Tuesday, January 16, 2007

Economic Freedom Index Improved-But Still Imperfect

I see the Heritage Foundation's economic freedom index, which I have previously criticized, have been released again. A quick look at their methodology page reveals they have changed their methodology, interestingly enough largely along the lines of changes I proposed. They haven't adopted all of my proposed changes, but some of them.

For example, they've dropped the ridiculous "informal market" category and replaced it with a labor regulation category, they've dropped the misleading practice of equating change in government spending with the level of it and they've included expropriation in the restriction of property rights category.

Largely as a result of this, Sweden and Denmark is no longer considered to have a low burden of government.

Some shortcomings remain, however. For example they still do not include union imposed minimum wages, even though union power is a product of the state, they still take no notice of forced savings schemes, they take no notice of other effects than consumer price inflation of monetary inflation, they still measure government ownership from share of government revenue coming from state-owned business (which is misleading since this first implies means that lower taxes reduces freedom and second that loss-making state companies is no freedom restriction) and they still take no notice in the index scores of the possible positive effects of corruption in some contexts (i.e., when the alternative is the enforcement of destructive regulation). Moreover, the grades of some of the categories seem rather arbitrary.

What is most curious about the continued inclusion of corruption in the index scores is the fact that in the methodology text they explicitly notices the ambigous effect of corruption on economic freedom. Yet they proceed to ignore it in the actual scoring.

In conclusion: the index is still imperfect, but it is nevertheless greatly improved compared to the previous versions.


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