New Economist

Who's on top?

Lists and rankings fascinate many, from Letterman's top ten to People magazine's best and worst dressed. Even economies have their own such lists. This week the Economist Intelligence Unit published its business environment rankings, with the United States the 9th most attractive place for business out of 82 countries, "the lowest the country has placed since the launch of the business environment rankings in 1997". Angola came last, while Denmark was ranked first, followed by Finland and Singapore. Canada came fourth, followed by Switzerland and Hong Kong.

The World Economic Forum's Global Competitiveness Report 2007-08 was also published this week. They rank the United States first for their Global Competitiveness Index, followed by Switzerland and Denmark.

The IMD's World Competitiveness Yearbook 2007 also ranked the US first, closely followed by Singapore and Hong Kong. Luxembourg was fourth, followed by Denmark and Switzerland.

Finally, the World Bank's Doing Business 2008 (sic) report ranks Singapore first in its Ease of Doing Business Index - followed by New Zealand and the United States. Hong Kong was fourth, followed by Denmark and the United Kingdom.

One can of course argue with the components and weighting of the various indices, which are by their nature somewhat arbitrary. Nonetheless, despite very different methodologies, the same handful of countries crop up time and time again. The general conclusion, as a previous post on this topic argued, is that three groups typically do well:

* the Nordic economies, particularly the smaller economies of Denmark and Finland;

* the Anglo-saxon economies - the US, UK, Canada, Australia and New Zealand;

* the Asian city-states of Singapore and Hong Kong.

So too does Switzerland.

These are clearly very different economic models, showing that in the path to economic prosperity 'one size fits all' just isn't true. Second, most of these countries have relatively 'free' markets and light regulatory regimes. Third, the relative success of the Nordic economies show that low tax rates are not a necessary pre-requisite. Fourth, in Europe smaller countries seem to do better than the larger ones.

Ten indicators for a happy society

Just about everyone seems to be writing about happiness these days - even investment bankers. Deutsche Bank economist Stefan Bergheim analyses 22 rich countries, and comes up with four varieties of capitalism: the happy variety, the less happy variety (Germany, Spain, France, Belgium and Austria), the unhappy variety (Portugal, Italy and Greece), and the Far Eastern variety (Japan and Korea). So which countries benefit from happy capitalism? it's the usual suspects - the Scandinavians and the Anglo-saxons:

The happy variety of capitalism: Australia, Switzerland, Canada, the UK, the US, Denmark, Sweden, Norway and the Netherlands as well as (to a lesser degree) Finland and New Zealand have organised society and institutions in such a way that they provide the conditions that are important for human happiness.

Lest American or British readers get too excited, Bergheim adds a coda:

Over the last ten years it is above all the Irish, the Spanish and the Scandinavians that have succeeded in implementing considerable happiness-enhancing changes.

Bergheim's paper, The happy variety of capitalism: Characterised by an array of commonalities (PDF), identifies ten commonalities or ''indicators for a happy society" from a cluster analysis of these countries:

1. High degree of trust in fellow citizens
2. Low amount of corruption
3. Low unemployment
4. High level of education
5. High income
6. High employment rate of older people
7. Small shadow economy
8. Extensive economic freedom
9. Low employment protection
10. High birth rate

One can quibble about one or two, but the list seems broadly right. However it is notable that Bergheim glosses over child poverty and inequality of income and wealth. These show greater divergence between the Anglo-saxon and Scandinavian countries than his analysis suggests. Likewise gender equality, or measures of 'active citizenship' and political engagament.

The key lesson of much recent cross-national happiness research, and the recent debates about social Europe, is that there is more than one path to economic prosperity and to high levels of subjective well-being. One is the Scandinavian/Nordic model of social democratic capitalism - more recenly dubbed 'flexicurity'. The other is the Anglo-saxon model of liberal capitalism - the so-called 'Anglosphere'. They each have their pros and cons, but both are associated with low unemployment, robust economic growth, and above-average levels of happiness and life satisfaction.

