As noted in the "Methodology" section, in calculations of the final Index of Leftness (Rightness) of Economy the higher weight is given to Public Finance Sub-Index:
IL(R)Ei = 0.30*PFi + 0.14*PRi + 0.14*FTi + 0.14*Li + 0.14*ERi + 0.14*MWi
When the tables are interpreted from top to down economies are ranked from more liberal to more dirigiste, and if from bottom to up – then from more dirigiste to more liberal. Higher place of a country in the table means that its economy contains more rightness (self-regulation) and less leftness (governmental regulation). The countries with GDP per capita over 35 thousand international dollars are in colored boxes.
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Table 7. Indices of Leftness (Rightness) of Economy (2016)
Scale 7. Indices of Leftness (Rightness) of Economy (2016)
The countries are almost equally scattered on the left and right sides from the relative center and located mirror-like on an identical distance from it.
By the integral index the economies are more centripetal than by the individual sub-indices. The reason is that the rankings of an economy on various criteria of the leftness-rightness somewhat balance each other. For example, by Public Finance Sub-Index Austrian economy is the left-wing (0.516), while by Price Regulation Sub-Index it is right-wing (0.099). Being one of rightest economies regarding Minimum Wage Sub-Index (0,080), South Africa is in the top 10 of leftest economies among the 95 countries as it comes to the Employment Regulation Sub-Index (0.495). As a result, by the integral index both economies gravitate to the relative center (Austria – 0.266, South Africa – 0.253).
The number of analyzed economies has grown almost 3 times compared to 2014 and 1.5 times compared with 2015. In 2016, the distribution density of the recalculated Indices of 37 countries analyzed in IL (P)E – 2015 Report, slightly decreased compared to 2014 and almost unchanged from 2015: in 2014 IL(P)Es were in the range of 0.117-0.276, in 2015 – in the range of 0.114-0.375, and in 2016 – 0.116-0.371. These indices were recalculated with a 2016 methodology and on the same statistical sources.
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The rightest economy among the 95 is Singapore's (0.116), where the government intervention in economy is at a minimum. Economies of the United Arab Emirates (0.157), Georgia (0.174), Switzerland (0.176), Qatar (0.179), Bahrain (0.187), Iceland (0.188) and Denmark (0.190) also belong to the right-wing. Argentine economy is the leftest (0.476), followed by Venezuela (0.454), Morocco (0.401), the Islamic Republic of Iran (0.390) and Brazil (0.380). Of the developed countries, the economy of France (0.371) and Belgium (0.358) are closest to the left pole.
In the ranking of 95 economies from right to left Azerbaijan (0,301) occupies 57th place and from left to right – 39th, and is located to the left from the relative center (0.288).
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To evaluate the changes that have occurred over the past three years, the Indices of Leftness (Rightness) of Economy of the 37 countries analyzed in 2014, were restated using the statistical sources and indexing methods of this Report, and the results for 2014, 2015 and 2016 were reduced to a single dimension.
Table 8. Indices of Leftness (Rightness) of Economy
(Eastern Europe and Central Asia, and selected developed
countries, in alphabetical order, 2014, 2015 and 2016)
Quite naturally, in such a short period of time there have not been big changes in general level of the government intervention in compared economies. The relative center of the leftness-rightness scales remained virtually unchanged (2014 – 0.276, 2016 – 0.275).
For a more accurate assessment of changes in the liberalism-dirigizme level of the economy, each country should be analyzed separately, since a change in the same indicator in the same direction (its rise or fall) in different countries can occur for various reasons.
For example, one of the two indicators that the Public Finance Subindex is based on is the share of budget expenditures in GDP, which can rise both by increasing tax rates (through increasing of the share of budget revenues in GDP), and by improving tax administration and tax collection. It can be achieved also under invariability, and sometimes even a decrease, of tax rates. The share of budget expenditures in GDP, and as a consequence – the Public Finance Subindex, will grow in both cases, regardless which of these two economic policies is implemented, although they are of different nature. But, in the second case, the economy does not move to the left, since strengthening (or weakening) of financial discipline does not add to the economy the characteristic of liberalism or dirigisme (does not apply to model-shaping forms of state intervention in the economy). While a tax rates reduction increases the level of liberalism (rightness) of the economy in any case, even if the volume of tax revenues increases due to a decrease in tax evasion.
Just as in 2014-2015, in 2016 the economies of Singapore, Georgia and Denmark represent the maximum rightness, and of France, Serbia and Ukraine, with some permutation of places, the leftness. This time Moldova and Bosnia and Herzegovina too joined the group of the most left-wing economies. In countries that have retained their positions (liberal or dirigiste), there have also been some changes in the level of model-shaping government intervention in the economy.
