The Index of Economic Freedom: Methodological matters

Composite indicators (CIs) are essential in public debates and policies so the social demand for synthetic tools is constantly increasing. They are also subject to criticism (see Saisana and Saltelli 2010; Klugman et al., 2011) due to lack of a gold standard in their construction. The Index of Economic Freedom (IEF) is one of these tools subject to criticism because it suffers from methodological matters. The IEF lacks statistical validity because two of its components are strongly and negatively correlated with the others. Both components are causing significant variations in 95 percent of countries ranked. This paper deals with these issues by using Principal Components Analysis (PCA) and Benefit Of the Doubt (BOD) methods to generate component and country specific weights in computing the scores. The PCA and BOD analyses provide consistent results that differ dramatically with the baseline ones (results using equal weights). Given stable results provided by the PCA and BOD analysis, the IEF would receive broad legitimacy basing the calculation of its scores on endogenous weighting models