Cliched Message From Country Rankings

All of them point to one aspect - that India has a long way to go

Bibek Debroy
Financial Express, 21 Sept 2004

Liberalisation is about ensuring economic freedom to citizens. "Economic freedom" is not a concept easy to pin down and any judgement is contingent on variables used to quantify and measure it. In cross-country comparisons, three such indices to capture economic freedom have surfaced, courtesy Fraser Institute, Freedom House and Heritage Foundation (in collaboration with Wall Street Journal).

Inevitably, rankings differ across these indices. Inevitable because the variables used differ. In any ranking, the ranker faces a perennial problem. Does one base one's rankings only on objective data or does one include subjective perceptions? The former avoids subjectivity, but can always be criticised because it is not comprehensive. After all, if ranking is based on data, quantifiable and measurable data have to be available. And typically, for many concepts associated with economic freedom, you don't have data.

Any objective ranking suffers from two kinds of criticisms - commission of and omission of variables. Commission of variables means you have included variables that shouldn't be included and this kind of criticism is rare. Omission of variables means you have excluded variables that should be included and this kind of criticism is more common. Almost certainly, the ranker hasn't used these variables not because she is unaware of their importance, but because data isn't available.

To circumvent the problem, one can use subjective data, based, say on questionnaires. This raises several problems, many related to sampling design. In addition, there's the presumption that the respondent is familiar with all the countries one is interested in ranking. If not, different respondents have responded about different countries and how does one make these responses comparable? For instance, UNDP's human development index (HDI) may now have acquired some degree of robustness. But because it's based on objective data, it always captures certain things and not others. In contrast, many cross-country indicators of governance suffer from the problem of subjectivity.

Back to the three indices, Freedom House and Heritage Foundation use subjective res-ponses and Fraser Institute is based on objective data. Courtesy the Centre for Civil Society and Academic Foundation, we have an Indian edition. Here is a quote from Parth Shah's introduction to the Indian edition. "Human freedom can be classified in three categories: political freedom, civil freedom, and economic freedom. Political freedom refers to the right to vote, elect a representative, participate in the collective decision making processes. Civil freedom includes the freedom of expression and of the press, freedom of association, freedom to practice one's faith. The freedom to produce and trade - to earn an honest living - without undue interference is the essence of economic freedom. It includes the right to own, use, and dispose property, right to proper and speedy resolution of disputes and enforcement of contracts, and overall protection of life and property so that everyone can earn their livelihood safely and peacefully".

So, how does India perform on economic freedom ratings? The constructed index has a maximum value of 10 and a minimum value of 0. First, how has the value of the Indian index changed over time? Second, how does India rank in comparison with other countries? Over time, India's index value was 4.9 in 1970 and 1980, declined to 4.8 in 1990 and increased to 6.2 in 2000 and 6.3 in 2002. (The 2004 report has data till 2002). This fits in with the perception that liberalisation has increased economic freedom. In comparison with other countries, India ranks 68th out of 123 countries. The best country among ones ranked is Hong Kong and the worst is Myanmar. India shares the 68th rank with Bahamas, Belize, Ghana, Tanzania and Tunisia.

There is another way to react to these findings. Given free choice, one would like to move to countries that exhibit higher economic freedom. I don't know about Bahamas and Belize. But given free choice, how many Indians would like to move to Ghana, Tanzania or Tunisia? In asking this question, one shouldn't be uncharitable. After all, this only measures economic freedom, not political or civil freedom. There is also the point that people react adversely to rankings that do not fit with a priori perceptions.

I once attended a talk by Robert Aumann, the mathematical economist and Aumann complained about the perils of being a mathematical economist. If you used mathematics and came up with a finding that was ostensibly counter-intuitive, people argued there must be something wrong with the mathematics. And if you came up with a finding that was intuitive, people said, why do you need all that mathematics to prove something obvious?

Having accepted these points, let's scrutinise India's 68th rank and as I have explained earlier, that amounts to scrutinising the 38 variables used under five heads. These five heads are: Size of government (expenditures, taxes and enterprises); legal structure and security of property rights; access to sound money; freedom to trade internationally; and regulation of credit, labour and business. Getting into the nitty-gritty, these 38 variables are clustered under the five heads. So for each head, you average out the scores assigned to variables under that head. That gives you a score for that head. And you average out across the heads to obtain an overall score for the country.

For example, for size of government, India gets a score of 7.1; for legal structure the score is 6; for access to sound money, 6.9; for freedom to trade the score is 6.2 and for regulation of credit, labour and business the score is 5.4. In each of these, it's possible to quibble. Is chapter VB of the Industrial Disputes Act (hiring and firing) really that important? Should external trade have that high a weightage? Seems to bias the rankings against large countries. And so on. But all said and done, the message is the cliched one of telling us that we have a long way to go.