The number of countries whose economies have significantly shifted to the left or to the right is not large. If to judge by the absolute values of IL(R)E, in 2016 compared with 2014, the economies of Ireland (-0.061), Japan (-0.028) and Ukraine (-0.022) have most moved to the right, and the economies of Germany (+ 0.056), Bosnia and Herzegovina (+0.036), New Zealand (+0.034) and Albania (+0.025), on the contrary, to the left.
Since the leftness-rightness of economies, in principle, appears in comparison with each other, changes in the places of countries in the rankings from right to left and from left to right also are of some interest. Regardless of how their absolute value of the Index of Leftness (Rightness) of Economy has changed, the economies that have most risen in the ranking from right to left (or dropped in the ranking from left to right) are Ireland, the Netherlands , Japan (each 8 positions), Italy (6 positions), Latvia, Russia and Sweden (each 4 positions). The economy of these countries in relative terms has become more liberal. And the economies that have most risen in ranking from left to right (or dropped in ranking from right to left) are Germany (17 positions), Bosnia and Herzegovina (9 positions), New Zealand (8 positions), Albania ( 6 positions) and Macedonia (5 positions). In relative terms, the economies of these countries have become more dirigiste.
In order to find out the reasons for change of IL(R)E’s absolute value in a particular country, an additional analysis of the reforms implemented there is needed, since it is reforms that increase liberalism, or vice versa, dirigisme of the economy. For example, in 2014-2016 the German economy, as noted, has significantly shifted to the left. It should be considered, however, that in 2016 Germany’s IL(R)E had practically the same value as in 2015 (respectively, 0.316 and 0.317), and in the ranking of economies from right to left it even climbed 2 positions. The shift occurred in 2015, when the value of the Index rose from 0.260 (2014) to 0.317, and in the ranking from right to left Germany dropped from 13th to 32nd place. The main reason for this was the introduction of the legislatively approved minimum wage. Due to a sharp increase in the MW Sub-index (from 0.050 to 0.477) the German economy despite some increase of its rightness by a number of sub-indices, as a whole moved to the left. (And of course, with equal justification it can be argued that in 2015 in the ranking of 37 economies from left to right Germany rose from 25th place to 6th).
In 2014-2016, Azerbaijan's economy has also shifted somewhat to the left. Although in 2015 the value of the Index slightly decreased compared to the previous year (-0.005), in 2016 it significantly increased (+ 0.021). In 2014, in the ranking of 37 economies from right to left, Azerbaijan shared 22-23rd places with Albania, in 2015 it took 20th place, and in 2016 – 25th place. Compared with 2015, in 2016, the Azerbaijani economy slightly moved to the right by the Foreign Trade (-0.009), Employment Regulation (-0.001) and Minimum Wage (-0.001) sub-indices, and, on the contrary, shifted to the left by the Public Finance (+ 0,012), Price Regulation (+ 0,113) and Licensing (+ 0,025) sub-indices. Obviously, the price regulation was responsible for the most of increase in IL(R)E value.
The IL(R)E – 2016 Report is based on the statistics for 2015 and therefore reflects also the consequences of two devaluations of the Azerbaijani manat carried out that year. As noted, after those devaluations, the Azerbaijani government for the social protection purposes, in a quite strict manner prevented the consumer prices increase. Azerbaijani manat’s fall against the US dollar and, at the same time, the retention of domestic prices at a relatively low level caused a significant increase in the deviation of GDP by PPP from GDP in current US dollars. This is what explains the increase of Azerbaijan’s Price Regulation Sub-index in 2015.
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If on any particular indicator – in this case on the IL(R)E – countries rank "logically", i.e. countries with different level of economic development (say, countries with GDP per capita above and below a certain value, in this study – 35 thou. Int. dollars), are arranged in separate groups, this means that comparisons on this indicator should be carried out within groups: developed countries should be compared with each other and developing countries with each other. But if the countries rank stochastically, i.e. countries with different level of economic development are arranged mixed, it means that the comparison of any pair of countries with one another is permissible.
Of course, it should be specially stipulated that some of the countries analyzed in this Report have achieved a high level of economic development (expressed in a high GDP per capita) not by accelerating economic growth due to limited government intervention in the economy, but because of natural resources (oil) exports. In such cases, low values of IL(R)E are not a cause, but a consequence of economic enrichment of the country. For example, Bahrain, the United Arab Emirates, Kuwait, Qatar and some other Muslim countries do not apply income tax (or "charge" it at a zero rate). The fact that it is related to religious reasons is best manifested in Saudi Arabia, whose citizens are not subject to income tax, but they officially pay a Zakat. In all of mentioned countries, GDP per capita exceeds 35 thou. Int. dollars and they belong to a group of high-income countries. However, their economic wealth is the result of oil exports, rather than a more liberal economic model, which, in turn, is a consequence, but not a reason of wealth. It is oil wealth that allows them to preserve citizens’ and businesses’ tax burden at a low level.
