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EconomyPolitics 4th annual index of Economic Efficiency of the World

By Taylor R. Cottam, CFA, FRM

Updated April 12, 2013

EconomyPolitics 4th annual Index of Economic Efficiency of the World

The top ten countries in terms of economic efficiency for 2013:

This is the first in a three part series where we identify the most attractive international investment opportunities for the next ten years. We start out by looking at economic efficiency, i.e. the fundamental freedoms and legal framework, which facilitates successful investing. In doing country analysis for international investments, it is often a first step to look at sovereign bond ratings from Moody's, Fitch or S&P. However, many smaller developing countries get very little if any play at the agencies. CDS spreads, another measure of investor risk only covers 80 countries. Our index covers 127 countries. To do so, we have looked at business and freedom indexes which assign values to sovereign attributes to gauge risk and assess opportunity. These indices attempt to measure economic freedom and a legal clarity. There are plenty of indices by many different sources, each one looks at important factors which could influence returns and hurdle rates. But which index do you use? We have looked into four of such indices and compiled an index of indices to measure efficiency. I have included information on five of such indices and compiled our own index of economic efficiency. The indices include: Heritage Foundation: Index of Economic Freedom Fraser Institute: Economic Freedom of the World World Economic Forum: Global Competitiveness Report World Bank: Doing Business Euromoney Country Risk

Updated April 12, 2013

EconomyPolitics Methodology
To come up with an effective way of comparing the different indices, we first eliminated any countries that were not covered on all indices. We then scaled them, with the lowest common country rank set to zero (which happens to be Zimbabwe) and the highest country set to one. Then their relative positions are weighted by the corresponding score, not the ranking. The indexes are all given equal weighting. That score is the EconomyPolitics index of Economic Efficiency. The results can be seen below:
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 Country Singapore Hong Kong Switzerland New Zealand Denmark Australia Finland United States Sweden Canada Norway United Kingdom Germany Taiwan Netherlands Japan Austria South Korea Ireland Chile Qatar Luxembourg United Arab Emirates Belgium France Bahrain Estonia Cyprus Iceland Israel Saudi Arabia Malaysia Oman Spain Lithuania Portugal Slovakia Mauritius Czech Republic Thailand Slovenia Georgia Kuwait Poland Peru Malta Region Oceania Asia Europe Oceania Europe Oceania Europe Mid East Europe Mid East Europe Europe Europe Asia Europe Asia Europe Asia Europe Lat Am Mid East Europe Mid East Europe Europe Mid East Europe Europe Europe Mid East Mid East Asia Mid East Europe Europe Europe Europe Africa Europe Asia Europe Mid East Mid East Europe Lat Am Europe Heritage 97.9% 100.0% 86.3% 87.0% 78.3% 89.0% 74.8% 78.1% 73.0% 83.7% 69.0% 76.1% 72.8% 72.7% 74.0% 71.2% 71.2% 68.7% 77.6% 83.0% 70.3% 75.1% 70.0% 66.9% 58.5% 77.3% 76.9% 66.6% 71.7% 63.1% 52.7% 61.8% 65.1% 64.9% 71.7% 56.8% 66.1% 79.6% 69.7% 58.5% 54.5% 71.8% 56.8% 61.6% 65.2% 64.1% Fraser 95.4% 100.0% 85.5% 88.1% 73.8% 79.6% 77.6% 73.4% 69.9% 79.6% 70.8% 74.7% 69.7% 74.1% 67.0% 72.3% 70.5% 67.0% 74.7% 76.7% 73.6% 68.6% 76.5% 65.9% 65.3% 78.9% 74.5% 72.3% 59.6% 63.5% 59.6% 57.4% 72.3% 67.7% 70.1% 61.3% 68.1% 78.0% 61.8% 51.6% 50.1% 65.7% 72.7% 65.1% 71.6% 70.8% WEF 94.2% 87.3% 100.0% 72.7% 88.1% 80.0% 90.0% 92.3% 97.3% 87.3% 81.2% 85.4% 90.8% 83.8% 88.5% 90.0% 79.2% 73.1% 65.8% 63.8% 79.6% 77.7% 71.5% 78.5% 80.8% 58.1% 60.8% 56.5% 63.5% 72.3% 73.8% 71.2% 60.8% 56.2% 51.9% 51.9% 46.9% 49.6% 59.2% 56.9% 53.5% 31.9% 60.0% 56.9% 41.5% 50.4% World Bank 100.0% 97.7% 69.6% 96.9% 92.7% 84.5% 84.8% 91.2% 84.1% 73.9% 88.7% 87.6% 73.0% 79.7% 66.5% 68.0% 67.1% 88.0% 76.6% 64.4% 61.4% 52.1% 69.9% 62.2% 65.5% 61.7% 74.3% 61.9% 81.7% 55.4% 69.9% 81.5% 58.2% 59.6% 68.4% 70.7% 54.2% 76.1% 42.3% 74.4% 64.7% 85.9% 39.6% 45.7% 57.1% 29.7% Euromoney 89.6% 91.9% 95.9% 87.5% 94.0% 90.6% 93.7% 85.2% 94.2% 93.3% 100.0% 85.3% 88.4% 82.1% 93.2% 85.0% 90.1% 80.3% 79.6% 85.6% 82.6% 93.3% 74.1% 82.7% 85.1% 72.0% 58.3% 82.4% 61.9% 74.9% 73.0% 54.6% 69.4% 72.3% 56.6% 74.3% 77.5% 28.5% 75.5% 64.7% 80.7% 47.7% 71.5% 69.9% 62.2% 76.7% Average 0.954 0.954 0.875 0.864 0.854 0.847 0.842 0.840 0.837 0.836 0.819 0.818 0.789 0.785 0.778 0.773 0.756 0.754 0.749 0.747 0.735 0.734 0.724 0.712 0.710 0.696 0.690 0.679 0.677 0.659 0.658 0.653 0.652 0.641 0.637 0.630 0.626 0.624 0.617 0.612 0.607 0.606 0.601 0.598 0.595 0.583 Change in Rank 0 0 0 1 -1 2 2 -1 1 -4 1 -1 0 4 -1 -1 -1 1 4 0 N/A -5 1 -3 -3 5 -2 1 -2 0 N/A -6 -5 1 -2 8 -3 -6 -3 -3 -3 0 -4 -4 -2 N/A

