N K Unnikrishnan: It's more about social welfare

Just as beauty lies in the eyes of the beholder, the meaning of economic freedom too varies, and varies widely. Naturally, quantification of economic freedom is indeed difficult.

There are wide disparities among states in terms of the quality of governance, social welfare measures, investment climate, role of religion and politics in public life and so on. Many of the positive developments in the sphere of social welfare had originated from social reformers such as Mahatma Phule and Sree Narayana Guru. Some of the struggles undertaken by them could be viewed as struggles for social equality and, equally, as struggles for economic freedom. Entry of dalits into temple premises is just one such example. The disparity that is visible at present is the sum of such evolution. Thus, tools of social change cannot be separated into watertight compartments of social welfare (as measure by, say, Human Development Index or HDI) and economic freedom.

Thus, in a country like India, it is indeed a difficult, if not impossible, task to measure economic freedom, which is distinct from, say, HDI.

Let me illustrate this with actual numbers. First, compare the Economic Freedom Index (EFI), reported by Bibek Debroy and Laveesh Bhandari, with HDI. Human Development Indices (HDIs) available for 1991 are of limited usage now, mainly due to formation of new states. However, HDIs for 2001 are available only for 15 major states.

A graph plotting the two indicates a strong linkage between EFI and HDI. Correlation between EFI and HDI-1991 is 0.51, which is statistically significant, and correlation between EFI and HDI-2001 is even higher at 0.57.

For further illustration, let us look at state-wise ratios of population above poverty line, the ratio of "non-poor". The headcount poverty ratios for 1999-2000 are used to compute the ratios of "non-poor". As in the case of HDI, the poverty ratios are not available for three states, and are excluded here. The graph plots EFI-2005 and the ratio of "non-poor" for 17 states, along with a polynomial trend line of the latter; note the difference in scales for the two variables. Except for top three states, EFI-2005 are almost identical with this trend line. Whatever be the data inputs and methodology adopted by the Debroy-Bhandari team, EFI-2005 seems to be a "smoothed version" (except for an intercept term, in the sense of statistical regression) of the ratios of "non-poor", at least for most of the states. The conclusion is too obvious to state: namely that the "information content" in EFI not much more than that in a simple smoothed version of the ratio of "non-poor".

It should be stressed that this is not a criticism of the methodology of constructing EFI. Rather, it is to stress difficulties inherent in meaningfully measuring economic freedom as a distinct entity from measures of social welfare. These two parameters seem to be intertwined, and due to historical reasons, more so among the states of India.

Finally, it would be surprising if the level of economic freedom undergoes dramatic changes in a single year. Such changes are more likely to be due to changes and refinements in methodology and data inputs than a reflection of social realities.

The writer is Assistant Adviser, Department of Statistical Analysis & Computer Services, Reserve Bank of India.
Views expressed are personal.