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Winter 2000
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The Director's Column
By Dr. Alvin Rabushka
Director, Division for Economic Policy Research
The
Institute for Advanced Strategic and Political Studies has as its primary
mission the cause of freedom. The Division for Economic Policy Research, in
particular, focuses on the issue of economic freedom and how to reduce the
scope and size of government in Israel. For more than a decade, the
Institute has conducted scholarly research on government control over the
lives of individual Israelis and proposed economic reforms that enhance
individual freedom.
As
IASPS has documented in more than 50 scholarly studies, and hundreds of
newspaper and magazine articles and other publications, Israel is one of the
few remaining socialist economies in the world. The government intrudes into
almost every area of economic life. To make matters worse, Israel receives
more than $8 billion a year in free money from foreign governments and
overseas Jews. Most of this money ends up in the hands of the government,
which permits it to sustain socialism.
Just Behind Egypt
The
absence of economic freedom in Israel is well documented. Every other year,
the Canadian-based Fraser Institute, in collaboration with more than 50 free-market
think tanks around the world, publishes a Survey
of Economic Freedom. In their most recent survey, which covers
the years 1997-1998, Israel finished 66th out of 123 countries. Israel was
tied with Sri Lanka, and placed just behind Egypt, Turkey, Botswana, and
Lithuania.
The
Fraser survey compared countries for which comparable data exist every five
years, beginning with 1975. (Since 1995 it has published biennial surveys.)
For 1990, Israel received a grade of “F.” Israel ranked near the bottom,
surpassing only 4 former communist countries and India. Israel also earned
summary ratings of “F” for 1975, 1980, and 1985.
Supporters
of socialist Israel say that the Fraser grades are too low, pointing to the
better scores Israel receives in an annual volume published by The Heritage
Foundation and The Wall Street Journal,
entitled Index of Economic Freedom.
The most recent issue, 2000 Index of
Economic Freedom, which includes data through June 1999, places
Israel in 49th position, tied with Greece, Morocco, and Turkey. Israel's
overall score is 2.75, which qualifies it as “mostly free” in the
Heritage/WSJ rating scheme.
Countries with an average overall score of 2.00 to 2.95 are deemed “mostly
free,” while those in the range of 3.00 to 3.95 are deemed “mostly
unfree.” Israel's score in 1995 (using 1994 data) was 2.90, just barely
qualifying it as “mostly free.” Its score in 1996 was 3.00, placing it
in the “mostly unfree” category. After a visit from members of the
Israeli Embassy to The Heritage Foundation, Israel was subsequently upgraded
to a higher score of 2.75 in 1997. It has since remained at that level.
Methodology
Matters
Not
all indexes are alike. The Fraser Institute index is far superior to that of
the Heritage/WSJ. It is based
on far more extensive research, deliberation, and testing by far more
qualified and distinguished scholars than the Heritage/WSJ
index.
With
financial support from The Liberty Fund, Inc. of Indianapolis, Indiana, The
Fraser Institute began to explore the measurement of economic freedom in
1986. It convened six conferences in 1986, 1988, 1989, 1990, 1992, and 1993.
Each two-day conference included some 20 distinguished scholars. Fifty-four
individuals participated in one or more of the six conferences. They
represented 12 countries, 28 universities, 9 institutes and think tanks, 1
central bank, the World Bank, and included 3 Nobel Laureates in economics.
The
inaugural conference explored several conceptual themes and examined case
studies in East Asia, Sub-Saharan Africa, Latin America, and Sweden. The
proceedings were released in a book edited by Michael Walker, Freedom,
Democracy, and Economic Welfare, published by The Fraser
Institute in 1988.
The
second conference set out three papers on the definition and possible
measurement of economic freedom (written by Rabushka), and included an
initial attempt to rate economic freedom for 145 countries by tabulating
data on some 20 economic dimensions. The Fraser Institute published the
proceedings in 1991, edited by Walter Block, Economic
Freedom: Toward a Theory of Measurement.
The
third and fourth conferences built on the earlier discussions and debates,
seeking to define economic freedom as precisely as possible and identifying
data sets that would make international comparisons possible. The Fraser
Institute published the proceedings in a volume edited by Stephen T. Easton
and Michael Walker, Rating Global
Economic Freedom.
The
fifth conference further explored measurement issues that arose in the
previous two meetings.
The
sixth, and final, conference further refined the measures that led to the
current index of economic freedom prepared by James D. Gwartney, Walter E.
Block, and Robert A. Lawson. The results were published by The Fraser
Institute in Economic Freedom of the World 1975-1995.
Experts
and Evidence
The
Fraser Index of Economic Freedom included five main components, with 15 sub-components.
Each sub-component had been carefully developed over a period of eight
years, along with the meaning of each numerical score.
To
confirm and test the validity of the Fraser index and its components, a
survey-based approach to an index of economic freedom was carried out. The
purpose was to see if the precision of experts tallied with the more
impressionistic evidence of people who are well acquainted with economics,
business, and the global scene on a practical basis — and who value
freedom. A questionnaire was sent to members of the Mont Pelerin Society, an
international association of about 500 distinguished academics, businessmen,
and public officials from several dozen countries, and a group of Eastern
European experts at the European Bank for Economic Reconstruction. The
recipients were asked to compare the U.S. Germany, Sweden, Israel, and India
along five scales ranging from 0 to 100 corresponding to the five main
components of the index. The composite scores were 84, 73, 48, 31, and 21.
Only India ranked below Israel. (There was a large number of responses,
which was amenable to rigorous statistical analysis.) These subjective
survey results correlated closely with the more objective Gwartney-Block-Lawson
index.