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47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108

Latvia Hungary South Africa Mexico Panama Italy Colombia Jordan Tunisia Uruguay Macedonia Bulgaria Armenia Turkey Kazakhstan Romania China Costa Rica Botswana Croatia Barbados Montenegro Albania Sri Lanka Greece Indonesia El Salvador Brazil Morocco Namibia Azerbaijan Philippines Russia Guatemala Trinidad & Tobago Vietnam Ghana Serbia India Rwanda Mongolia Jamaica Egypt Paraguay Zambia Honduras Uganda Kyrgyzstan Dominican Republic Moldova Nicaragua Kenya Pakistan Guyana Bosnia & Herzegovina Tanzania Bangladesh Ukraine Argentina Cambodia Madagascar Bolivia

Europe Europe Africa Lat Am Lat Am Europe Lat Am Mid East Mid East Lat Am Europe Europe Mid East Mid East Asia Europe Asia Lat Am Africa Europe Mid East Europe Europe Asia Europe Oceania Lat Am Lat Am Mid East Africa Mid East Asia Europe Lat Am Lat Am Asia Africa Europe Asia Africa Asia Mid East Mid East Lat Am Africa Lat Am Africa Asia Lat Am Europe Lat Am Africa Asia Lat Am Europe Africa Asia Europe Lat Am Asia Africa Lat Am

