Unexpectedly Intriguing!
16 September 2005

The last two weeks have seen the release of two real blockbuster reports related to the differences between the economies of the world's nations: the Fraser Institute's 2005 Annual Report on Economic Freedom in the World (available as a 1.96MB PDF document) which ranked the economic freedom of 127 nations and the World Bank's International Finance Corporation's database ranking the ease of Doing Business in 155 nations of the world.

Political Calculations has previously commented upon the strong link between economic freedom and the peaceful coexistence between economically-free nations established in the Fraser Institute's report, but hasn't yet commented upon the economic aspects of that report. Meanwhile, the publishing of the IFC's database offers a unique opportunity: why not put the findings of the two reports together?

Here's what I'd expect to see - the nations that ranked the most highly for economic freedom should also be the nations that provide the greatest ease of doing business. Likewise, the lowest ranked nations will likely be those that create the greatest barriers to doing business within their territory. Here are the top-ranked nations for economic freedom and their ease of doing business ranking, presented below in a dynamic table (click the column headings to sort the data according to the category):

Top Ranked Nations for Economic Freedom and Their Doing Business Ranking
Country Economic Freedom Index Score Ease of Doing Business Rank
Australia 7.8 6
Canada 8.0 4
Estonia 7.8 16
Hong Kong 8.7 7
Ireland 7.9 11
Luxembourg 7.8 Not Ranked
New Zealand 8.2 1
Singapore 8.5 2
Switzerland 8.2 17
United Arab Emirates 7.8 69
United Kingdom 8.1 9
United States 8.2 3

As expected, nearly all of the top-ranked nations for economic freedom also scored very highly for their ease of doing business. All except for one: the United Arab Emirates, which had an Economic Freedom Index score of 7.8 while being ranked 69 of 155 in the world for Doing Business. How could that happen?

The answer might be suggested by examining the scoring for the various categories that make up the Economic Freedom Index (EFI). Here is the breakdown for the top-ranked nations, again presented in a dynamic table (click the column headings to sort the data according to the category):

Top Ranked Nations for Economic Freedom and Their Subrankings
Country Government Size Legal Structure Sound Money International Trade Regulation
Australia 6.2 8.9 9.3 7.5 7.4
Canada 6.6 8.7 9.5 8.0 7.3
Estonia 6.5 7.0 9.7 8.6 7.0
Hong Kong 8.9 7.4 9.2 9.7 8.2
Ireland 5.9 8.3 9.6 8.8 6.7
Luxembourg 4.2 8.9 9.7 8.9 7.2
New Zealand 6.8 8.9 9.5 8.2 7.6
Singapore 8.0 8.2 9.7 9.5 7.0
Switzerland 7.3 8.7 9.6 8.1 7.1
United Arab Emirates 7.6 6.8 8.6 8.3 7.7
United Kingdom 6.5 9.2 9.4 8.3 7.4
United States 7.8 7.9 9.8 7.8 7.6

Of the major sub-categories for evaluating economic freedom, the United Arab Emirates scores the lowest among the top-ranked nations in the world only in Legal Structure, which examines the degree to which independent, impartial institutions exist for resolving disputes, particularly those between government entities and individuals or private businesses. The Economic Freedom Index's individual country analysis for the United Arab Emirates indicates that it scores low in this regard due to a lack of impartiality on the part of its judicial system.

Meanwhile, the Doing Business summary for the UAE confirms that the UAE ranks 133 out of 155 nations in enforcing contracts (the most directly comparable component to the Economic Freedom Index' Legal Structure category), requiring some 53 steps and 614 days to enforce contracts.

The UAE's Doing Business ranking is also lowered by the country's regulatory hurdles for starting and closing a business. In particular, the IFC found that launching a business in the UAE requires 12 steps and 54 days, at a cost roughly equal to 44.3% of the UAE's gross national income per capita - enough to earn a ranking of 134 out of 155 nations. Closing a business through bankruptcy in the UAE takes 5.1 years. The Economic Freedom Index Regulation subcategory confirms the UAE's low score in the regulation of businesses, but this is offset in the EFI's subcategory ranking for Regulation by the UAE's high scores in the regulation of credit and labor markets.

It would be very interesting to see if it would be worthwhile to merge the two studies together, assuming that the people behind the EFI and the Doing Business research can work out their differences and agree on an appropriate methodology for doing so. And while I'm at it, why not toss in relative measures on the costs of running a business in the various nations as well? It seems to me that high land, labor and operating costs could be just as much a barrier to doing business and economic freedom as government interference.

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