Challenging the report published recently by the Heritage Foundation and Wall Street Journal, ranking the UAE 63rd out of 157 in a list of the world's freest economies with an overall score of 62.8, Aref Al Farra, Senior Economic Advisor to the Ministry of Economy, said the "information was based on faulty data and a questionable and non-uniform methodology which renders the report unreliable."

Lashing out at the report's inconsistent methodology, he pointed out that frequent changes in methodology weaken the reliability of the report and makes a researcher wonder if  2009 and subsequent years will witness similar changes "The report for 2007 had a different methodology than the report in 2006 and before. And the report for 2008 used different methodology than the one used for 2007. "

The Heritage Foundation's report has several problems, which affect 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," Al Farra said.

He pointed out 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. "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."

Outlining the discrepancies in the report, he said the UAE's average score increased from being "60.4 per cent free" in the 2007 report to being "62.8 per cent free" in the 2008. "However, the 2008 report claims that the "overall score is 0.1 percentage point lower than last year. Upon first reading, these results are counter-intuitive. One wonders how the percentage decreased if the UAE economy is becoming 'more free'?  It takes closer examination to discover that the methodology of calculation was actually changed, once again, in 2008."

Another discrepancy, Al Farra pointed out was UAE's CPI (consumer price index) inflation which was listed as 7.8 per cent in 2005 . This is not consistent with official UAE and IMF data of 6.2 per cent. On property rights, the report has given the UAE an unexplained lower score (40 per cent) than some of its GCC counterparts (Saudi Arabia, Kuwait, and Bahrain, which got 50 per cent, 55 per cent and 60 per cent, respectively), though the UAE was one of the first countries to introduce options for the foreign ownership of property.

On government size, the 2008 report argues that government spending equalled 25.7 per cent of GDP. "When we have unprecedentedly 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," he argued. Al Farra also questioned the report's contention that the average inflation for the years 2004-2006 was 9.1 per cent. "This is exaggerated; average inflation for these years was 6.8 per cent."

"Investment freedom is an assessment of the free flow of capital, especially foreign capital.  It seems strange that the UAE would get a 30 per cent score for this sub-component. The UAE is the highest FDI performer in the Arab World, with an FDI figure that exceeded  $ 18.6 billion in 2006."

BY ISSAC JOHN (Deputy Business Editor)

© Khaleej Times 2008

 

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