Monday, February 26, 2007

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Tuesday, February 06, 2007

On Economic Freedom

Andy from Siberian Light posted some very interesting statistics from Index of Economic Freedom 2007 compiled by Heritage Foundation. According to the index Russia is #120 among 157 rated countries while other post-Soviet countries are mostly doing much better. For example, Kazakhstan is #75 and Georgia is #35.

Andy is at a loss
I’ve been racking my brains to think of something positive to say about this for Russia, and about the only thing I can think of is: if Russia has the world’s 10th largest economy, but is this unfree… imagine what it could do if it took deregulation seriously.

I decided to dig a bit deeper into the index because I know well how the economy of Kazakhstan works and I don’t find any serious differences between Kazakhstan and Russia. I did find many curious details.

First, the overall country index is based on a weighted score of such factors as business freedom, fiscal freedom, property rights, freedom from corruption, etc. The freest country in the world Hong Kong has the score of 89,3. At the bottom of the list are Cuba (29,7) and North Korea (3). Russia’s score is 54 and Kazakhstan’s score is 60,4. The difference of 6,4 points brings Russia 45 places down. If Russia could improve its score from 54 to 64 it could be as free as Jordan and South Africa (67 countries in between). At the same time at the top of the list things look different. Hong Kong score of 89 minus 10 brings us to Luxembourg (6 countries in between). Luxembourg score minus ten brings us to Czech Republic (69,7 and 23 countries in between). As we see for “mostly unfree” and “repressed” countries every point counts but for free countries plus-minus 10 points don't really matter.

Second, let us look at detailed ratings of Kazakhstan and Russia. There are two approaches: some ratings are calculated technically: inflation, taxes, taxed to GDP, etc. This is a very nice approach – no bias only digits. But then some rating are purely subjective and sometimes subjective beyond comprehension. Technical scores of Russia and Kazakhstan are very similar. There are only two differences. The first difference: in financial freedom Kazakhstan gets 60 but Russia 40. Why? I agree that Kazakhstan has better banking regulations, fewer banks and the sector is less dominated by state-owned banks (it is dominated by private banks run by Nazarbayev’s close relatives). But does it make 20 points difference? The second difference in ratings: Kazakhstan labor freedom rating is 80,5 but Russia gets only 66,2. This means that in Kazakhstan labor has less guarantees from employers, minimal wage is tiny, working hours are not limited, unwanted workers could be fired without much ado. Russia cares more about employees rights and less about employers. Conclusion – Russian economy is less free. Don’t you find this labor freedom index a bit tricky? For example, the shining example of labor freedom is Georgia – it’s 99,9 (one of the main reasons Georgia is #35). I can confirm it – in Georgia employees are treated like cattle.

Third, even technical scores could be adjusted subjectively. There is a freedom from corruption score. It's subjective but separate from technical ratings. Good. But the guys from Heritage Foundation act differently. There’s corruption rating, then (in case with Russia) they say that from the point of legal demands the courts are totally independent but judges are corrupt and we bring the score down. Property rights judicially are ok but officials are corrupt. What’s the problem? Either get rid of a separate corruption rating or stop introducing this “Russia is corrupt” bias into every technical ratings.

Comparing ratings of rich countries and the rest of the world is hilarious. Take labor freedom rating in France and Russia. French labor code is Draconian – to fire a lazy worker is almost impossible. France labor rating is 65,9 and Russia has 66,2.

Heritage Foundation has a lot of problems trying in vain to prove that economic freedom brings prosperity, growth and a lot of investments. Unfortunately the correlation is so weak that special methods are introduced into methodology to make statistics more “supportive” for ideological dogmas.

PS. By the way, Andy. Before exclaiming "Russia's economy is less free than Communist China's" look at the rating Russia and China both have 54,0 score. Why China is #119 but Russia #120? Can you guess?