Cato’s Economic Freedom Index 2005

Have India and China improved their economic freedom ratings?

The Cato Institute has released the latest international economic freedom rankings (for year 2003). While it is clear that most of India’s neighbours slipped in this year’s rankings, India’s own position is not as clear. For example, while Cato’s EFW 2004 ranks India at number 68 for year 2002, EFW 2005 ranks it at 62 for the same year. That suggests that going by its original measure, India’s has climbed two steps in the rankings. But going by its latest report, India has slipped four notches. China is similarly affected.

Country       EFI Rank (2005) EFI Rank (2004) EFI Rank (2003)
India 66 68 62 71
Sri Lanka 76 78 80 71
China 86 9084 84
Bangladesh 96 83 84 87
Pakistan 98 90 93 101
Nepal 112 94 93 87
Myanmar 127 123 122

India leads its neighbours in terms of economic freedom. But that’s not enough. It is already clear that there is a clear correlation between economic freedom and human development. There’s no reason for the Indian government to delay bringing on further economic liberalisation.

Related Link: Dan Drezner discusses Cato’s findings that compared to democracy, economic freedom is much more likely to prevent war. He quotes Eric Gartzke’s observations, which look suspiciously like the Golden Arches theory of conflict prevention.

The Indo-Pakistani conflict has regularly erupted in warfare but leaders in both countries have recently come to accept that their more open economies suffer greatly from active hostilities. The growing dependence on international capital and the declining value of disputed territory relative to technological innovation means that the impetus to make peace has increased and the value of war has declined. [Dan Drezner]

The Acorn has always had reservations about such theories, especially when applied to Pakistan.

5 thoughts on “Cato’s Economic Freedom Index 2005”

  1. Honestly, I’m surprised that India is considered more economically free than China. I would have thought the opposite was true…

  2. Cato uses a fairly broad index, though. Among other things, it looks at intellectual property protection, access to courts, level of regulation, openness to foreign investment, etc. Although most of the attention is on China these days, I agree with Cato that, as a whole, India seems to be at least slightly more open than China, despite what the nationalists did to screw up the economy in past decades. Obviously, India has one major leg up in the competition: it’s politically liberalized as well as economically liberalizing, something I don’t think we’ll be able to say about China for some time to come.

  3. Joe,

    Yes, I think you have a point there.

    Most of the attention on China’s increasing economic freedom seems to be on those aspects that involve ease of investing, ease of starting a business etc. While China may lead India in these areas, these are not the whole thing. Legal environment, the working of institutions, checks and balances etc do play a big part in how those economic freedoms can be used, enforced and redressed if denied. Cato’s rankings may reflect India’s advantages in this respect.

    Still, The Acorn’s case has been that India’s economic freedoms do not match up to its political ones. And that is simply unacceptable.

  4. I think China is more complicated economically than India. China central government is lot more free economically but the provincial governments have something else on their mind. September 1st Economist had a good story about China Inc. Indian private sector is much freer than China and its own past since, probably, late 19th century British rule. But when it comes trade and foreign investment, China beats India hands down. China trade environment is freer than most developed countries.

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