Barometer - January 2008

The booming economies of Asia continue to raise millions of people out of poverty and improve the standard of living for billions more. But there is considerable diversity within this positive overall picture. For instance, several economies have successfully created competitive business environments that fuel high growth rates, despite having backward political institutions. Elsewhere, however, corruption and lack of reforms have created apparently insurmountable handicaps, leading to relative stagnation. What are the key differences thataccount for these divergent outcomes?

In October 2006, the REVIEW first offered its own contribution to the ongoing debate over the sources of Asian economic growth in the form of a Barometer of Asian Development. It presented a variety of factors (economic, political and social), which we suggested might provide clues as to the dynamism (or sluggishness) ofthe 12 countries selected for inclusion. This year we fine-tuned our approach in the hope the Barometer will be of even more use to investors in and observers of the region. 

An Index of Indexes

Though not exhaustive, our original approach relied on a wide variety of data from a broad range of sources. But there were still certain areas for which we had to rely on less than optimum information. With this year's inclusion of Taiwan as the 13th country, we encountered the additional problem of finding disaggregated data for a country that is often conflated within existing information for China. This further impelled us to try a different approach for this year's Barometer–one that would rely less on raw data and build instead on the expertise and insightsof established organizations.

Many organizations, both private and governmental, are already in the business of preparing and publishing annual indexes of one sort or another. These often include a variety of factors relevant to our purposes and are often based on both qualitative and quantitative information, as well as standard statistical and survey data. Someof these indexes—such as Transparency International's Corruption Perception Index (CPI)—focus on one particular component of country performance while others— such as A. T. Kearney's Globalization Index—look at a variety of seemingly unrelated factors, from governance to technological connectivity.

Nevertheless, we continue to be skeptical of the idea that any country's competitiveness or investment-worthiness can be reduced to a single number. But it is our hope that by drawing together different indexes and rankings of a country's performance in economic, political and social affairs, readers will be provided with a broader, fuller picture of a given country.

The 2008 Barometerof Asian Development brings together 13 different indexes designed and put together by a variety of organizations around the world. These third-party indexes were selected on the basis of the kind of information included, the durability or longevity of the index and the prestige and reputability of the sponsoring organizations.

Though the data sources used in the construction of each particular index varied—from statistical data to polls and surveys—nearly all of them produced a single, simple, overall ranking for each country. For the purposes of the REVIEW Barometer, we took these rankings and turned them into a numerical score on a scale of 1 to 100.

In addition, there are several other methodological aspects behind this year's Barometer which needto be explained. Many of these third-party indexes included various subcomponents, some of which, in turn, were made up of more specific subindicators. In some cases, we were guided by the final ranking assigned to acountry by a particular index. In other cases, however, especially where a final ranking was composed of several subindicators, or where the subindicators were widely diverse within one subcomponent, we relied less on the overall index ranking and more on the scoring given to a particular subindicator. These were then grouped together with related subindicators from other indexes. Thus, for example, in this year's Barometer, all subindicators from different indexe shaving to do with tax burden were grouped together.

In contrast to last year's Barometer, different components and subindicators are now organized into five Barometer categories. Each of these categories has a different weight based on the importance assigned to that particular category. Thus, for the purpose ofthe calculation of the final country score, the Barometer speaks of a country's human factors (15%), political environment (17.5%), market incentives (25%), macroeconomic factors (22.5%) and global integration (20%).

A country is assigned a score in each of these five categories by adding together the scores received in different subindicators within a category. Each of these scores, inturn, were also given a specific weighting in order to reflect the relative importance given to one subindicator over another (or simply to accommodate thefact that some indexes relied on subjective polls rather than statistical data).

Thus, a country with perfect scoring in each of the subindicators within one of the five categories would have received the total number of possible points for that category—and, consequently, a total country score of 100 in the Barometer's bottom line.

No country comes close to the chimera of perfection. But this year's Barometer indicates that New Zealand, Australia and Hong Kong clearly offer the most hospitable environment for economic activity, providing the institutional factors and macroeconomic conditions necessary to encourage the entrepreneurial spirit and growth of free enterprise.

These results are significantly different from last year. That's because the first Barometer was ameasure of the most-improved countries, whereas we have now standardized ourapproach on assessing the absolute levels of the prerequisites for development.

We hope to continuebuilding and refining the review Barometer—so that it may help others find theirway through the region's instability and uncertainty but, also, suggest a wayforward to those countries that continue to stifle their people's creativeenergies.

A full introductionto the methodology and data of the Barometer is available at www.feer.com. Belowis a brief introduction to this year's factors and the indexes from which theyare culled:

Human Capital(10) This factor reflects the quality of human capital, which is oftenas important as other inputs like financial and physical capital. The UnitedNations Development Program's Human Development Index (HDI) provides someindication of the quality of a country's human capital and potential futurelabor force. It ranks countries according to people's life expectancy, literacyrates, school enrollment rates and education levels.