62.4% 63.8% 54.7% 63.3% 55.8% 52.7% 67.5% 68.9% 46.8% 67.7% 65.2% 60.0% 67.2% 56.5% 56.7% 60.1% 38.4% 63.3% 69.2% 53.9% 67.1% 56.0% 60.3% 52.9% 44.2% 46.6% 62.8% 47.9% 51.1% 52.2% 51.2% 48.8% 37.1% 51.7% 55.5% 36.9% 53.9% 49.4% 43.8% 58.5% 54.5% 62.9% 43.2% 53.5% 49.6% 49.1% 53.5% 51.1% 51.2% 44.3% 46.1% 45.0% 43.7% 41.5% 47.3% 48.3% 39.5% 29.2% 29.8% 49.3% 55.0% 31.8%

60.9% 60.0% 52.7% 50.8% 67.0% 53.2% 47.3% 72.1% 54.1% 64.6% 56.9% 65.5% 67.5% 56.5% 57.6% 67.3% 44.0% 65.7% 58.9% 53.0% 56.9% 70.1% 65.7% 46.8% 53.4% 55.6% 62.6% 44.4% 45.3% 49.2% 40.0% 60.9% 48.6% 62.9% 55.6% 48.1% 57.4% 45.3% 42.0% 65.5% 58.5% 54.7% 47.0% 53.4% 65.1% 63.5% 64.8% 51.2% 60.2% 52.7% 63.5% 55.4% 42.0% 41.5% 49.7% 44.0% 43.7% 34.9% 31.6% 61.8% 45.5% 44.8%

42.7% 50.0% 49.6% 44.6% 50.0% 51.5% 42.7% 45.4% 62.3% 46.2% 38.1% 42.3% 28.1% 46.9% 41.9% 43.5% 69.6% 49.2% 39.2% 38.8% 54.6% 51.2% 35.0% 46.9% 36.9% 53.8% 36.9% 48.1% 40.4% 40.8% 48.5% 35.8% 46.5% 38.8% 36.2% 47.7% 20.4% 31.2% 50.0% 37.3% 27.7% 31.5% 37.3% 17.7% 20.0% 33.1% 18.5% 17.7% 26.5% 31.9% 20.8% 23.8% 17.3% 22.7% 25.8% 20.4% 23.5% 33.5% 35.4% 23.1% 16.5% 23.5%

69.2% 51.5% 57.0% 52.7% 47.5% 40.4% 51.7% 32.4% 57.2% 33.7% 69.4% 43.1% 60.7% 45.3% 55.6% 40.0% 33.7% 27.6% 48.5% 40.8% 38.0% 48.4% 33.6% 36.1% 42.1% 20.5% 23.3% 18.9% 35.7% 36.1% 43.5% 17.1% 28.4% 34.8% 39.3% 33.5% 44.9% 36.9% 14.3% 55.7% 42.9% 36.4% 25.7% 31.9% 33.2% 18.4% 20.0% 42.2% 26.6% 35.5% 21.2% 17.2% 23.7% 26.6% 16.2% 17.1% 17.5% 14.9% 18.4% 15.9% 12.3% 4.8%

50.5% 57.8% 66.9% 67.4% 54.1% 74.6% 61.3% 51.1% 48.5% 56.5% 37.8% 56.0% 41.6% 59.5% 47.6% 47.6% 72.7% 46.6% 30.4% 57.8% 25.7% 14.9% 42.5% 51.4% 56.5% 54.5% 43.2% 68.7% 54.3% 44.2% 38.4% 56.3% 58.1% 27.2% 27.4% 45.9% 35.0% 48.5% 59.8% -8.9% 24.5% 22.0% 52.7% 43.3% 26.7% 26.0% 28.6% 21.1% 16.5% 16.0% 22.6% 27.3% 41.1% 33.8% 26.3% 29.9% 32.5% 43.9% 40.0% 4.2% 18.6% 38.1%

0.571 0.566 0.562 0.557 0.549 0.545 0.541 0.540 0.538 0.537 0.535 0.534 0.530 0.529 0.519 0.517 0.517 0.505 0.492 0.489 0.484 0.481 0.474 0.468 0.466 0.462 0.458 0.456 0.453 0.445 0.443 0.437 0.437 0.431 0.428 0.424 0.423 0.422 0.420 0.416 0.416 0.415 0.412 0.400 0.389 0.380 0.371 0.367 0.362 0.361 0.348 0.338 0.335 0.332 0.330 0.319 0.314 0.313 0.311 0.309 0.296 0.286

