Model For Measuring National Global Performance Economics Essay

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Economic arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom (Friedman, 1962).

Shaanan (2009) emphasize that unrestricted economic freedom enhances our economic and political well being. On the other hand, he demonstrates that while economic freedom provides benefits, its unchecked version, including the right to profit through government, inflicts a heavy toll on democracy, free markets and, paradoxically, on economic freedom itself.

Others authors (Stansel and Swaleheen, 2007) demonstrate in their studies that „for countries with low economic freedom (where individuals have limited economic choices), corruption reduces economic growth. However, in countries with high economic freedom, corruption is found to increase economic growth. Our results contradict the generally accepted view that corruption lowers the rate of growth… Thus, in economies where economic freedom is high, if bribing makes public officials less diligent in enforcing restrictions on firms' activities, output will increase. However, corruption will restrict output when bribes reduce competition and increase market rigidities”.

Economic freedoms generate growth primarily because they promote underlying productive private-sector entrepreneurial activity (Kreft and Sobel, 2005).

The Heritage Foundation postulates that economic freedom is "the absence of government coercion or constraint on the production, distribution or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself” (Cummings, 2000).

Heritage Foundation and Wall Street Journal proposed for calculating an index to measuring the economic freedom - Index of Economic Freedom (IEF). This index emphasizes the link between economic opportunity and prosperity.

According to the same source, the ten pillars of IEF are: business freedom, trade freedom, fiscal freedom, government freedom, monetary freedom, investment freedom, financial freedom, property freedom, freedom from corruption, labor freedom.

Countries with an IEF between: 100-80 are free; 79.9-70 are mostly free; 69.6-60 are moderately free; 59.9-50 are mostly unfree; 49.9-0 are repressed.

2.2 National Competitiveness - Global Competitiveness Index

The literature on competitiveness offers a wide variety of definitions. In an interview for World Economic Forum about Global Competitiveness Report 2005/2006, Michael Porter (2005) has chosen a definition for competitiveness that is simple to understand, while it simultaneously incorporates those key elements which combined produce a competitive economy: “Competitiveness is the ability to achieve success in markets leading to better living standards for all. It is based on a number of factors, a notably firm level competitiveness and a supportive business environment that encourages innovation and investment, which combined lead to strong productivity growth, real income gains and sustainable development”. The competitiveness of a nation is from Porter's point of view national productivity. An increase in competitiveness in one country does not come at the expense of another. On the contrary, raised productivity and efficiency in different countries can and must be integrated and mutually reinforced.

For ranking the countries after competitiveness, the Word Economic Forum calculated Global Competitiveness Index (GCI), that taking into consideration 12 pillars, as follows: institutions; infrastructure; macroeconomic stability; higher education and training; goods market efficiency; labor market efficiency; financial market sophistication; technological readiness; market size, business sophistication; innovation.

2.3. Country Risk Classification

Country risk is generated by the interaction of many factors political, economic and social and acts as a complex relationship, which affects all international economic transactions.

According to Alexe, Hammer, et al. (2005) country risk is the risk that a country defaults on its obligations. The existing literature on the topic recognizes financial/economic and political components of country risk. According to the degree to which some of these components are emphasized, country risk is viewed either from the financial/economic perspective only, or from the financial/economic and political perspectives combined.

Given that no country can survive autarchic requires measuring and evaluating country risk so that losses are smaller and gains bigger.

OECD calculated country risk by a methodology that allows to identify a score in the interval 0-7, where 0 is no country risk, and 7 represents the highest level of country risk.

2.4. Knowledge Economy - Knowledge Economy Index

It is not a new idea that knowledge plays an important role in the economy, nor is it a new fact. All economies, however simple, are based on knowledge about how, for example, to farm, to mine and to build; and this use of knowledge has been increasing since the Industrial Revolution. But the degree of incorporation of knowledge and information into economic activity is now so great that it is inducing quite profound structural and qualitative changes in the operation of the economy and transforming the basis of competitive advantage. (Houghton and Sheehan, 2000). In their view, the emergence of the knowledge economy can be characterized in terms of the increasing role of knowledge as a factor of production and its impact on skills, learning, organization and innovation.

