#2
Moscow Times
November 15, 2001
Editorial
Economic Index Off The Mark

The "2002 Index of Economic Freedom" survey by the Heritage Foundation and The Wall Street Journal released this week had one senior analyst at a loss as to whether to laugh or cry. With El Salvador beating Germany and Armenia ahead of France in terms of economic freedom, we quite understand. And given that the index is billed as a "tool for policymakers and investors" and that the organizations behind the survey carry a lot of weight, its sometimes off-beam conclusions cannot simply be dismissed out of hand.

The 450-page report classifies Russia as one of the 25 least economically free countries in the world, with commensurately little likelihood of achieving economic growth. Furthermore, Russia's rating has remained unchanged for the past two years and is actually worse than it was in the years 1995-99.

This country has a lot of problems, but you don't have to be overly bullish to see that the economy has been growing and that important economic reforms (from taxes to de-bureaucratization and the Land Code) have been implemented in the past year.

Just focusing on the Russia section, there are a number of points that seem to seriously undermine the report's credibility and its aspirations to be "systematic and empirical."

In the first paragraph of the Russia country write-up, the authors appear to contradict themselves by first stating that among Russia's economic problems is the "inability to close the gap between available public resources and government spending," and then a few lines later praising President Putin for his "balanced budgets." In the same paragraph, the bold assertion that "the black market continues to account for at least 50 percent of GDP" is left totally unsubstantiated.

Due to methodological idiosyncrasies, Russia gets the worst possible score for inflation, despite inflation having been brought down to reasonable levels in recent years.

Russia justifiably scores poorly on property rights, and few would argue with this. However, why Russia's score has been downgraded since last year is a bit of a mystery. One would expect either no change or possibly that the recently adopted Land Code might even have nudged its score up a notch.

The fact that Russia's rating climbed in 1998 at the height of investor euphoria over Russia (the report having been written in 1997) suggests that the index is far from immune to subjective assessments, and that the set of criteria used is not as objective as the report would have us believe.

In any case, claims that because the index is published annually readers can "see how recent changes in government policy affect economic freedom," aren't borne out.

In fact, quite the opposite.

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