Tuesday, September 05, 2006

Limits of EFW rankings

Various economic freedom index studies (Fraser Institute's "Economic Freedom of the World" {EFW}), Heritage Foundation's "Economic Freedom Index", and so on) are useful, but they are not really precise.

The WB and IFC jointly produce an annual study, "Doing Business". Results of this good study I think are not taken into account by those EFW studies. Take their definition of "economic freedom" -- (a) full property rights and protection from forcible grabbing of property, and (b) ability to exchange (sell, lease, etc.) your property. This is very limited. Consider continental Europe like France, Germany, Italy, Belgium. Their very high unemployment rates of 9-11% annually means that employers and entrepreneurs in those countries do not have much "economic freedom" to hire people. The rigid government labor regulations and very strict environmental regulations tie the hands of entrepreneurs. Some of them would rather keep their firms small than expand and hire more people because hiring more workers means more labor laws to follow, more labor insurance and fees to pay.

On the other hand, some Asian industrializing countries like China, Korea, Thailand, Malaysia, HK, Taiwan, others (the Philippines not one of them, unfortunately), the entrepreneurs there have more "economic freedom" in ever-expanding their businesses, that results in more workers hired, more economic growth. But in the EFW index ranking, many of those Asian countries (China, Thailand, etc.) rank very low.

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