and access to publications to support the case for global warming. Still, many around the world would support sensible, cost-effective strategies to minimize the risk of man-made global climate change.

The inconvenient truth, however, is that the mammoth government regulatory schemes discussed at Copenhagen are both prohibitively expensive and unlikely to work -- the worst possible combination in any cost/benefit analysis.

THERE IS A BETTER WAY. 
For 15 years, The Heritage Foundation and The Wall Street Journal have been measuring economic freedom in countries worldwide. Our historical evidence and volumes of supportive social science research demonstrate that economic freedom is good not only for individual economic advancement, but for the progressive values and public goods that people seek for society as a whole.

It’s simply better to live in a free society. Higher levels of economic freedom lead to higher living standards and healthier human development. Greater economic freedom provides more choices and improves the quality of life by opening opportunities and promoting innovation.

The benefits of economic freedom also extend to environmental protection. Proponents of cap-and-trade schemes or other massive government regulatory interventions assert that only a strong government can protect the environment. In fact, the market forces unleashed in an economically free society are far more likely to drive economic results in the positive directions demanded by those concerned about the environment.

The most remarkable improvements in clean energy use and energy efficiency over the past decades haven’t been as a result of government regulation. The most progress was driven by advances in economic freedom and freer trade. These unleash greater economic opportunity and increase prosperity, generating a virtuous cycle of investment, innovation, and dynamic economic growth.

The fundamental flaw of those who favor new government regulations is their belief that there is a trade-off between economic growth and environmental protection. They seem to think that to get more of one, you have to have less of the other. The truth is just the opposite: to get more environmental protection you need more growth, not less. And the surest path to economic growth is through greater economic freedom.

A recent study from the World Bank reports that freer Trade is “a key factor in helping developing countries reduce their greenhouse gas emissions and adapt to climate change.”

Other evidence abounds. The Environmental Performance Index (EPI), published by the World Economic Forum, the Center for International Earth Science Information Network (CIESIN), and the Yale Center for Environmental Law and Policy, provides “a composite index of current national environmental protection efforts.” Levels of economic freedom and the EPI are positively correlated at a statistically significant level. The freer the economy, the higher -- and more sustainable -- the level of environmental protection.

Policy efforts aimed at imposing stricter environmental standards through a global regulatory body run great risk of being not only fruitless, but counterproductive as well. They undercut the economic growth necessary for greater efforts to protect the environment. Such regulations only serve as feel-good actions, without generating real “change” that could mitigate climate change and its possible negative impacts.

Countries in general -- but developing countries in particular -- are able to protect their environment only if their economies prosper and the standard of living of their citizens improves.

The surest way to promote sustainable environmental policies around the world is to increase economic growth and the standard of living. Increased government regulation would stifle that growth. The compelling force of economic freedom, by contrast, has been proven over and over, in countries around the world, to empower people, create positive forces of opportunity and innovation, and nourish overall well-being, including through a cleaner environment.

Note: Terry Miller is the Director of the Center for International Trade and Economics (CITE) at The Heritage Foundation. Anthony Kim is a Policy Analyst in CITE. 

LINK: to Index of Economic Freedom: http://www.heritage.org/index
LINK: to information about Ukraine: http://www.heritage.org/index/Country/Ukraine
LINK: TO Miller and Kim article: http://www.heritage.org/Research/Commentary/ 2010/01/Its-Economic-Freedom-That-Will-Save-the-Earth?utm_source=Index%2B of%2BEconomic%2BFreedom&utm_medium=IndexArticles&utm_campaign= IndexArticles