EconomyPolitics 4th annual Index of Economic Efficiency of the World

The top ten countries in terms of economic efficiency for 2013:  

This is the first in a three part series where we identify the most attractive international investment opportunities for the next ten years. We start out by looking at economic efficiency, i.e. the fundamental freedoms and legal framework, which facilitates successful investing.

In doing country analysis for international investments, it is often a first step to look at sovereign bond ratings from Moody's, Fitch or S&P. However, many smaller developing countries get very little if any play at the agencies. CDS spreads, another measure of investor risk only covers 80 countries. Our index covers 127 countries.  To do so, we have looked at business and freedom indexes which assign values to sovereign attributes to gauge risk and assess opportunity. These indices attempt to measure economic freedom and a legal clarity.

There are plenty of indices by many different sources, each one looks at important factors which could influence returns and hurdle rates. But which index do you use? We have looked into four of such indices and compiled an index of indices to measure efficiency.

I have included information on five of such indices and compiled our own index of economic efficiency.  The indices include: 

• Heritage Foundation: Index of Economic Freedom
• Fraser Institute: Economic Freedom of the World
• World Economic Forum: Global Competitiveness Report
• World Bank:  Doing Business
• Euromoney Country Risk

Please download our white paper:

Economic Efficiency 2013

Correlation between Right to Work laws and Republican Voting

With Michigan passing right to work laws, I ask Interesting on many levels.

There is a high correlation between right to work laws and voting patterns.  This is a real blow to unions, even a greater blow than Scott Walker's taking away collective bargaining for government employee unions. One thing I was noticing was the high correlation between the two maps.  Almost all the North East, Great Lakes area and the left coast are all forced unionism states.

The correlation is not perfect, but there are weird patterns, such as Indiana.  India is the only great lakes state that is right to work.  It is also the only great lakes state to vote Republican in the last election.  Also, New Mexico and Colorado are the only states in the last election to vote Democrat.  They are both forced unionism states surrounded by right to work states.

Correlation is not causation however, so making Michigan a right to work state will not make it Republican.  If there is any causation, it is probably the Republican voting patterns that allow the state legislatures to pass right to work legislation.  In this case, Michigan could likely be an anomaly.

Another, more likely explanation is that right-to-work legislation is a sensible legislation which is being pushed by conservative voters, but is catching on slowly throughout the country.  In that case, the leglislation is likely to pass in other states too.  Map via NRTW:

Right to work States vs. Forced Unionism States

Blue = Democrat, Red = Republican

A Model for determining the Purpose of Governemnt

What is government?  Why are they formed?  What should the limits of government be? These are questions that run through my head often as I develop inside myself a political philosophy.  Why? So that I can compete in the great debate of ideas and so I can help share why I think my ideas are sound (I say my ideas as though they have never been thought before, but I am not that naive).  

I am going to share how I determine the roleof government.  It isn't something I've perfected, but maybe you can add your two cents in the comments.  

I start with 4 families who live on 4 plots of land with room for a road between them.  They live on the corners of an intersection of two crossing paths.  From there I think...what would cause these families feel the need to form a government.  

Try it yourself...allow that community to grow.  What are the basics needs that will bring the community together to see to common needs?   The first thing I think of is the two roads.  What about resolution to commerce disputes between the families? What about domestic disputes as the families intermarry? What about the rights of the four original families and their offspring vs. other families that seek to move in or who simply seek to do commerce with the four families?  

I start here because it simplifies things for me.  I put in different variables to see if they fit.  Stop lights...that might make sense if the intersection were to get busy.  Marriage...what if you had one man decide that the children he bore with a woman were not his (clearly they are his as he lived with the woman)?  What is the woman is unable to support herself and the kids?  What happens when the townsfolk are called upon to take care of this woman?  I guess that they wouldn't be to happy with that idea knowing that she had a mate that should be supporting her.  Maybe they create the institution of marriage as a way to bind that man legally to his family and assure that he will be responsible for them despite leaving the family home. Now, I'm not say that that is what happened...this is just my way of coming up with possible reasons for political and legal traditions we have today.  