Although in developed countries, IL(R)E, as a rule, does not exceed a certain level, the ranking of 95 countries is, in fact, of the stochastic nature: both economically developed and developing countries are located on either side of the relative center. Therefore, this is incorrect to suppose that successful economic development is assured if the government intervention in the economy is above or below a certain level. Singapore and the United Arab Emirates, located on the right pole, France that occupies the left-wing position, Malta and Netherlands, that are placed close to the relative center, are the countries successful both in the economic development, and in improving of public welfare. That is to say, some countries attain better socio-economic results due to the rightness of their economy, others through the leftness.
Collation of Indices of Leftness (Rightness) of 95 economies with a cumulative GDP growth achieved by them over the last 5 years shows that a single value of the IL(R)E, which could be considered optimal for all countries, does not exist. Diagram below shows that relation between IL(R)E and economic growth is weak both in countries with GDP per capita above 35 thou. Int. dollars (intermittent logarithmic curve), and, especially, in all others (solid logarithmic curve).
Theoretically, if other conditions of economic development are constant, in any particular country as the level of the government intervention in economy is approaching its optimal value, economic growth should accelerate, and as is distancing from it, growth should slow down. Or vice versa: if economic growth rates of a country are getting higher, it means that the IL(R)E is getting closer to its optimal value for this country at this time framework.
Hungary, Poland and Portugal are on approximately similar level of economic development (GDP per capita is, respectively, 27.5 thou., 27.8 thou. and 28.9 thou. Int. dollars). These countries’ IL(P)E values also are very close to each other (respectively, 0.307, 0.309 and 0.293). Meanwhile, the cumulative growth of real GDP achieved in these countries in 2012-2016 varies significantly – 9.9%, 13.5% and -1.4%, respectively. It can be argued that in Poland, which has achieved the highest economic growth, this IL(R)E is closer to its optimum for the country and for the time being.
In terms of GDP per capita (PPP) Australia (48.9 thou.), Slovakia (31.3 thou.) and Estonia (29.3 thou. Int. dollars) – in one group, and Uruguay (21.5 thou.), Mexico (18.9 thou.), Jordan (12.3 thou.) and Ecuador (11.1 thou. Int. dollars) – in another group, are at different level of economic development. The intensity of model-shaping government intervention in the economy in these countries also significantly differs: IL(R)Es are, respectively, 0.266, 0.325, 0.267, 0.290, 0.263, 0.318 and 0.364. However, in 2012-2016, these 7 countries achieved approximately the same cumulative real GDP growth – 14.2%, 13.5%, 13.5%, 13.9%, 13.2%, 13.7% and 13.8, respectively. Collation of these statistical series may well be interpreted in a way that these countries’ IL(R)Es are at roughly equal distance from their optimal value.
In some countries accelerated development appears as a result of stricter regulation, while in others – due to liberal reforms. To judge what level of the government intervention in economy is more effective for a country, it is needed to find out the IL(R)E’s optimal value interval for that particular country in a given time. Corresponding studies are underway.
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In Table 9, the distribution of countries by IL(R)E is compared with the real GDP cumulative growth in 2012-2016, based on the groupings both by the IL(R)E ranges and by cumulative growth intervals.
In terms of IL(R)E the largest number of countries (approximately two thirds of them) is in the ranges of 0.251 - 0.300 (33 countries) and 0.301 - 0.350 (26 countries). In countries ranging from 0.251 to 0.350, the average GDP cumulative growth rate is 15.4%, in particular, in countries ranging from 0.251 to 0.300 – 15.2%, and from 0,301 to 0,350 – 15,7%.
Table 9. Distribution of Countries by IL(R)E Ranges and
by Intervals of Real GDP Cumulative Growth
By IL(R)E, Azerbaijan (0.301) belongs to the central group. However, the cumulative GDP growth of 8.2%, achieved by Azerbaijan in 2012-2016 (12.4% in 2011-2015), is noticeably lower than the average of the countries with the medium values of IL(R)E. These comparisons confirm that Azerbaijan’s IL(R)E deviated from its optimal value and the acceleration of liberal economic reforms is the urgent task for the next few years.
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Index of Leftness (Rightness) of Economy reveals one of the fundamental changes that have occurred in the global economy over the past 25 years. During this period some new states that came out of “socialism” have created economies that are righter than the well-established market economies of some rich countries. Azerbaijan, whose economy just only 25 years ago was characterized by extreme leftness, now has a more liberal economy than France, Belgium, Germany and many other countries.
The economic reforms that were implemented by former "socialist" countries with far left economies differ in content and intensity. IL(R)E allows evaluating and comparing the result of these reforms. For example, it becomes clear that Azerbaijan has built the righter economy than Serbia, but kept government intervention in the economy at the higher level than Georgia – although all these countries attributed the liberal reforms to the main priorities of economic policy for many years ahead.