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World: Making The 2007 Index Of Economic Freedom

(official site) January 17, 2007 (RFE/RL) -- The Heritage Foundation -- a conservative U.S. think tank -- and "The Wall Street Journal" newspaper have released their "2007 Index of Economic Freedom." The index ranks 157 countries on 10 types of economic freedom -- among them tax rates and property rights.

According to the survey, Hong Kong, Singapore, and Australia are the three freest economies in the world. The United States ranks fourth. Among the 20 freest economies in the world, Europe holds 12 places. Daniella Markheim, a senior analyst with the Heritage Foundation, spoke with RFE/RL correspondent Nikola Krastev about the making of the report.

RFE/RL: Is there a correlation between economic freedom and political freedom in a given country?

"It will be interesting to see how [Russia] moves forward in terms of trying to strengthen their judicial system, their ability to deal with corruption, strengthen property rights, protect intellectual-property rights."

Daniella Markheim: There is a pretty strong link between increasing economic freedom and a tendency, at least over time, for political freedom to also improve. If you give people the means by which to make their own decisions and to carry them out in their lives, they become vested in those lives. Their home becomes important to them; their job becomes important to them, because it's something that actually is improving their well-being. And as people become more [aware] of that, more protective of that, they take a larger interest in seeing that political reform within a country, or that political movement within a country moves in a way that supports that. So, I think that over time there is a positive link between the two.

RFE/RL: Many of the countries in the former Soviet Union and Eastern Europe score low in economic freedom. What does it mean?

Markheim: For a lot of the countries in Eastern Europe specifically -- because they are so struggling with issues of corruption, problems with starting a business, a fairly high degree of regulation, a high degree still of government presence within the economy -- those factors are actually reflecting in the score and making it look a little bit more difficult. It probably was there, but because we've moved to a 0-100 percent scale -- it's now much more magnified, much more obvious vis-a-vis other countries how those policies are affecting the rankings across the world.

RFE/RL: What's the state of economic freedom in Russia?

Markheim: They've actually done pretty [well] in terms of lowering income-tax rates. [They] have a moderate corporate-tax rate and that's helped their score, as well as managing or at least starting to reduce some of the price controls and things like that that were affecting their monetary freedom. Unfortunately, because they do have some fairly negative force in property rights, in financial freedom, in investment freedom, corruption -- those were fairly significant and those tended to overbalance some of the successes they've had in trying to deregulate, in trying to reduce taxes, and other policies. So, Russia's had a bit of a tough time. It will be interesting to see how they move forward in terms of trying to strengthen their judicial system, their ability to deal with corruption, strengthen property rights, protect intellectual-property rights, and then move forward in trying to continue to remove government from the financial system, from the investment system and let foreign companies in, and open that part of the economy up to true competition.

RFE/RL: Five countries -- Congo, Iraq, Serbia, Montenegro, and Sudan were suspended from grading this year because of questions about the accuracy of the data reported. What does it mean?

Markheim: We try to compare every country fairly. So, if we cannot collect enough of the data that we need in order to develop what those individual factor scores are for each country -- we really can't do that. And unfortunately, for a lot of different reasons, whether it's civil upheaval or war -- those statistics aren't being generated and so we cannot really fairly assess how that country rates vis-a-vis other countries if the data isn't there to support what we're doing. What we've been trying pretty recently to do is to move away from a subjective grading system and we're trying to use just hard economic data more and more in the way that we make these evaluations. So, if that hard data isn't there, we're sort of hand-tied with grading some of these other countries that are really just burdened by the fact that they are not able to report those economic statistics.

RFE/RL: Is there a correlation between the level of corruption and the state of economic freedom in a given country?

Markheim: Corruption is a fundamental problem. It affects all aspects of economic life. And if that rating is low, or if that score is low -- that's going to influence the overall score because it plays into everything whether it's just going into the store, having access to credit, being able to sell your goods, being able to get a job -- corruption can have a high impact. And it's actually captured not only in our corruption factor, but it is also captured is some other factors as well because it influences prices, it influences all aspects of economic policy. So, I would expect that there would be pretty positive relationship between high corruption and low economic freedom. So, the higher the corruption -- the worse the freedom score because that is affecting the ability of these countries [CIS] to perform well.

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