Opinion Index of Economic Freedom

Though similar in spirit,there are two distinct indices that measure economic freedom and do cross-country comparisons.

New DelhiJanuary 15, 2011 02:49 PM IST First published on: Jan 15, 2011 at 02:49 PM IST

Though similar in spirit,there are two distinct indices that measure economic freedom and do cross-country comparisons. The first is Fraser Institutes Economic Freedom of the World (EFW),while the second is Heritage Institute and Wall Street Journals Index of Economic Freedom (IEF). Variables,data sources,weights and aggregation methods vary between the two. For instance,IEF scores countries on 10 different factors (1) business freedom; (2) trade freedom; (3) monetary freedom; (4) government size; (5) fiscal freedom; (6) property rights; (7) investment freedom; (8) financial freedom; (9) freedom from corruption; and (10) labor freedom. Each of these is scored on a scale of 1 to 10 and then aggregated to obtain a countrys total score on economic freedom,100 being the maximum.

The 2011 IEF has just been published for 183 countries. India is at the 124th spot,just behind Pakistan. India scores relatively the worst in business freedom,property rights and freedom from corruption. The top five are Hong Kong,Singapore,Australia,New Zealand and Switzerland. With global financial crisis and consequent policies,it is understandable that economic freedom should have declined in Europe and North America.

Every region except Europe and North America registered an improvement in economic freedom. 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.

The list of countries that have improved their scores compared to last year is revealing.

The top gainers are Rwanda,Djibouti,Seychelles,Solomon Islands and Guineau-Bissau. In the list of important losers are Iceland,Kuwait,Ireland,Nepal,Greece,Italy and United Kingdom. Such exercises are more than intellectual and statistical experiments,since they do highlight policy problems. For instance,there is correlation between IEF,and EFW,and many indicators of economic development. There are three ways in which one can gauge a countrys performance.

First,how has it improved over time? Second,how does it compare with similar countries? Third,in which of the various segments is the country relatively behind? In answering all three questions,one should focus on scores,not ranks. Ranks depend on how a different country has been performing.

Scores are absolute. Indias aggregated score is 54.6,while free economies on an average have a score of 84.1.

Potential entrepreneurs face severe challenges. The regulatory framework is burdensome,and the legal framework is weak. It can take almost 200 days to obtain a construction permit. Thats on business freedom.