UPDATE: The Economist blog, Free Exchange, is more sceptical about the paper, particularly its policy conclusions: That's enough happynomics

There's nothing new in the data: happiness correlates positively with wealth, education and trust, negatively with corruption and unemployment. But the conclusion is a touch unusual, coming from an investment bank. For governments:

Happiness and life satisfaction should be explicit policy objectives

Eeek. To do Deutsche the courtesy of taking its paper seriously, has it given any thought to what would follow? Governments telling us how happy we are, civil servants walking around with absurd smiles on their faces, public festivities day in day out, holidays for every trade and age. A favourite slogan of Stalinism, in the depths of the terror, held that "life is better and merrier than ever before".

No! Enough social engineering, even in the name of happiness! let me be miserable in my own way, that's what would make me happy.   

 

Human Development Report 2006

The UNDA has just published the 2006 Human Development Report. The full report is available online, with this year's issue focussing on 'the global water crisis'.

The latest Human Development Index, which analyses 2004 statistics from 175 UN member countries, is published in the report. It once again ranks the Nordic and Anglo-saxon economies highly, accounting for seven of the top ten: 

1. Norway
2. Iceland
3. Australia
4. Ireland
5. Sweden
6. Canada
7. Japan
8. United States
9. Switzerland
10. Netherlands

Finland, for once, didn't come first - it ranked 11th. The United States moved up from tenth to eighth place. The UK was 18th, down from 15 in 2005 "because of a change in how education statistics are reported". The press release notes:

After a costly setback in human development in the first half of the 1990s, Central and Eastern Europe and the Commonwealth of Independent States (CIS) have recovered strongly, and progress since 1990 in East and South Asia continues to accelerate. But  sub-Saharan Africa shows no sign of improving, principally because of the devastating effect of HIV/AIDS on life expectancy.

Doing business: Singapore is No 1

Singapore overtook New Zealand as the most business-friendly economy in the world in 2006, while the United States held steady in third place, according to the World Bank's Doing Business 2007 report - published today.

The dominance of the Anglo-Saxon and Nordic countries continues (see my post on last year's report). Other economies in the top ten for ease of doing business were: (4) Canada, (5) Hong Kong, (6) the United Kingdom, (7) Denmark, (8) Australia, (9) Norway, (10) Ireland.

The top 10 reformers were, in order, Georgia, Romania, Mexico, China, Peru, France, Croatia, Guatemala, Ghana and Tanzania. In Africa, a more business-friendly approach has seen the region move up from last place to the middle of the pack among world regions in carrying out changes that make it easier to start and run a business.

The report praised China's acceleration of reforms, which saw its ranking improve from 108th to 93rd:

Watch out, rest of the world: China is a top-10 reformer. The government sped business entry, increased investor protections and reduced red tape in trading across borders. China also established a credit information registry for consumer loans. Now 340 million citizens have credit histories.

Although reforms improved India's ranking over last year, "it still ranks relatively low at 134 and lies 41 places after China, which is reforming at a faster pace than India."

Among Europe's biggest economies, Germany ranked 21st, France 35th and Italy 82nd, down from 69th in the previous report. Meanwhile, Venezuela plunged to 164th from 144th.

Why does this matter? As the report notes:

Publishing comparative data on the ease of doing business inspires governments to reform. Since its start in October 2003, the Doing Business project has inspired or informed 48 reforms around the world. Mozambique is reforming several aspects of its business environment, with the goal of reaching the top rank on the ease of doing business in southern Africa. Burkina Faso, Mali and Niger are competing for the top rank in West Africa. Georgia has targeted the top 25 list and uses Doing Business indicators as benchmarks of its progress. Mauritius and Saudi Arabia have targeted the top 10.

Comparisons among states or cities within a country are even stronger drivers of reform. Recent studies across 13 cities in Brazil and 12 in Mexico have created fierce competition to build the best business environment. The reason is simple: with identical federal regulations, mayors have difficulty explaining why it takes longer or costs more to start a business or register property in their city. There are no excuses.

You can download a 12 page overview (PDF, 1.8Mb), press notice, rankings, country reports and details of the methodology used from the extensive webite: www.doingbusiness.org

Yes, UK rates are going up

A slew of recent economic data have suggested the British economy is finally perking up. That did not cause the Monetary Policy Committee to raise official UK rates yesterday, but it does mean we are seeing headlines like this in today's press: Data bolster belief that next UK rates move is up, by Jamie Chisholm in the Financial Times.

