How accurate are economic surveys?

It's not easy being a policy maker these days. In the earlier days of reforms, you were told the fiscal deficit was the main thing to watch for; fix this and everything else would fall into place.

Now, it appears that's not enough; indeed with all the liquidity sloshing around globally, even the traditional equation of high-fiscal-deficit equals high-interest-rate no longer holds true.

Indeed, while The Fraser Institute links various variables like poverty and investment to its Economic Freedom Index, the World Bank's Doing Business links poverty removal with the ease of doing business.

There's even a distinction between various components of an index -- at Phuket last week, to release the latest EFI, Michael Walker, who is one of the original founders of the EFI, showed that per capita incomes were more closely correlated to the "rule of law" component of the EFI as compared to the overall EFI!

Economist Dipankar Sengupta at the Delhi-based Centre de Sciences Humaines found that the relationship between the incremental capital-output ratio (which measures productivity) and the "size of government" component of the EFI was not significant but that with the "regulation of business" sub-component (this is akin to the Bank's Doing Business Index) was significant.

If this isn't bad enough, most well-recognised surveys give dramatically different ranks to various countries. The EFI ranks Hong Kong as the best out of 127 countries in the world, the IMD in Lausanne ranks it second out of 60 countries, the Bank ranks it 7th out of 155 countries, but the World Economic Forum's Business Competitiveness Index ranks the same Hong Kong as 20th of 117 countries -- the WEF's Growth Competitiveness Index, which signals macro-economic strength, ranks it at 28th!

The ranks for the US and Singapore are broadly consistent across all surveys, but the UK is ranked among the top 13 countries by the WEF, the Bank and the EFI, but the IMD ranks it 22nd out of 60 countries.

As for India and China, the WEF's BCI, which reflects the operating environment for firms, says India (ranked 31st) is streets ahead of China (57th) but the WEF's GCI feels they're on about a par (China's 49 and India' s 50) -- at Phuket, Dr Irene Mia, a senior economist at the WEF, said they'd be coming out with one composite index next year (presumably to sort out the confusion over whether the BCI or the GCI is better!).

The EFI feels India's better (ranked 66th as compared to China's 86th position), the Bank feels China's better (91st versus India's 116th position out of 155 countries) while the IMD feels they're both sort of the same (31 for China out of 60 countries as compared to 39 for India).

So are these indices just political tools? After all, the EFI gives China a score of 4.4 on "regulation of labour markets" while India gets 5.7 though most industrialists will tell you that China's ease of hire and fire is more to their liking. Examine this component's parts, and you find that China loses out on the "military conscription" sub-component.

Now, it's probably true that "military conscription" lowers economic freedom and so is a bad thing in principle, but from the point of view of businessmen who are deciding on whether to invest or not, it perhaps doesn't matter much.

While the political angle can't be ruled out completely, one possible answer to whether the indices are more than just political tools perhaps lies in the nature of the countries being surveyed, and the degree of heterogeneity within them.

Dr Fan Gang, who is executive director of the National Economic Research Institute at Beijing, for instance, has measured the "marketisation index" in various provinces in China.

According to Walker, if you weight this for each province with its share in the country's total population, you come up with a number that is broadly consistent with the EFI score for China.

Gang shows that while Guangdong, which is ranked number 1 in China, gets a score of 9.74, Zhejiang, which is next, has a score of 9.1, and Shanghai, which is number 4, has a score of 8.54, as compared to Tibet's (the lowest ranked) 2.05 and China's overall 5.98. In other words, comparing India with China is meaningless, much better to compare a Guangdong with a Gujarat.

In India, the Friendrich-Naumann-Stiftung, which sponsored the Phuket conference, is developing similar state-wise indices to help get a better sense of the situation of the ground (the second index -- by Bibek Debroy of the Rajiv Gandhi Institute of Contemporary Studies and Laveesh Bhandari of Indicus Analytics -- is expected within a month).

The World Bank, too, has a states' index, which is expected by the end of the year, and the IMD is also increasing its regional coverage -- its latest ranking puts Zhejiang in China at 20th out of provinces in 60 countries, and Maharashtra at 42nd (marginally behind the overall rank of 39 for India). Hopefully, when Debroy comes out with his new states' index, you won't have the same political furore as was seen the last time around.