It
should be noted that a representative of The Heritage Foundation attended
the third conference in 1989. No one from The
Wall Street Journal attended any of the six conferences.
In
the executive summary of the Heritage/WSJ
volume, the authors claim that The Heritage Foundation first discussed the
concept of producing a user-friendly “index of economic freedom” as a
tool for policy makers and investors in the late 1980s. To this end,
Foundation staff developed a set of objective economic criteria and, since
1994, have graded various countries. The Heritage/WSJ
index measures how well 161 countries score on a list of 10 broad factors of
economic freedom, based on 50 independent economic variables.
The
Heritage/WSJ authors write
that the 1995 Index was the
first comprehensive study of economic freedom ever published. They further
write that other studies have since appeared, mentioning in a footnote the
Fraser report also published in 1995, implying that Heritage beat Fraser to
the punch.
Shoddy Scholarship
The
Heritage/WSJ claim is
erroneous. It reflects shoddy scholarship. The first full set of global
freedom ratings was published in 1991 by Zane Spindler and Laurie Still in
the second Fraser conference volume (1988 conference). The third conference
volume published in 1992 (1989 conference) contained a second set of global
economic freedom ratings assembled by Gwartney, Block, and Lawson for 1975,
1980, 1985, and 1987. It is more likely that Heritage did not give the
concept of economic freedom serious thought until one of its staff returned
from the third Fraser conference. Nor did Heritage issue any reports until
after the Fraser Institute had published four volumes.
In
contrast with the development of the Fraser index, the Heritage/WSJ
report does not describe thistorical development of its index, except to
note some recent changes suggested by outside scholars. The report does not
provide a list of independent, distinguished scholars who assisted in the
compilation of the 10 institutional factors and the 50 independent variables
used to score them. The acknowledgments thank numerous staff of Heritage and
note that “many from outside The Heritage Foundation also made significant
contributions to the Index
[the report, not the actual index itself].”
Errors
in the Heritage/WSJ Ratings
for Israel
Several
of the scores for Israel in the Heritage/WSJ
survey bear little relationship to the country's economic realities. But
most of all, the scores indicate freedom where there is no freedom. To begin
with, Heritage/WSJ gives
Israel a high score of 2.0 for “Trade.” The score is based on an average
tariff rate of less than 1 percent, which is defined as a low level of
protectionism. But as readers of our Policy
Studies and NBNs know, there are import monopolies in many
economic areas, which prevent import competition (cement, for example) and
keep consumer prices high. There is also a raft of non-tariff barriers that
impede the free inflow of goods.
Bizarre
Justification
“Capital
Flows and Foreign Investment” receive the highest score of 1.0. The
justification for this high score is bizarre, namely, that the government
offers investment incentives. But these investment incentives, which include
capital grants, come at the expense of Israeli taxpayers. A subsidy from
Israeli taxpayers to foreign investors does not qualify as a mark of
economic freedom at all. It is a mark of socialism.
“Wages
and Prices” receive a high score of 2.0, and are rated as stable. But
again, this is preposterous. Anyone who has had to survive a month or more
of strikes in Israel can attest to this. Labor market instability in Israel
is among the highest in the world.
A
high score of 2.0 on “Property Rights” is equally absurd. The government
of Israel owns more than 90 percent of the country's land. Property rights
of every sort are routinely abused in Israel.
A
high score of 2.0 on “Regulation,” calling it low level, is
intellectually dishonest. Israel remains one of the most highly regulated
economies in the world.
Nor
is there any mention of the fact that, on a per capita basis, Israel is the
world's largest recipient of U.S. foreign aid, receiving billions more in
charity and reparations. The inflow of free money enables the government to
sustain one of the few remaining socialist economies on earth.
It also enables Israelis to consume far more than they produce,
creating the impression of a “booming and zooming” economy. It's easy to
live well when Uncle Sam pays much of the bill.
When
the Heritage/WSJ scores are
correctly assigned in accordance with Israel's economic reality, the overall
score of 2.75 will fall to 3.75, placing the country near the bottom of the
“mostly unfree” category, and just a shade short of the “repressive”
category.
As
I said at the outset, not all indexes are equal. Neither The Heritage
Foundation nor The Wall Street Journal
do the cause of economic freedom and reform in Israel much good with their
wildly inaccurate scores.
Conservative
institutions that feel the need to be “politically correct” when it
comes to Israel do the Israeli people no favor in their quest for the same
measure of freedom that is enjoyed in America.
Israel,
Egypt, Freedom, and Prosperity
One
might reasonably ask how Israel can get a lower score than Egypt yet have a
higher standard of living. It is important to note that any measure of
economic freedom is exactly that: a measure of freedom, not an indicator of
national wealth. During much of its history, the Soviet Union enjoyed high
rates of economic growth (thanks to the slave labor of its people). Paul
Samuelson, in the 3rd edition of his best-selling, introductory economics
textbook, predicted that the Soviet Union would surpass the United States in
per capita income sometime in the early 1990s. (He abandoned that prediction
by the 11th edition.) At one time, the U.S. Central Intelligence Agency
claimed that per capita income in communist East Germany exceeded that in
West Germany.
Indeed,
China today has higher per capita income than India, and far higher than Sri
Lanka. In these two comparisons, and numerous others, countries with less
economic freedom have higher per capita income and national wealth. Freedom,
in and of itself, is an important dimension of the human condition. While
freedom and growth are positively correlated for most countries, prosperity
without freedom, or perhaps despite freedom, is nonetheless not freedom