Expectations of an interest rate increase later this year hardened on Thursday after data showed an acceleration in economic activity that might prompt the Bank of England to apply a cautionary touch on the brakes.

Although the Bank’s monetary policy committee said on Thursday it would leave its main interest rate unchanged at 4.5 per cent for the ninth consecutive month, robust surveys on manufacturing, the service sector and the housing market led money markets to price in a quarter point hike before December, with the possibility of more to follow.

And City expects rate rise this year, by Larry Elliott in The Guardian

The City was last night betting on at least one increase in interest rates before the end of the year after a strong performance by the service sector raised the prospect of anti-inflationary action from the Bank of England.

Despite leaving the cost of borrowing unchanged for the ninth successive month, the best performance by the service sector in more than two years prompted speculation that the monetary policy committee would soon be forced to raise rates. Money markets were signalling rates of between 4.75% and 5% by the end of 2006 compared with the current level of 4.5%. Upbeat economic data this month, culminating in yesterday's survey of the service sector from the Chartered Institute of Purchasing and Supply, prompted analysts to suggest there was an increased chance of tightening of policy.

I agree with these assessments, though expect to see the first 25 bp rate hike sooner than the market expects. This follows recent rate hikes in the United States, Australia and Canada. New Zealand aside, there is little sign yet that interest rates in the anglo-saxon economies have peaked.

(Almost) everything you wanted to know about the Nordic model

Edward Hugh has already stolen my thunder, but as promised yesterday here is some more about the so-called 'Nordic model'. The Nordic countries are ranked among the most competitive countries in the world, have high living standards, and are home to quite a few successful multinationals. Yet they also have some of the highest rates of taxation and public spending, and lowest levels of inequality, in the world. How do they do it?

That question has been posed many times in recent years. The best recent work I am aware of on the Nordic model was published by the European Policy Centre as a working paper in September: The Nordic model: A recipe for European success? (PDF). Edited by Carlos Buhigas Schubert and Hans Martens, it includes quite a wide range of contributors and is over a hundred pages long. In their introduction, Schubert and Martens provide a good overview of what makes the Nordic model distinct - and successful. But they also point out that what may look to outsiders like a coherent approach contains significant differences:

When one looks at the situation in more detail, the Nordic model naturally divides into many sub-models. So although it has some clear overall characteristics, there are, of course, also differences. Norway is an oil economy. Sweden is still a manufacturing society to a significant extent. Finland is dominated by one company, Nokia, and is still suffering from losing its biggest trading partner – the Soviet Union. Denmark has a small, flexible economy which relies on pockets of high-tech and generally small and medium-sized businesses.

Can the Nordic model be replicated? Perhaps, but not easily. The authors also note that the Nordic countries have small populations, are very homogenous, "with a preference for equality, inclusion and collective action". Most also have a long history of political dominance by social democratic parties. Those cultural and political characteristics, and the institutional complementarities that go with the Nordic economic and social model, will make it harder to export key elements elsewhere, particularly in anglo-saxon countries.

Though recommended reading, I would add the caveat that you won't find much criticism within the EPC document. It was "produced with the generous support of the Nordic Council of Ministers", after all.

Also worth a look:
* The Nordic model - a model for Lisbon? (PDF), a 16 page paper prepared by Danish, Finnish and Swedish Social Democrat MEPs for a Socialist Goup discussion, May 2005.
* A new book by Olli Kangas and Joakim Palme, Social Policy and Economic Development in the Nordic Countries, Palgrave, July 2005 (though it is more about social policy than economic).
* The January 1999 Economist survey of the Nordic countries, Happy family? (Unfortunately, most is only available to subscribers only).
* A 1996 conference paper by Lars Mjøset, Nordic economic policies in the 1980s and 1990s (PDF).
* Papers given at a 2001 seminar on the Nordic alternative and the related Nordic model website.

