Malawi vs. Sweden: Which has better economic incentives?
An from the book written by at UC caught my attention. Often newspapers carry articles, indices and rankings that have no meaning behind them. As long as the the African countries lay at the bottom of the pile, all is well and good. This gives room for mainstream media and bloggers to trumpet the woes of the motherland. Data interpretation very much like beauty is often in the eye of the beholder. It takes a bold researcher (with no grant at stake) to admit that the data set does not quite interpret the realities on ground. Often we find researchers tweaking the models to fit the reality. Africa has suffered, unduly from indexes and rankings, because of a dearth in representation in qualitative research. The few researchers available are largely outnumbered by the group that insist on painting Africa black.
Available resarch o Africa's hot topics, such as AID, SME's, Microfinance, is relatively few. Many of the studies available seek to expain the African challenge ex-post. Personally I am not too concerned about academic research and the various interesting findings. I get worried when these findings make it into mainstream media and the hands of non-acedemic policy makers. This folks often aren't aware that many research findings in the social science ought to be interpreted with care and in man cases taken with a pinch of salt. Please enjoy this , which quite frankly is easy to read and isn't dense in economic jargon.
Here are few facts from the article;Income per person in Sweden averaged $25,921 (2000 $ PPP) in 2000-2004. Income per person in Malawi in the same period averaged $784.
He took a swipe at the Index of Economic incentives;
Thus the Heritage Foundation, in an index constructed in conjunction with the Wall Street Journal, ranks Sweden as 21st in the world in its index of economic freedom (72.6% free), and Malawi as 104th (55.5% free) out of 157 countries.
And finds that something rather funky was amiss, so he asked a rather poignant question about the objectives of a rankings like this;
But the weightings of the components of the index are chosen with the result in
mind. Had Heritage and the Wall Street Journal produced an index which ranked
economic freedom higher systematically in poor countries, no-one would have
liked the index. This is not a scientific enterprise, it is an ideological one.
Explaining why he thinks this ranking is erroneous, that is, punishing African countries for disincentives to doing business whereas turning a blind eye to similar negative factors in the case of European economies. Which results in an index that interprets perception rather than one which interprets data.
Yet frequently corruption in low income societies is a way of getting round
burdensome bureaucratic requirements. Why should states like those of northern
Europe which impose many arbitrary and vexatious requirements on their citizens
and businesses be further rewarded in the index of economic freedom by the fact
that their soulless bureaucrats are rigid in the enforcement of these
regulations?
A case of double counting;
Similarly having assessed Malawi penalties for its legal systems failure to
follow the formal rule of law (a whopping 50 points), the Freedom Index then
penalizes Malawi a further 41 points under Business Freedom for having a formal
set of requirements on business enterprises that are more onerous than in
Sweden, even though given the weakness of the legal system we have no idea if
any of these rules are applied in practice. The Chinese market traders so
evident across countries like Malawi do not seem to have found the formal
business requirements of the Malawian legal code too much of an obstacle.
And finally he concludes;
This was an index enterprise whose result was known before it was ever begun, and whose underpinning is an economic ideology that assumes that economic freedom must produce economic growth, so that the absence of growth must be found in a restriction of economic freedom.
Update
A reader disagrees with my evaluation;
As far as the logic in this paper, no it's not flawless:
if you check these:
http://www.heritage.org/research/features/index/country.cfm?id=Malawi
http://www.heritage.org/research/features/index/country.cfm?id=Sweden
- The truth is Malawi ranks higher than Sweden in Fiscal Freedom, Labour Freedom, Freedom from Government. So saying that the "flexibility" of the rules is not taken in consideration is quite false. And remember Sweden is not France or Italy, it's quite easy to fire someone there by European standards.
- Clarck defines corruption as payment of bribes to avoid taxes/regulation etc.. Do you feel it's the case in general ? Was that the case when that government official fucked up with your project ?
Clark decides to use a form of corruption that is far more benign than the reality.
- his case for double accounting is weak. Is that the only thing a judicial system does ? enforcing government regulation ? What about settling disputes ? One important part in the Heritage index is Propriety Rights. And those need competent and secure courts to be enforced. Think the effect it has on growth..
- RIGIDITY in the enforcement of regulations IS A GOOD THING. AT least businesses and people are traded equally. No special treatment, no import permits, no wrote off debt, no "no interest" credit for the well-connected. Everybody pays taxes.
