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UAE challenges its economic freedom ranking in paper by Heritage Foundation
Source: BI-ME , Author: BI-ME staff
Posted: Thu January 31, 2008 12:00 am

UAE. The Studies Department at the UAE Ministry of Economy has stated that the report released recently by the Heritage Foundation on the index of economic freedom in regard to UAE's economic freedom, is contrary to other credible international reports in this respect.

Senior Economic Advisor at the Ministry of Economy Aref Al Farra said: "The Heritage Foundation's assessment of the UAE's economy came in contrary to other credible international reports. The report was based on faulty information and a questionable and non-uniform methodology which renders the report unreliable".

He cited that the report for 2007 had a different methodology than reports in 2006 and before. Moreover, the report for 2008 had a different methodology than the one used for 2007. Such frequent changes in methodology weaken the reliability of the report and make the researcher wonder if 2009 and subsequent years will witness similar changes.

Moreover, the official said that the index of 'economic freedom' is based on ten sub-indices that are most probably correlated, which means that the index would, therefore, not be unbiased.

He added: "Several economists and researchers question the validity of the Economic Freedom Index. Some of the critiques presented against this index include the difficulty in determining which factors or subcomponents are actually responsible for economic growth. For instance, functioning property rights, low corruption, and low inflation may be particularly important. Regarding the size of government and free trade there is much conflicting evidence.

"Some critics have asked, for instance, if Canada's slightly higher income tax rates makes it a less economically free country than the United States. Critics of the index's methodology take issue with its equation of low tax rates and weak labour regulations with economic freedom.

"Others went as far to say that the index judges countries against a specious list of 'ideal' economic and fiscal policies, which reflect the creators' own laissez-faire economic and fiscal policy ideas more than they do a substantive concept of economic freedom. For such critics, the list is simply a promotional tool for laissez-faire policy, rather than a meaningful index of economically free countries."

The discrepancies were noted in the report. The UAE's average score increased from being 60.4% free, in the 2007 report (page 379), to being 62.8% free in the 2008 report (page 381).

The 2008 report also claims that the "overall score is 0.1 percentage point lower than last year." Upon first reading, these results are counter-intuitive, the official said. "One wonders how the percentage decreases if the UAE economy is becoming 'freer'. It takes closer examination to discover that the methodology of calculation was actually changed, once again, in 2008.

UAE CPI (consumer price index) inflation, in 2005, was listed as 7.8%. This is not consistent with official UAE and IMF data at 6.2%.

On property rights, the report has given the UAE an unexplained lower score (40%) than some of its GCC counterparts (Saudi Arabia, Kuwait, and Bahrain, which got 50%, 55% and 60%, respectively), though the UAE was one of the first countries to introduce options for the foreign ownership of property and it has also led in introducing the legislation supporting this, with the escrow account law and the strata property rights law.

"Government size is defined to include all government expenditures, including consumption and transfers. Ideally, the state will provide only true public goods, with an absolute minimum of expenditure," said the official.

On government size, the 2008 report argues that UAE government spending equaled 25.7% of GDP. Note, however, that especially when we have unprecedented high international oil prices, it is only natural that government spending would be a huge component of GDP to finance the huge fiscal expansion to build the infrastructure necessary for ambitious growth objectives. Thus, this should not be interpreted as a factor that reduces 'economic freedom'.

The report argues that the average UAE inflation for the years 2004-2006 was 9.1%. This is exaggerated and the Ministry pointed out that average inflation for these years was 6.8%. Investment freedom is an assessment of the free flow of capital, especially foreign capital. It seems strange that the UAE would get a 30% score for this sub-component. The UAE is the highest FDI performer in the Arab world, with an FDI figure that exceeded US$ 18.6 billion in 2006.

The report noted that there were several restrictions to foreign direct investment which include "All investors face significant bureaucratic impediments and corruption. Residents and non-residents face strict restrictions on access to foreign exchange, and the government imposes many controls on international payments."

Any investor or expatriate living in the UAE knows that this is not true: there are no restrictions on access to foreign exchange. The government does not put controls on international payments. As for corruption, this is inconsistent with the relatively good score (62%) the report itself gave in the 'Freedom from Corruption Index'.

The Heritage Foundation's report has several problems, which affects the perception of potential foreign investors, researchers, as well as people around the world. Moreover, the Heritage Foundation's report flies in the face of most international reports (such as Moody's, Transparency International, and other reports), which actually put the UAE as one of the top economic performers (and sometimes the top performer) in the region.

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