The Human Freedom Index

Investing in Freedom

The Cato and Fraser Institute recently released their 10^th edition of the 2024 Human Freedom Index, which compares countries on personal and economic freedom. The index ranges from 0-10. On the personal freedom end, the index contains seven areas: rule of law/justice, security and safety, freedom of movement, freedom of religion, freedom of association and assembly, freedom of expression and information, and freedom of relationships. Economic freedom contains the five areas found in the Economic Freedom of the World Index: (smaller) size of government, legal system and property rights, sound monetary policy, freedom to trade internationally, and (lax) regulatory policies.

There are generally no surprises at the extremes. The top five countries are (in order) Switzerland, New Zealand, Denmark, Luxembourg, and Ireland. The bottom five are Syria, Yemen, Iran, Myanmar, and Sudan.

While year-over-year changes are generally small, there are a few notable movers. Eight countries increased their ranking by ten or more from 2021-2022 (Panama, Dominican Republic, Belize, Paraguay, Colombia, Madagascar, Zambia, Comoros). Zambia in particular was the largest mover, increasing 22 spots to 94^th out of 165 countries (based on an over half-point increase in Human Freedom). Most of Zambia’s increases in personal freedom came from increasing their freedom of association & assembly, religion, and expression & information. Their economic freedom scores increased from 5.63 to 6.17, a quite remarkable change over just one year. This was largely driven by improvements in monetary policy and freedom to trade internationally, which each increased by one point or more.

Seven countries saw their rankings fall by 10 spots or more (Hong Kong, Moldova, Bhutan, Burkina Faso, Ukraine, Russia, and Turkey). Ukraine’s score fell by 0.84 points, dropping them to 122^nd (a fall of 37 spots).

Of course, personal and economic freedom is valuable in its own right, there are positive consequences from countries having both. When the authors compare the freest quartile to the least free quartile, they find that: median earners make five times more in income, extreme poverty is noticeably lower, deaths from conflict are especially lower, there are fewer emissions, people are more satisfied with their lives, and people are more tolerant.

This index provides valuable insights into the ever-changing dynamics of freedom around the world. Perth Tolle, the founder of the Life + Liberty Indexes and creator of the Freedom 100 Emerging Markets Index, is a great example of an active believer that freedom creates prosperity. In her emerging markets exchange-traded fund (ETF), she weights the possible countries that are included in the portfolio based on their personal and economic freedom scores. Her investment philosophy is that personal and economic freedoms are intertwined and work together; greater scores in one is not a simple replacement for lower scores in another area. Countries can best perform when both are strong.

In her ETF, almost one-third of the weighting comes from companies in Taiwan, which scored the highest according to the Human Freedom Index among “emerging market” countries. Taiwan (which is its own country, sorry, not sorry China) has a score of 9.26 in personal freedom and 7.71 in economic freedom. Companies in Chile (18%), South Korea (13%), and Poland (12.5%) are the next highest weighted countries. Companies in other countries like South Africa, Brazil, Thailand, and Malaysia all contribute 3% or more of the ETF.

The proof is in the pudding on this ETF. The ETF came out on May 22^nd, 2019 for $25. As of December 20^th, the price was $33.30, an increase of 33%. We see worse returns when we compare this to Vanguard’s Emerging Market ETF (VWO), which does not freedom-weight. By the end of May 2019, VMO’s price was $40.64; today, it is $44.46. This is an increase of just 9%. (If you account for total returns, or dividend included, FRDM is at 50.73% and VWO is 34.46%).

Freedom has tangible benefits for the individuals in the country, for society at large, for Mother Nature, and for investors. Believe in freedom!