To be clear about the words in quotation marks in the heading of this article:
The Index of “Economic Freedom” is an annual measure, conducted by The Heritage Foundation and The Wall Street Journal, of 10 freedoms – from property rights to entrepreneurship – in 183 countries. These freedoms will be listed, below.
The Legatum Prosperity Index annually ranks 104 nations according to nine building blocks of prosperity, about which more below as well.
The Corruption Perceptions Index is part of an annual report published by Transparency International (TI) which ranks 178 countries according to the perception of corruption in the public sector. TI defines corruption as the abuse of entrusted power for private gain, in both the public and private sectors. For the purposes of this article and study I have chosen to call TI’s report the “Transparency Index.”
Each of these organizations is independent of the others and employs different methods of measurement, so I thought it useful to see if there are correlations among and between their most recent findings, published in 2010.
Because the Legatum Institute indexed only 104 countries, I limited my country aggregations and comparisons to this number, less one that doesn’t appear in one of the other indexes. Even so, these 103 countries represent approximately 90% of the world’s population.
Here’s a quick take on how these three indexes tracked with each other, comparing data for each country by two indexes at a time:
You will see properly formatted versions of these three graphs, below. I merely intend to show here that there are strong correlations among the three indexes as shown in these scattergraphs. (The trend lines are automatically generated in the Microsoft Excel spreadsheets that created these graphs).
It seems intuitive that, in a given country, greater transparency (or less corruption) would be associated with greater economic freedom and with greater prosperity, and all with each. So, these graphs are mostly a test of how well the indexes are measuring what they intend to measure. My confidence in them is high.
It needs to be emphasized, however, that no causative relationship is implied, or should be inferred, between and among the underlying data in each graph. These are correlations, not causations.
It is also notable that each graph has a different ‘tightness’ of data points around each trend line. This may suggest the degree of relative confidence we can have in the apparent correlations we can see.
There are some major ‘outliers’ in each graph which stand apart from the major clusters of data points. These will be identified and discussed, below.
First, let’s see how Prosperity and Economic Freedom track with each other in CHART NO. 1:
PLEASE CLICK ON ALL EXHIBITS TO SEE THEM FULLY AND LEGIBLY
Other than several apparent outliers which will be discussed later, one can see a positive correlation between the two independent measures: the greater the Economic Freedom, the greater the Prosperity, but no causative relationship should be inferred.
I will leave it to the more mathematically and statistically able to calculate, from the source data available under the links in this article, the coefficient of correlation of the data points represented in this and the other two following graphs. Here is an Excel spreadsheet with basic data from which the graphs were developed: 103 Countries-population-Economic Freedom-Prosperity-Transparency 2010
Next, let’s look see how Transparency (the inverse of Corruption) tracks with Prosperity in CHART NO. 2:
The two independent indexes seem to have a positive correlation, with two major groupings: those countries ranking 5.3 and above on the Transparency Index, and those ranking 4.7 and below. Within both these groups, greater Transparency (or less corruption) seems to indicate greater Prosperity in a given country, and vice versa (no causative relationship should be inferred). The larger number of apparent outliers in this graph will be listed and discussed below.
Last, let’s see how Economic Freedom tracks with Transparency (the inverse of Corruption) in CHART NO. 3:
Other than three or more apparent outliers, one can see a positive correlation between the two independent measures: the greater the Transparency (or the less corruption), the greater the Economic Freedom, and vice versa, but again no causative relationship should be inferred.
Legatum Prosperity Index
lēgātum (Latin); a bequest, legacy
Now in its third year, the 2009 edition of the Prosperity Index ranks 104 nations according to nine building blocks of prosperity, which we have identified through extensive research and analysis:
|• Economic Fundamentals
• Entrepreneurship and Innovation
• Democratic Institutions
• Safety and Security
• Personal Freedom
• Social Capital
Key findings (Edited)
1. Prosperous countries which lead the Index do well in all nine sub-indexes, indicating that the foundations of prosperity reinforce each other.
2. Entrepreneurs at the micro level need good economic policies at the macro level. Aspiring entrepreneurs will often hit a “ceiling” limiting their success if a nation’s economy is not fundamentally strong.
3. Freedom cannot be divided. While some nations seek to allow one aspect of freedom while restricting other aspects, prosperous nations respect freedom in all of its dimensions: economic, political, religious, and personal.
4. Prosperity is concentrated in the North Atlantic – for now. Sixteen of the top 20 most prosperous countries sit in North America and Europe.
5. Highly ranked nations include those with a long history of productive economies, effective and limited government, and social capital. Yet several other nations rank high that not long ago were afflicted with poverty, oppression, and unhappiness.
6. Good governance is central to life satisfaction and economic progress.
7. Security and safety function as both a cause and an effect of overall prosperity. A secure nation enables its citizens to flourish without fear of attack or harm, and prosperous citizens provide the financial resources and social capital to maintain safety and security.
8. Happiness is … opportunity, good health, relationships, and the freedom to choose who you want to be.
9. Some countries with ineffective governments still score well on social capital, indicating that healthy networks of families and friends play an essential role in helping a nation function.
10. It’s true that money can’t buy happiness … unless you are poor. Only in the poorest countries do increases in income have a significant effect on people’s life satisfaction.
Index of Economic Freedom
Economic freedom is the (ability) of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.
