Business Magazine

Too Many Indicators?

Posted on the 17 January 2012 by Center For International Private Enterprise @CIPEglobal
The world according to development indexes.

The world according to indexes (from top left: Heritage Foundation, Freedom House, Transparency International)

Last week, the Heritage Foundation released the 2012 Index of Economic Freedom. The results are worrying: policies that promote entrepreneurship have been weakening worldwide since the global economic crisis, representing both a collapse of confidence among small business owners and a drop in government support for entrepreneurship.

These results echo the findings of other measures of barriers to economic growth, including the Heritage Foundation’s own Global Entrepreneurship and Development Index, which was released on January 5th. The GEDI (pronounced like “Jedi” by its creators) focuses not only on laws and institutions, but also on the aspirations and attitudes of would-be entrepreneurs. Launched in 2004, it is yet another refinement in our ability to understand what helps and hinders economic growth around the world.

The Economic Freedom Index and GEDI are both feats of scholarship and valuable tools for real-world policy-making. They also join a long and growing list of indexes and indicators that aim to measure progress on economic development, such as the World Bank’s Doing Business survey (also unveiled in 2004). Each has its own unique take on the issues — and each claims to cover something the others miss.

The explosion of indicators has been even more pronounced in other areas of development. In addition to the now-familiar Human Development Index, there are now rankings or scorecards on notions as abstract as democracy, prosperity, governance, corruption, freedom, gender relations, environmental sustainability, even happiness. It is fair to say the development world is awash in indexes and indicators; the UN even allows you to build your own development index right in your Web browser.

Not long ago, the very idea of measuring “development” by anything other than GNP was considered revolutionary. The turning point came in the late 1990s, around the time that Mahbub ul Haq, the pioneer of human development theory, convinced his fellow economist Amartya Sen that only a single, unified number could focus the international community’s attention on social deprivation issues like infant mortality and illiteracy.

According to Sen, Haq demanded  “a measure of the same level of vulgarity as GNP—just one number—but a measure that is not as blind to social aspects of human lives as GNP is.” Today, billions of dollars in aid and loans hinge on the ups and downs of that single, “vulgar” number, the Human Development Index.

The HDI’s success and appeal has not been lost on promoters of other kinds of development and policy agendas. Sen says he ultimately agreed to Haq’s idea because he thought the power of a single number would draw people in to the complex and nuanced world of detailed charts and tables contained within the Human Development Report.

Indeed, much like the dizzying array of gauges and dials in an airplane cockpit, the wide selection of indexes and indicators can provide vital feedback to policymakers as they navigate the complex and changing global economy. CIPE itself relies on many of these indicators to measure progress and setbacks in the countries where we work.

However, a gauge or a dial which displays misleading or inaccurate information can be dangerous. And one major weakness of many of today’s indicators and indexes, especially those that measure policies and institutions, is that a law on paper may be miles away from the reality of enforcement on the ground (as CIPE and its partners recently found in Kenya, for example) . Conditions may also differ radically from one region to another within a single country — Lima may be full of successful small and medium enterprises, but in rural areas of Peru attitudes towards entrepreneurship are still weak.

Ranked country lists and headline numbers like the Index of Economic Freedom are vital for tracking year-to-year outcomes and attracting public attention to key issues of economic reform. But to fully understand the real-world policies driving the numbers, let alone change them, also requires hard work on the ground with partners who understand the local context.

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