Fraser Institute?s Economic Freedom of the World (EFW) for 2010 has just been published. Several such cross-country indices float around. This one computes an aggregate index based on five broad areas of (1) size of government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labour and business.
India is ranked 87th out of 141 countries. For the record, China is ranked 82nd. How can China rank higher if little freedom exists there, illustrated, say, by Liu Xiabao? EFW, and others like it, are about economic freedom, not political freedom. These two types of freedom may have some correlation, but aren?t identical. For the record again, the top-5 countries are Hong Kong, Singapore, New Zealand, Switzerland and Chile. Bottom-5 consists of Republic of Congo, Venezuela, Angola, Myanmar and Zimbabwe. That listing itself suggests there is a correlation between economic freedom and economic development indicators, be they per capita income, GDP growth, poverty, life expectancy, infant mortality, literacy, life satisfaction, corruption, and political rights and civil liberties and research based on EFW has probed these. Having said this, there are caveats. First, EFW is based on a set of variables.
Occasionally, there are criticisms of inclusion (variables shouldn?t have been included) and exclusion (variables haven?t been included). For instance, all EFW variables are driven by a desire to capture freer cross-border movements of capital. Why shouldn?t there be variables on freer cross-movement movements of labour? Required data have now begun to emerge. Often, data aren?t available objectively for some variables. Therefore, data are collected subjectively, through questionnaires and this raises problems. EFW doesn?t itself collect data. It uses third-party sources. However, using third-party sources doesn?t solve the third-party problem. It merely passes the buck.
Second, EFW is at a country-level and doesn?t capture regional variations, important among large and heterogeneous countries. That?s the reason sub-national indices have been attempted for countries like the US, Canada, China and India. But the present one is at a national level.
Third, once one has obtained objective data and subjective scores and has gone through a process of normalisation, there is the matter of weights and aggregation. Overall rankings are not sufficiently robust if these are changed. Consequently, one should focus more on scores, not ranks. A country?s rank also depends on how other countries are performing. It is relative. A score is absolute and is a better indicator of how a country has been performing over time.
Let?s look at India?s scores. The closer a score is to 10, the better. India?s aggregate score was 5.41 in 1980, declined to 5.13 in 1990, increased to 6.27 in 2000 and 6.48 in 2008. (Though the report is for 2010, because of time-lags, data are for 2008.) Reforms are also about greater economic freedom. Consequently, it shouldn?t be surprising that India?s score has improved over time, especially after 1990. For the individual five heads, size of government was 5.00 in 1980, 4.88 in 1990, 6.27 in 2000 and 6.84 in 2008. Legal structure and security of property rights was 6.32 in 1980, 4.79 in 1990, 5.99 in 2000 and 5.93 in 2008. Access to sound money was 6.29 in 1980, 6.63 in 1990, 6.88 in 2000 and 6.69 in 2008. Freedom to trade internationally was 4.32 in 1980, 4.02 in 1990, 5.54 in 2000 and 6.79 in 2008. Regulation of credit, labour and business was 5.22 in 1980, 5.29 in 1990, 6.09 in 2000 and 6.16 in 2008. At a broad level, though this is subject to specific variables included under each of these heads, this fits in with our perceptions of where reforms have occurred and where they have not. For instance, reforms haven?t occurred in legal structure and security of property rights.
What one should focus on is not 1980 to 2008, but 2000 to 2008, or even better, 2005 to 2008 and there are 42 variables, clustered under those 5 heads. Between 2005 and 2008, if one zeroes in on the variables, India has declined on government consumption, transfers and subsidies, judicial independence, impartial courts, protection of property rights, standard deviation of inflation, inflation, trade taxes, NTBs, foreign ownership/investment restrictions, centralised collective bargaining, administrative costs, bureaucracy costs, extra payments/bribes, licensing restrictions and cost of tax compliance. A few of these might raise eyebrows, such as trade taxes or foreign ownership/investment. These don?t seem to have worsened since 2005.
Answers have to be sought in the third-party data, not only for variables where there have been declines, but also where there have been improvements. For instance, why has there been an improvement in hiring and firing regulations since 2005? But such criticism, or even that of EFW in general, is pointless. There are other surveys too, identifying non-reform in similar sectors. Interpreted thus, results are robust.
The author is a noted economist