GenderEquality (25) Women's access to factors of production like land andcapital is a powerful indicator of whether a country will fulfill its economicpotential. The International Property Rights Alliance brings together relevantdata in the form of an International Property Rights Index, which, under itsgender equity subcomponent, provides measurements for access to land and otherproperty, access to bank loans, ease of inheritance and overall social rights.

CivilLiberties (30) The civil liberties subcomponent of the Freedom in theWorld report published by Freedom House is the basis for this factor on theBarometer. It includes data on freedom of expression and belief, associationalrights, rule of law and personal autonomy.

Press Freedom(35) This factor is based on the overall country ranking provided by theWorld Press Freedom Index compiled by Reporters Without Borders. Their indexmeasures government censorship of the press, lack of guarantees, and harassmentand violence against reporters.

Institutionality (30) This factor is based on the political rightscomponent of the Freedom in the World report put out by Freedom House. Theirdata assesses political pluralism and participation as well as electoralprocesses.

Governance(30) This factor is based on the political environment component of theIPRI, which, in turn, is derived from measures of judicial independence,confidence in the courts, corruption and political stability.

Corruption(40) This factor is based on the overall ranking given to countries byTransparency International's Corruption Perception Index. That index is compiledfrom surveys that poll perceptions of public-sector corruption amongspecialists, industry professionals and other experts.

PropertyRights (a) (15) The protection of property rights is paramount. Thisfactor is based on data from two specific subindicators—property-rightsprotection and registering a property—that form part of the physicalproperty-rights component of the IPRI.

PropertyRights (b) (15) Similarly, this factor is based on three subindicators—intellectualproperty-rights protection, strength of patent rights and copyright piracy—thatform part of the intellectual property-rights component of the IPRI.

Competitiveness (a) (15) This factor is based on the country rankingsgiven by the Global Competitiveness Index put out by the World Economic Forum.That index is calculated on the basis of statistical data as well as expertsurveys among global institutions.

Competitiveness (b) (20) This factor is based directly on the WorldCompetitiveness Scoreboard put out by the World Competitiveness Center at theglobal business school IMD. The scores are based on data regarding a country'seconomic performance, government efficiency, overall business efficiency andinfrastructure.

BusinessClimate (35) The World Bank's Doing Business Database ranks countriesbased on a collection of business-related indicators. This factor is drawn fromseveral of the subcomponents in their database, including starting a business,dealing with licenses, employing workers, registering a property, closing abusiness, protecting investors and enforcing contracts.

Freedom (35)This factor relies simply on the overall country rank given by the Indexof Economic Freedom issued by the Heritage Foundation in partnership with TheWall Street Journal. That index tracks state intervention across 10 criteria.

Taxes (a)(20) This factor is derived from the Tax Misery Index compiled annuallyby Forbes magazine, which includes data about taxes on corporate income,personal income, employer and employee social security, wealth taxes andvalue-added taxes/sales taxes.

Taxes (b)(15) This related factor is based on the paying taxes subcomponent ofthe Doing Business database compiled by the World Bank.

Access toCredit (a) (10) In recent years, thanks to the work of Hernando de Soto,access to credit and capital has been recognized as one of the most importantcontributors to the growth of an entrepreneurial class. This factor is based onthe getting credit subcomponent of the Doing Business database compiled by theWorld Bank.

Access toCredit (b) (10) Similarly, this factor includes relevant data regardingthe access to bank loans subindicator within the gender-equity subcomponent ofthe IPRI.

Sources ofCapital (10) This factor considers a country's financial infrastructure,as well as information about its macroeconomic environment, bankinginstitutions, securities markets and alternative sources of capital. It isderived from the Milken Institute's Capital Access Index.

Access (20)The ease with which people can travel, communicate and transport goodsbetween countries is an important indicator of a country's integration into theglobal economy. For this factor, we rely on the Access Index produced by FederalExpress, which is based on several subcomponents: access to people, access tobusiness and access to nations.

Trade (10)This factor is based on the trading across borders subcomponent of theWorld Bank's Doing Business Database. It looks at the ease with which good andservices flow across borders.

Integration(10) The Economic Integration subcomponent of A.T. Kearney's broadGlobalization Index provides us with the basis for this factor. Theirsubcomponent, in turn, is composed of subindicators measuring trade, FDI andtelephone access.

Technology(25) This score is based on the Technological Connectivity subcomponentof A.T. Kearney's Globalization Index, which is made up of a variety ofsubindicators including the number of Internet users, secure servers andinternational organizations.

Communications (20) The personal contact subcomponent of A.T. Kearney'sGlobalization Index forms the basis for this factor. This includes subindicatorsregarding telephone access, travel, remittances and transfers.

Politics (15)The political engagement subcomponent of A.T. Kearney's GlobalizationIndex is our final factor. Their political engagement subcomponent is based onthe country's involvement in international organizations.

Mr. Fantini is awriter and development consultant based in Vermont. Mr. Restall is editor of theREVIEW.