We measure ten components of economic freedom, assigning a grade in each using a scale from 0 to 100, where 100 represents the maximum freedom. The ten component scores are then averaged to give an overall economic freedom score for each country. The ten components of economic freedom are:
The 2010 CPI draws on different assessments and business opinion surveys carried out by independent and reputable institutions. It captures information about the administrative and political aspects of corruption. Broadly speaking, the surveys and assessments used to compile the index include questions relating to bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and questions that probe the strength and effectiveness of public sector anti-corruption efforts.
For a country or territory to be included in the index a minimum of three of the sources that TI uses must assess that country. Thus inclusion in the index depends solely on the availability of information.
Perceptions are used because corruption – whether frequency or amount – is to a great extent a hidden activity that is difficult to measure. Over time, perceptions have proved to be a reliable estimate of corruption. Measuring scandals, investigations or prosecutions, while offering ‘non-perception’ data, reflect less on the prevalence of corruption in a country and more on other factors, such as freedom of the press or the efficiency of the judicial system. TI considers it of critical importance to measure both corruption and integrity, and to do so in the public and private sectors at global, national and local levels. The CPI is therefore one of many TI measurement tools that serve the fight against corruption.
The 2010 CPI measures the degree to which public sector corruption is perceived to exist in 178 countries around the world. It scores countries on a scale from 10 (very clean) to 0 (highly corrupt).
Outliers (See this Excel Spreadsheet as the reference for the following: Outliers)
Where any country has appeared more than once as an outlier in the three charts, whether in a favorable, mixed or unfavorable position, I have identified these as the countries to examine further to see what we can learn. Here are the Countries, by my ranking:
|High (Favorable)||Hong Kong|
Let’s see what’s so special about Hong Kong and Singapore:
In Legatum’s Prosperity Index, Singapore and Hong Kong rank 17th and 20th, respectively, out of 110 countries. Singapore ranks 5 and 6 in in *Safety & Security’ and ‘Economy.’ Hong Kong ranks slightly lower in of these areas as well.
In the Index of Economic Freedom, Hong Kong and Singapore rank 1 and 2, respectively, in a list of 179 countries.
Here are excerpts from the Global Corruption Report of Transparency International regarding Hong Kong:
- In Hong Kong as many as two-thirds of businesses believed that they lost opportunities on account of corruption by competitors within a one-year time frame.
- In Hong Kong, Germany, France and Brazil, fewer than half the surveyed companies reported having a specific procedure for vetting agents and suppliers before entering into a relationship with them.
- (In Hong Kong) laws or regulations require disclosing how a director’s compensation was reviewed and evaluated, but compensation (is not) linked to the director’s performance.
- (In Hong Kong) the legal and regulatory framework (does not) provide whistleblower protection.
Here are excerpts from the Global Corruption Report of Transparency International regarding Singapore:
- Laws or regulations do not require disclosing how a director’s compensation was reviewed and evaluated, but it is recommended by Code of Corporate Governance.
- Compensation linked to the director’s performance is not mandatory, but it is recommended.
- There is whistleblower protection for auditors.
- Singapore has subsidised training related to the adoption of environmental and labour standards.
- Much work remains to be done in the area of Sovereign Wealth Funds (such as Singapore’s Temasek Holdings and Government Investment Corporation) in governance and transparency.
My rough summary of these two political entities is that there is so much freedom to establish and operate an enterprise, and so much safety and security in daily life, that these far outweigh any corruption. The latter seems to be addressed in principle, if not fully in application.
The Eight “Intermediate” Outliers
These countries are assigned at least one big favorable finding and at least one big unfavorable finding. The findings may have to do, at least in part, with current perceptions in comparison to past conditions. That is, most things may be not so good now, but they were very much worse in the past and there are some new good things. This seems generally true, from my reading, of the Latin American countries: Argentina, El Salvador, Mexico, Paraguay, Peru. Other than in Argentina, there is much emigration. Generally, there is little confidence in governments including the judiciary branch, despite welcome stability.
On the other hand are the countries whose past performance has provided a strong economic and social base, including infrastructure, but where the government seems to be losing its ability to cope with some major current issues. France and Italy seem to fit this description, even though the cultures and circumstances are quite different. One big difference between these two countries is French optimism and Italian pessimism (my interpretation).
Botswana is unique in its position of being an African country where things are measurably and sensibly improving and improved, despite a low standard of living for most people. There is great mineral wealth and much industry, with personal and business freedoms not found in other poor African countries, or in the five Latin American countries, above.
These summary impressions should be tested by the reader looking at the specific findings and comments under the three separate reports and summary charts.
Jordan and Saudi Arabia are assigned one favorable outlying position, but also two unfavorable outlying positions.
As far as I can determine, Jordan’s one favorable point is in relation to other countries in a group which register much worse in Transparency, but all are low in Prosperity and Economic Freedom. Personal freedoms are low, as are the levels of social cohesion and health.
Saudi Arabia’s mineral wealth provides the basis for the one positive outlying measure, but personal freedom, safety and security, education, property rights (especially for women) and Transparency are low.
The “Low” Countries
These four countries are found in at least two unfavorable outlying positions, with Zimbabwe found in this position in all three charts. Iran, Ukraine and Venezuela are positioned unfavorably in Prosperity and Transparency. Zimbabwe is also positioned unfavorably in Economic Freedom. None of these countries is positioned favorably in an outlying position.
Where one or two of these indexes may be short on observations or might lack objective accuracy about a given country, one or two of the others will make up for this deficiency, in my reading of them. In the event that one may still not be convinced regarding the placement of any country in these indexes, one always has access to a comprehensive and continually updated profile of all the World’s countries in The World Factbook of the CIA.