DEVELOPMENT
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to the conclusion that differences in economic freedom<br />
cause an approximate 2% fluctuation in economic growth<br />
annually. The author of this study has also reached the<br />
same conclusion (Sepp 2006).<br />
The Heritage Foundation rankings are led by Hong<br />
Kong and Singapore; in Europe, by Great Britain and Ireland.<br />
Estonia’s position in the HF ranking is also good; in<br />
2005, even culminating with 4th place in the world. In<br />
2007, Estonia was 12th, and 16th in 2012, between Finland<br />
and the Netherlands; Estonia places seventh, when<br />
the ranking is limited to Europe. Starting in 2007, the<br />
impact of the economic crisis has caused a negative trend<br />
in the composite index of Estonia’s economic freedom,<br />
which on a scale of 1 to 100 fell from 78 to 73 points.<br />
The main reason is the decline in the assessment given to<br />
government spending, which fell to 38.8 points. This was<br />
lower only in 2000. Another problem is labour market<br />
freedom and freedom from corruption. The remaining<br />
components steadily score over 70 points, and therefore<br />
are not directly affected by the economic situation<br />
(see Figure 4.1.3).<br />
A more detailed ranking of business freedom is<br />
provided by the World Bank (see Annex). The ranking<br />
is led again by Singapore and Hong Kong, and Denmark<br />
and Norway in Europe. In the ranking of the world’s<br />
states during the last year, Estonia has dropped two<br />
places, being 21st in the world in 2013, and 14th among<br />
OECD states between Germany and Japan.<br />
Figure 4.1.4 shows that Estonia’s weaknesses and<br />
strengths are quite graphic. If goods markets are very<br />
open, and the registration of property is simple, greater<br />
problems are related to bankruptcy proceedings and<br />
investor protection. It is noteworthy that the World Bank<br />
is no longer assessing business freedom in the context<br />
of the labour market. Earlier research gave Estonia a<br />
damning assessment in this regard. Therefore, the situation<br />
in the labour market is dealt with separately, in<br />
sub-chapter 4.3.<br />
4.1.3<br />
Quality of governance<br />
Another possibility for assessing the quality of institutions<br />
is related to the concept of governance. The empirical<br />
basis for this is provided by the World Bank’s Worldwide<br />
Governance Indicators (WGI). Essentially, Kaufmann, et<br />
al. (2010) defines governance as traditions and institutions<br />
by which the authority in a state is exercised. Thereafter,<br />
it is divided into three dimensions, each of which is<br />
characterised by two indicators.<br />
Unlike the concept of business freedom, the political<br />
institutions are also considered. The first two indicators<br />
are related to the rules for electing a government, controlling<br />
it and dispersing it. The first indicator, called<br />
Voice and Accountability, measures the participation of<br />
the citizenry in democratic processes, and the freedom of<br />
opinion and assembly. The second dimension characterises<br />
political freedom, and the extent of terror and political<br />
violence in each state, and examines the ability of the<br />
government to formulate and execute economic policy.<br />
The first indicator of this dimension measures the general<br />
effectiveness of the government, including assessments of<br />
the quality of officialdom, and of political independence.<br />
The second indicator characterises regulatory quality,<br />
based on the impact of regulations on economic development,<br />
primarily by supporting the private sector.<br />
The third dimension of the quality of governance<br />
presumes that the citizenry and the state respect the<br />
economic and political institutions. In this connection,<br />
the rule of law is first evaluated, which is related to the<br />
protection of property rights and the enforcement of contracts.<br />
At the same time, corruption is also measured as a<br />
means of abusing public office for private economic gain.<br />
Thereby a total of six indicators are assembled,<br />
behind each of which there are numerous sub-indicators,<br />
a total of 31. 10 The sources include surveys of individuals<br />
and companies, expert opinions from officials (e.g.<br />
the World Bank, African Development Bank, U.S. State<br />
Department, etc.), information from nongovernmental<br />
organisations (e.g. Reporters Without Borders) and economic<br />
information from commercial sources (e.g. Economist<br />
Intelligence Unit). In this report, when assessing the<br />
Figure 4.1.5<br />
The development reserve of the reference states as<br />
the difference between the rankings for income and the<br />
average of the economic environment indicators.<br />
Slovenia<br />
Israel<br />
Singapore<br />
Hungary<br />
Austria<br />
Slovakia<br />
Netherlands<br />
Czech Republic<br />
Uruguay<br />
Switzerland<br />
South Korea<br />
Costa Rica<br />
Canada<br />
Denmark<br />
Ireland<br />
Finland<br />
Estonia<br />
Chile<br />
New Zealand<br />
-20 -10 0 10 20<br />
-20 -10 0 10 20<br />
10 Here we also conducted our own factor and regression analysis. By using the data on the reference states, two latent factors appeared, whereas<br />
the first of these is related, primarily, to economic traits, and the other, to political traits. The previously mentioned regularity was confirmed,<br />
namely, that political factors by themselves do not correlate with economic development. On the other hand, the quality of economic institutions<br />
(first factor) was closely connected to the achieved level of earning, and statistically significant.<br />
154<br />
Estonian Human Development Report 2012/2013