-1 -7 -1 -3 -6 0 -4 6 2 2 -3 -7 3 -7 -5 -1 -8 -5 -15 -2 N/A -5 -1 3 15 2 -1 -4 1 -10 -12 5 -1 -3 -12 -1 -8 0 -6 -19 -16 -6 1 -5 -11 -4 0 0 -4 -4 -2 -11 3 8 -2 -5 -3 5 -9 N/A 0 -2

Updated April 12, 2013

109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129

Iran Nigeria Malawi Ethiopia Algeria Burkina Faso Senegal Ecuador Cameroon Mali Mozambique Nepal Benin Lesotho Cte d'Ivoire Angola Mauritania Venezuela Burundi Chad Zimbabwe

Mid East Africa Africa Africa Mid East Africa Africa Lat Am Africa Africa Africa Asia Africa Africa Africa Africa Africa Lat Am Africa Africa Africa

24.1% 43.7% 44.0% 34.3% 34.6% 51.6% 44.3% 30.1% 39.0% 45.8% 43.5% 35.9% 47.8% 31.8% 42.0% 30.8% 39.0% 12.4% 33.6% 27.3% 0.0%

42.0% 37.8% 51.2% 30.1% 21.8% 38.2% 33.6% 31.9% 44.2% 38.9% 24.2% 43.5% 40.2% 32.1% 31.0% 16.9% 29.0% -6.2% 24.2% 23.3% 0.0%

42.7% 13.5% 16.2% 18.5% 35.8% 6.5% 24.6% 23.8% 21.2% 9.6% 11.2% 11.9% 25.4% 12.7% 12.3% -3.8% 4.2% 17.3% -2.7% -11.5% 0.0%

9.8% 16.8% 6.6% 23.5% 4.9% 9.6% 1.8% 15.5% 5.0% 9.1% 10.4% 28.9% -3.4% 13.5% -5.8% -0.6% 4.4% -4.0% 5.1% -13.9% 0.0%

20.5% 26.9% 18.6% 27.8% 31.4% 19.9% 21.4% 23.4% 14.7% 18.7% 31.8% 0.0% 9.6% 10.1% 13.6% 32.1% -13.6% 37.0% -5.9% -13.0% 0.0%

0.278 0.277 0.273 0.268 0.257 0.252 0.252 0.249 0.248 0.244 0.242 0.241 0.239 0.200 0.186 0.151 0.126 0.113 0.109 0.024 0.000

-4 -12 -7 -11 -3 -2 -2 -13 -2 -4 -1 -4 -4 -3 -3 -1 -3 -2 -2 -2 -2

New Additions The new countries added to the list are Qatar, Saudi Arabia, Malta, Barbados and Cambodia. We only include countries that are ranked by all five agencies. That means that the index ranking will have the tendency to have negative changes, especially at the bottom quartile where the results can be a lot more volatile. Big Movers The countries that changed the most are from the developing world including Africa, Latin America and Asia. Rwanda, Mongolia, Botswana and Ecuador fared the worst each dropping in ranking over 10 places. Among the top countries improving in ranking are bouncers. Greece, Portugal, Bahrain and Jordan have had their share of problems in the last five years. What we are seeing now is the fact that they are bouncing from their previously dramatic declines.

Regional Differences
Culture matters within countries as well as regions. We have split up the globe into spheres of influence. We have then taken an unweighted average of the countries seen below.

