The Economic Freedom of Indices

he quality of Wall Street research has suffered grievous blows these last six years. Yet, publishers of political and economic indices largely escaped unscathed. Though their indicators often influence the pecuniary fate of developing countries, they are open to little scrutiny and criticism.

The Heritage Foundation and the Wall Street Journal are the joint publishers of the 2002 edition of the much-vaunted "Index of Economic Freedom". The annual publication purports to measure and compare the level of economic freedoms in 155 countries.

According to its Web site, the Index takes into account these factors:

Corruption in the judiciary, customs service, and government bureaucracy; Non-tariff barriers to trade, such as import bans and quotas as well as strict labeling and licensing requirements; The fiscal burden of government, which encompasses income tax rates, corporate tax rates, and government expenditures as a percent of output; The rule of law, efficiency within the judiciary, and the ability to enforce contracts; Regulatory burdens on business, including health, safety, and environmental regulation; Restrictions on banks regarding financial services, such as selling securities and insurance; Labor market regulations, such as established work weeks and mandatory separation pay; and Black market activities, including smuggling, piracy of intellectual property rights, and the underground provision of labor and other services. The Heritage Foundation's boasts of using the "most recent data" available on September 2001. I downloaded the chapter about Macedonia and studied it at length, starting with the most basic, numerical, "facts". I then compared them to figures released by the Macedonian Bureau of Statistics, the IMF, the World Bank, the European Bank for Reconstruction and Development, the United Nations Development agency, and the European Investment Bank. Macedonia's GDP is $3.4 billion and not $2.7 billion as the report states. Macedonia's GDP exceeded $3 billion in the last 4 years. Nor has GDP grown by 2.7 percent last year or the year before. In 2001, it has actually declined by 4.3 percent and is likely to decline again or rise a little this year. As a result, GDP per capita is wrongly computed. The trade deficit is not $300 million - but double that. It has been above $500 for the last few years. Net foreign direct investment has been closer to $100 million for two years now - rather than the paltry $29 million the report misreports. The report makes "rice" one of Macedonia's "major" agricultural products. It is, actually, first on its list. Alas, little rice is grown in Macedonia nowadays, though it did use to be a weighty European rice grower decades ago. Nor does the country produce noticeable quantities of citrus, or grains, as the report would have us believe. The authoritative-sounding introduction to the chapter informs us that Macedonia maintains a budget surplus "from the sale of state-owned telecommunications". In its decade of existence, Macedonia enjoyed a budget surplus only in 2000 and it had nothing to do with the sale of its telecom to the German-Hungarian MATAV. The proceeds of this privatization were kept in a separate bank account. Only a small part was used for budgetary and balance of payment purposes. The outgoing prime minister would be pleasantly astounded to learn that he "privatized approximately 90 percent of (the country's) state-owned firms". These were actually privatized by the opposition when it was in power until 1998. It is true that major assets, such as Macedonia's refinery and its leading bank, were privatized in the last 4 years. It is also true that the bulk of state-owned loss making enterprises were either sold or shut. But these constitute less than 15 percent of the number of companies the state owned in 1992. The fiscal burden of Macedonia is 34 percent of GDP - not 23 percent as is the impression that section provides. It has surpassed 30 percent of GDP long ago. Moreover, in the sub-chapter titled "Fiscal Burden of the Government" the authors contend that "government expenditures equaled 23.3 percent of GDP". A mere three lines later fiscal rectitude sets in and "the government consumes 19 percent of GDP". Which is it? The "monetary policy" segment is a misleading one-liner: "Between 1993 and 2000, Macedonia's weighted annual average rate of inflation was 7.15 percent." The term "weighted annual average rate of inflation" is not explained anywhere in the tome. Whatever it is, this average masks the hyperinflation of Macedonia's first half decade and the near deflation of the last few years. The straight average in this period was 56 percent, not 7 percent. The report says that "the country's political instability has had a debilitating effect on foreign investment". It sounds logical but does not stand up to scrutiny. Investment flows actually increased in the conflict year as bargain hunters from Greece, Slovenia, Germany, and other countries converged on Macedonia. And so it continues. Macedonia is a tiny and unimportant country. Clearly, scarce research resources are better allocated to Russia or Indonesia. But many of the erroneous data quoted in the report would have required a single surfing session to amend. Sloppy editing, internal contradictions, and outdated information regarding one country, regardless of how inconsequential it is, render the entire opus suspicious. Unfortunately, indices such as these affect both portfolio and direct investment flows, the country's rating, its image in the international media, and the government's standing domestically. The golden rule with such a responsibility is "handle with care". Regrettably, few do.