Knowledge economy is, according to Brinkley (2006) one in which the generation and exploitation of knowledge has come to play the predominant part in the creation of wealth. It is not simply about pushing back the frontiers of knowledge; it is also about the most effective use and exploitation of all types of knowledge in all manner of economic activity”.

With sustained use and creation of knowledge at the center of the economic development process, an economy essentially becomes a knowledge economy. Chen and Dahlman (2005) emphasize that a knowledge economy is one that utilizes knowledge as the key engine of economic growth. It is an economy where knowledge is acquired, created, disseminated and used effectively to enhance economic development.

Various authors (Veugelars and Mrak, 2009) describe development economy as a knowledge economy, or an information society. But the rules and practices that determined success in the knowledge economy of the 21st century need rewriting in an interconnected world where resources such as know-how are more critical than other economic resources.

The World Bank Institute's Knowledge for Development Program (K4D) helps build the capacity of countries to access and use knowledge to become more competitive and improve growth and welfare. K4D helps countries assess how they compare with others in their ability to compete in the global knowledge economy.

The World Bank, KAM methodology, proposed for calculating an index to measuring the knowledge economy - Knowledge Economy Index (KEI).

According to World Bank the Knowledge Economy Index (KEI) takes into account whether the environment is conducive for knowledge to be used effectively for economic development. It is an aggregate index that represents the overall level of development of a country or region towards the Knowledge Economy.

The four pillars of the knowledge economy framework and for the Knowledge Economy Index (KEI) are (Chen and Dahlman, 2005): Economic incentive and institutional regime; Education; Innovation; Information and Communication Technology.

2.5. Human development - Human development Index

3. Methodology and empirical results

5. References

  • Brinkley, I. (1998) in Defining the knowledge economy, Knowledge economy programme report, DTI Competitiveness White Paper, The Work Foundation, 206.

  • Chen, D., Dahlman, C. (2005) The Knowledge Economy, the KAM Methodology and World Bank Operations, World Bank Institute, Working Paper No. 37256,

  • Cummings, J. (2000) Economic freedom indices: their use as tools for monitoring and evaluation, SCS Working Paper Number 00/01, April,

  • Friedman, M. (1962) Excerpts from Milton Friedman, Capitalism and Freedom, Chapter 1, "The Relation between Economic Freedom and Political Freedom," pp. 7-17,

  • Houghton, J., Sheehan, P. (2000) A Primer on the Knowledge Economy, Centre for Strategic Economic Studies, February,

  • Kreft, S., Sobel, R. (2005) Public policy, entrepreneurship, and economic freedom, Cato Journal, Vol. 25, No. 3, Fall 2005.

  • Miller, T., Holmes, K., Kim, A., Markheim, D., Walsh, C. (2010) 2010 Index of Economic Freedom, The Heritage Foundation and Dow Jones & Company, Inc..

  • Shaanan, J. (2009) Economic Freedom and the American Dream, Palgrave Macmillan, December.

  • Solomon, E. (1989) The Economy in a Free Society, The Free Society Papers,

  • Stansel, D., Swaleheen, M.(2007) Economic freedom, corruption, and growth. CATO Journal

  • Veugelers, R., Mrak, M. (2009) The Knowledge Economy and Catching-up Member States of the European Union, Report prepared for Commissioner's Potocnik's Expert Group, “Knowledge for Growth”, May.

  • WB (2009) Measuring Knowledge in the World's economies, Knowledge for Development, World Bank,



  • Interview With Michael Porter About The Global Competitiveness Report 2005-2006, World Economic Forum

  • Alexe S., Hammer P. L., Kogan A. and Lejeune M. A. 2003a. Country Risk Rating Based on Pairwise Comparisons. Piscataway, New Jersey, RUTCOR, Rutgers University