I imagine these four families want to live in peace and freedom.  They only create government to take care of those things that no one family can deal with which I suspect is a government that starts out as a mere family council.  

I'm going to stop the example there.  But as you think about the role of government.  I suggest you use something similar to my model.  I sometimes like to use a town in the Old West for variety and because those towns sprang up just as organically as my four family example.  

Here is a modern example I have been contemplating recently.  The city where I live seems to have a lot of toll roads.  I have a problem with this.  Toll roads come about when government officials tell us that there isn't enough money to keep up the roads.  But using my example above, I think isn't building roads one of the essential purpose of government?  Where does the money go if it is not there for purpose number one (or at lease one of the top 10 reasons for government) of government?  

How about this?  Is it the government's role to start or own a business?  How does that fit into the model?  Why would those families have a need of a government owned business?  I'm not making any conclusions here.  I'm just running these things through my mind.  I go back to this model constantly when deciding whether any particular policy is the role of government.    

Another topic would be entitlement programs. How might the families feel about taking care of one of the four families?  Short term...long term.  What about paying for the education of the children of that one family AND the education of their own.  What if that one family did not contribute anything in the common fund that was used to keep up the roads and the other services of the government? 

It is a work in process for me...just thought I'd share.  I'd love to hear everyone's thoughts.

EconomyPolitics 3rd Annual Latent Growth Index 2012

The idea of Index of Incremental GDP is an extension of the previous lists. The previous two indexes have measured economic efficiency and GDP growth rates. Both are inputs into the Incremental GDP measurement. For the wise investor seeking to capture economic growth, the major inputs are included. I have included portfolio percentages as to where you should be investing to capture that growth and build a globally diversified investment portfolio.

Looking at the list, one thing stands out. Incremental GDP is coming from both the developed world and emerging markets. China stands out as the best place to capture GDP growth because demographically, it has a lot to offer, but also because the Communist China is making investments into infrastructure and increasing economic freedom. I have outlined the basics of my methodology below.

Demographics Matter… a Lot

A more populous country, with similar economic freedom will have advantages of size and scale. Greater working population translates into greater economic activity given a similar GDP per capita. Furthermore, more populous countries have a larger internal market for their goods and services. For example, India may not have a lot of Free Trade Agreements with other countries, however their internal free trade area encompasses 17% of the world’s population, more than double the size of the European Union common market. The United States currently has free trade agreements with 17 countries, but this common market is less than half the size of the internal Chinese market.

In fact, if you eyeball the countries, going down the list, it is obvious that there is a clear preference for large countries, with their inherent network effect. Note that investment bankers understood this point when they coined the BRIC (Brazil, Russia, India, China). These countries are simply the most populous developing countries, with the exception of Indonesia. South Korea, Japan, Chile, Hong Kong and Thailand were not included in BRIC because they were either too small or too developed or both.

Low GDP Brings Higher Growth Rates

The rankings uses a long term GDP outlook called Latent GDP, which looks at long term growth potential for 116 countries. Using the United States as an anchor, we looked at future GDP Per Capita of the United States, using a 2.23% real growth rate for 40 years. In that timeframe, any country that practices sensible policies of economic liberalization should be able catch up in terms of GDP Per capita. In capturing GDP per capita, we used Purchasing Power Parity (PPP) to as long term, things drift toward PPP.

Countries that are catching up in terms of GDP per capita, will have higher growth rates than countries that have less catching up to do. The greater the difference in GDP per capita, the greater the potential for growth as the county builds new infrastructure, often leapfrogging old technology with new.

But High GDP leads to Greater Aggregate Growth

At the same time, high GDP leads to a higher incremental GDP with a similar growth rates. The reason is simple: the base is higher. For Example, if you have 3% growth on a very high GDP number, the incremental GDP will be higher. Africa might have higher GDP growth rates, but their GDP numbers are inconsequential compared to the United States. For a wise investor seeking growth, they should seek incremental economic activity, or as we call it Incremental GDP. That can come from high GDP countries with a much larger base, but lower growth, just as it can come from the emerging markets with a healthy catch-up factor.