Social model debate 'pointless'

Wolfgand Munchau doesn't mince words. In today's Financial Times he explains Why social models are irrelevant (subscription required):

The least helpful contribution one can conceivably make in any economic debate is to recommend that one country adopt the social model of another. That is guaranteed to get you absolutely nowhere.

These days, it is difficult to find a European think-tank that does not advocate adoption of the Scandinavian social model. But the notion that the social model in small, consensual, wealthy and ethnically homogenous northern European countries such as Sweden and Denmark should serve as a model for large economies with huge wealth and income differences and mass immigration such as Germany or Italy is surely bordering on insanity.

Yet this is precisely the debate that European Union leaders will be having when they meet for their special summit at Hampton Court near London on Thursday. Instead of focusing on reforms of the social model, they should look at reforms of the EU’s economic system. The latter refers to the regulation of markets and macroeconomic governance. The former relates to risk insurance and social transfer systems. In the European debate, we have been committing a big classification error by confusing these two systems.

His solution is more flexibility, not less social protection:

Doing business: New Zealand, Singapore beat the US

The United States is a good place to open and run a local business, but it is even easier in New Zealand and Singapore, according to the World Bank's Doing Business 2006 report, released today. Canada came fourth in the Ease of Doing Business Index, Norway fifth and Australia sixth out of 155 countries surveyed. 

As one might expect, the five Anglosphere economies did well - all five were ranked in the top ten, a remarkably strong and consistent performance. The Nordic nations also stood out, with all five coming within the first 14.

Serbia and Montenegro was top reformer, improving in eight of the ten areas studied. It was followed by Georgia, Vietnam and Slovakia. Former Soviet bloc countries Lithuania and Estonia were ranked just behind Sweden at 15 and 16 respectively - better than most EU-15 members. Iraq (114) and Afghanistan (122) were not strong performers, but better than Congo, which came last at 155. Most of the mots business very poor performers were African countries, and they also had the lowest pace of reform.

Amongst the G10, Germany came 19th, the Netherlands 24th, Spain was 30th, France a poor 44th, and Italy a truly woeful 70th - behind such 'business friendly' regimes like Columbia, Saudi Arabia, Nepal and Columbia. The World Bank estimate that in Italy it takes 17 steps and 284 days to complying with licensing and permit requirements for ongoing business operations, which costs on average a staggering 147.3% of income per capita. Is it any wonder their economy is doing so badly?

The United Kingdom came ninth, down from seventh place last year - though the Bank notes that "this year's rankings are not comparable to last year's as three new sets of indicators - on dealing with licences, paying taxes and trading across borders - have been included". That did not stop today's Times claiming "Britain has slipped back in the race to be the best country in the world for doing business", which was "a blow to Gordon Brown’s claims to be boosting Britain’s competitiveness".

I doubt it; excluding the three new topics, the UK had the fourth best average ranking - suggesting, if anything, an improvement on last year's  rankings (though some methodologies have changed).

The 2006 report and overview (PDF) make it clear these measures of how business-friendly a country is are closely related to economic performance. Although I have some quibbles about the data and methodology, the findings are fascinating and are a valuable way of encouraging cuts in red tape for business. Well worth a look.

UPDATE: The World Bank press release has now been issued. There is also some press attention already. As mentioned, The Times tries to beat up the UK numbers. Reuters leads with Simple business rules spur job creation, and Edmund L Andrews at The New York Times highlights that New Zealand Named Best Nation for Business.

Is Ireland really the second wealthiest nation in the world?

Slugger O'Toole quotes the newly published Human Development Report 2005, which claims that Ireland is the second wealthiest nation in the world:

When all factors were taken into account Ireland rose two places to eighth in the Human Development Index, leapfrogging the US, Japan, Belgium and the Netherlands but falling behind Luxembourg and Switzerland.

Surely some mistake, many of you must be thinking? And you would be right. Every year the Human Development Index comes out with some surprising move up or down, and almost every year it turns out the reason is dodgy number crunching at the UNDP.

There is a long and fascinating debate in the comments to Slugger's post, but the nub of it is this: the UNDP used Gross Domestic Product (GDP) rather than Gross National Product (GNP). In most countries there is little difference between the two, but in Ireland GDP was almost 20% higher than GNP in 2004 according to their Central Statistics Office. That's huge.

