Every year, a US think tank called the American Heritage Foundation publishes something called the "Index of Economic Freedom". The Index claims to measure the economic freedom of the economies of almost every country in the world. Thus, it should give you an idea of whether (say) a Bulgarian in Bulgaria has more economic freedom than a Mexican in Mexico. The Index rates almost every country in the world on ten categories, including things like "Trade", "Regulation", and "Monetary Policy". It gives each category a numerical rating between 1 (best) and 5 (worst). Then it averages the ten and comes up with a composite rank between 1 and 5. This lets it rank the world's countries from best (Hong Kong) to worst (North Korea). Finally, based on the numerical score, it states whether they are "free", "mostly free", "mostly unfree", or "unfree". The Index just came out with its 2004 edition, and Romania didn't do so well. Its overall score was 3.7, it came in 129th out of 180 or so countries, and its rating was "mostly unfree". This has caused a certain amount of consternation here in Romania. Is the Index an accurate reflection of how things are here? Well, it says that it is. "The internationally acclaimed Index of Economic Freedom remains one of the world?s most reliable and authoritative guides to economic growth: an essential resource for anyone who wants to understand why some countries prosper while others still lag behind." Or so says the website. Unfortunately, at least with regard to Romania, the Index is pretty worthless. I think I'd have to do a longer post to explain why in detail, but here are a few reasons.
My biggest problem with this index is that it's so damn crude. It uses a lot of really arbitrary figures, most of which seem to have been chosen for how easy they are to find rather than how relevant they are to economic freedom or economic growth. Here's one example: "Monetary Policy". (You might want to open up Romania's entry in the Index and follow along.) MONETARY POLICY Score: 5.0 From 1993 to 2002, Romania?s weighted average annual rate of inflation was 29.08 percent. "Monetary Policy", according to the Heritage Foundation, consists of just one thing: average inflation over the last ten years. I checked the entries for several other countries and, yep, this is how they do it for everyone. Since Romania had a couple of bouts of heavy inflation -- on in the mid-'90s, another around 2000 -- it's cursed with a bad score until at least 2010 or so. This is particularly stupid, because Romania has had pretty decent macroeconomic and monetary policy for the last two or three years. Inflation is down, interest rates are falling slowly, the leu is pretty stable. And this has been the case for a while. But it doesn't matter how good monetary policy is. It can be good, and stay good, for the next five years; but the score won't come down from 5.0. That's just dumb; and it doesn't say anything meaningful about Romania in 2004. Here's another example: REGULATION Score: 4.0 The Financial Times reports, based on a U.S. Agency for International Development study, that ?it takes anything from 49 to 102 days to register a new company: 83 pages of forms have to be completed, weighing half a kilo?. Small to medium-sized enterprises have between 11 and 23 inspections a year?. A business start-up needs between 23 and 29 authorisations and approvals.? I know the study that they're talking about. It's the IRIS study, done in May 2000. You can find it here (.pdf file -- click on "English version" and then on "Red Tape"). It was a pretty good study, but it's nearly four years old, and much has changed since then. The fact that these turkeys are using it as a basis for their study is... suggestive. And then there's this: GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2.5 The World Bank reports that the government consumed 6.3 percent of GDP in 2001, down from the 12.5 percent reported in the 2003 Index. Pause right there. Is it just me, or does that seem a really suspect figure? How did government consumption drop by 50% in just one year? GDP grew only by about 4%; goverment expenditures went down by only about 2%. So... is it possible that there might be an error here? Based on the decrease in the level of government consumption, Romania?s government intervention score is 1.5 point better this year. Apparently the Heritage Foundation doesn't give it a second thought. I could go on. There are ten categories, and I'd say at least half of them are suspect, and two or three are really completely worthless. But, really, the whole thing is just crap. This wouldn't bother me if it was labelled honestly. If it said, "Here's a very rough, crude measurement culled from easily assembled secondary sources. It applies the same methodologies to the United States, China and Congo, but hey -- we had to cover 180 countries, and this was quick and simple" -- if it said that, I guess I'd be OK with it. But it says it's "one of the world?s most reliable and authoritative guides to economic growth"; an "essential resource for anyone who wants to understand why some countries prosper while others still lag behind". And, you know, that's just not so. The more I stare at this thing, the sloppier and lazier it looks. Puffing it up as "authoritative" and "essential" is just adding insult to injury. Unfortunately, the Romanians appear to have taken it pretty seriously; it got major articles in all the respectable daily newspapers and was mentioned on national TV. More's the pity.