Region Oceania Europe North America Middle East

Rank 20.750 42.050 43.250 57.400

2013 Score 0.782 0.632 0.644 0.548

2012 Score 0.763 0.606 0.830 0.478

Updated April 12, 2013

Asia Latin America Africa

65.000 78.800 103.800

0.517 0.429 0.288

0.505 0.411 0.285

The region that is most free on the globe is Oceania. However, in this group we only have four countries, including Australia, New Zealand and Singapore. Europe and North America are about even. Middle East is just above Asia, followed by Latin America. Africa lags the whole group by a lot. North America looks like it has gone down dramatically, but this is mostly because we have added Jamaica to North America and with the small number of countries in this survey, it drags down the numbers. Oceania, Europe, Middle East, Asia and Latin America have all become more economically free and efficient. The biggest changes are in the Middle East. If these trends continue next year, we will be able to positively identify a healthy pattern.

Index Information
Heritage Foundation: Index of Economic Freedomi
Per the Heritage Foundation, economic freedom is the fundamental right 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. The main components of economic freedom include: Business Freedom Trade Freedom Fiscal Freedom Government Size Monetary Freedom Financial Freedom Property rights Freedom from Corruption Labor Freedom Investment Freedom

Fraser Institute: Economic Freedom of the Worldii

Per the Fraser institute, the index published in Economic Freedom of the World is designed to measure the consistency of a nations institutions and policies with economic freedom. The key ingredients of economic freedom are: Personal choice Voluntary exchange coordinated by markets Freedom to enter and compete in markets Protection of persons and their property from aggression by others.

Updated April 12, 2013

These four cornerstones underpin the design of the index. Put simply, institutions and policies are consistent with economic freedom when they provide an infrastructure for voluntary exchange and protect individuals and their property from aggressors. In order to achieve a high EFW rating, a country must provide secure protection of privately owned property, even-handed enforcement of contracts, and a stable monetary environment. It also must keep taxes low, refrain from creating barriers to both domestic and international trade, and rely more fully on markets rather than the political process to allocate goods and resources.

World Economic Forum: Global Competitiveness Reportiii

The Global Competitiveness Reports competitiveness ranking is based on the Global Competitiveness Index, developed for the World Economic Forum based on 12 pillars of competitiveness, providing a comprehensive picture of the competitiveness landscape in countries around the world at all stages of development. The pillars include: Institutions Infrastructure Macroeconomic Stability Health and Primary Education Higher Education and Training Goods Market Efficiency Labor Market efficiency Financial Market Sophistication Technological Readiness Market Size Business Sophistication Innovation

World Bank: Doing Businessiv

A fundamental premise of Doing Business is that economic activity requires good rules. These include rules that establish and clarify property rights and reduce the cost of resolving disputes, rules that increase the predictability of economic interactions and rules that provide contractual partners with core protections against abuse. The objective: regulations designed to be efficient in their implementation, to be accessible to all who need to use them and to be simple in their implementation. The list of measured activities which encompass the doing business survey include: Starting a Business Dealing with Construction Permits Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Closing a Business

Euromoney Country Riskv

The Euromoney Country Risk grades the economies a bit different than the other assessment. Whereas the other surveys try to gauge opportunity, Euromoney tries to assess risk. This is very important in

Updated April 12, 2013

dealing with investment, particularly because a single devaluation can destroy returns. Political uncertainty can destroy returns in spite of relative economic freedom. Economic freedom does not preclude countries from bubbles and their subsequent crashes. The virtue of economic freedom is seen in the recovery. The following items makeup the Euromoney Country Risk Report: Political Risk Economic Performance Structural Assessment Debt Indicators Credit Rating Access to Bank Finance/Capital Markets

Download Indices Datavi For media inquiries into the EconomyPolitics Index of Economic Efficiency, please contact economipolitics [at] gmail [dot] com. Please feel free to use the full index, but must source back to EconomyPolitics.
i

http://www.heritage.org/Index/Ranking.aspx http://www.freetheworld.com/release.html iii http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm iv http://www.doingbusiness.org/rankings v http://www.euromoney.com/Article/2675660/Country-risk-Full-results.html

ii vi

https://docs.google.com/uc?id=0B0C4PemWytzfYzU5NjVkN2MtZTRjNC00YmJkLTg4MzItNTM0NGViMTYxYjAw&ex port=download&hl=en

Updated April 12, 2013