GNP is the value of final goods and services produced in a year by a country's nationals. It includes profits from capital held abroad, but excludes all repatriated profits and income. In Ireland, home of the multinational, a lot of that money goes offshore. As Wikipedia notes:

GDP is a better measure of the state of production in the short term. GNP is better when analysing sources and uses of income.

They really should have used GNP. Just goes to show, its not only Polly Toynbee who gets confused by GDP measures! What's galling about the UNDP mistake is that the problems with using GDP for such rankings are well known. In March, for example, an article in the OECD Observer pointed out:

Ireland is another country where GDP has to be read with care. Ireland's position has risen up the GDP per head rankings since 1999, and is now in the top five countries in the OECD. ...But does GDP per head accurately reflects Ireland’s actual wealth, since all that inward investment (and foreign labour) generates profits and other revenues, some of which inevitably flows back to the countries of origin?

Another measure, Gross National Income, accounts for these flows in and out of the country. For many countries, the flows tend to balance out, leaving little difference between GDP and GNI. But not so for Ireland, as outflows of profits and income, largely from global business giants located there, often exceed income flows back into the country. This means that in a GNI ranking, rather than being in the top five, Ireland drops to 17th. In other words, while Ireland produces a lot of income per inhabitant, GNI shows that less of it stays in the country than GDP might suggest.

GNI in Ireland is very similar to GNP, so the key point remains. Surely the UNDP ought to know this stuff? Or, as Brad DeLong might mutter, why oh why can't we have better UN statisticians?

Measuring transparency, fighting corruption

Is the importance of governance and anti-corruption overrated? Is governance is a luxury that only rich countries can afford? Doesn't it take generations for governance to improve? Not according to Daniel Kaufmann, Director of Global Programs at the World Bank Institute. In his article 10 Myths About Governance and Corruption, just published in Finance & Development, Kaufman tackles those and other myths. The potential economic gains from improved governance are big:

The research generally shows that countries can derive a very large "development dividend" from better governance. We estimate that a country that improves its governance from a relatively low level to an average level could almost triple the income per capita of its population in the long term, and similarly reduce infant mortality and illiteracy.

But it is a fallacy that one "fights corruption by fighting corruption":

..through yet another anticorruption campaign, the creation of more 'commissions' and ethics agencies, and the incessant drafting of new laws, decrees, and codes of conduct. Overall, such initiatives appear to have little impact, and are often politically expedient ways of reacting to pressures to do something about corruption, substituting for the need for fundamental and systemic governance reforms.

Kaufman argues against the 'business-as-usual' modus operandi: "a bolder approach is needed". A key part of the solution is greater transparency and accountability. To do that you need among other things, better measures. The World Bank Institute's good governance and anti-corruption activities have developed  Worldwide Governance Research Indicators covering 209 countries, helped to build governance diagnostic capacity, and are now seeking to better measure transparency.

In a forthcoming World Bank Policy working paper, Transparenting Transparency: Initial Empirics and Policy Applications, Ana Bellver and Daniel Kaufmann construct an initial transparency index for 194 countries. The aggregate index is based on over 20 independent sources, and has two sub-components: economic/institutional transparency, and political transparency. An unobserved component model was used to generate country ratings and margins of error. What did they find?

The results emphasize variance. First, the preliminary evidence based on these initial indicators suggests enormous variation across countries in the extent of transparency. ...Further, there is significant within-country variation, with large differences in performance between economic/ institutional and political dimensions of transparency.

Liberia and north Korea had the worst economic/institutional transparency, while the United States had the highest, closely followed by Canada, Chile and the UK. Political transparency estimates saw North Korea and Libya at the bottom, while the Nordic countries fared best. Though "mindful of the challenges in inferring causality", their analysis finds that:

..transparency is associated with better economic and human development indicators, even after controlling for differences in income. Thus, for the same level of income per capita, countries which rank higher in the overall transparency index are also more competitive in international markets and their population has higher life expectancy at birth, female literacy and child immunization levels.

This paper is very much a work-in-progress. The authors emphasise its preliminary nature, and hope "to elicit feedback at an early stage". Go read it.