Economic Efficiency Matters

Economic Efficiency encompasses economic freedom, infrastructure, monetary policy, property rights and fiscal policy. A country that has these characteristics will naturally be in a greater position to capture growth than one that is less efficient. This becomes an input into economic growth rates which in turn affects incremental GDP.

How to structure a portfolio to capture growth

Since growth is the ultimate driver of long-term portfolio returns, ultimately we should seek growth, as measured by incremental GDP. The most compelling incremental GDP stories come from poor countries with high economic efficiency and large populations. Tailor your portfolio to capture this incremental GDP. Likewise, a rich country with low populations and little economic freedom have little to offer investors.

Feel free to use but must source back to EconomyPolitics. See the full list below.

	Country	USD GDP Per Capita	Population	Latent USD GDP Growth	Portfolio Weights
1	China	7,600	1,347,350,000	6,352	23.5%
2	India	3,500	1,210,193,422	3,376	12.5%
3	United States	47,200	313,115,000	2,602	9.6%
	EU 27		411,069,077	1,963	7.2%
4	Brazil	10,800	192,376,496	923	3.4%
5	Mexico	13,900	112,336,538	794	2.9%
6	Indonesia	4,200	237,641,326	756	2.8%
7	United Kingdom	34,800	62,300,000	529	2.0%
8	Turkey	12,300	74,724,269	496	1.8%
9	Thailand	8,700	65,926,261	430	1.6%
10	France	33,100	65,350,000	413	1.5%
11	Saudi Arabia	24,200	27,136,977	375	1.4%
12	Malaysia	14,700	28,334,135	327	1.2%
13	Canada	39,400	33,476,688	316	1.2%
14	Japan	34,000	127,770,000	302	1.1%
15	South Korea	30,000	48,580,000	298	1.1%
16	Colombia	9,800	46,407,000	295	1.1%
17	Egypt	6,200	81,625,000	289	1.1%
18	Australia	41,000	22,847,458	273	1.0%
19	Philippines	3,500	94,013,200	270	1.0%
20	Russia	15,900	143,030,106	262	1.0%
21	Spain	29,400	46,196,278	261	1.0%
22	Nigeria	2,500	162,471,000	248	0.9%
23	Pakistan	2,500	178,874,000	242	0.9%
24	Vietnam	3,100	87,840,000	216	0.8%
25	United Arab Emirates	49,600	8,264,070	210	0.8%
26	South Africa	10,700	50,586,757	207	0.8%
27	Germany	35,700	81,796,000	207	0.8%
28	Peru	9,200	29,797,694	204	0.8%
29	Italy	30,500	60,776,531	195	0.7%
30	Chile	15,400	17,248,450	182	0.7%
31	Poland	18,800	38,092,000	174	0.6%
32	Bangladesh	1,700	142,319,000	162	0.6%
33	Iran	10,600	76,146,000	156	0.6%
34	Argentina	14,700	40,117,096	108	0.4%
35	Morocco	4,800	32,481,700	108	0.4%
36	Taiwan	35,700	23,230,506	104	0.4%
37	Israel	29,800	7,836,300	87	0.3%
38	Ethiopia	1,000	84,320,987	82	0.3%
39	Kazakhstan	12,700	16,674,000	80	0.3%
40	Netherlands	40,300	16,725,902	79	0.3%
41	Kenya	1,600	38,610,097	73	0.3%
42	Sri Lanka	5,000	20,653,000	70	0.3%
43	Romania	11,600	19,042,936	67	0.2%
44	Singapore	62,100	5,183,700	66	0.2%
45	Ghana	2,500	24,233,431	66	0.2%
46	Algeria	7,300	37,100,000	61	0.2%
47	New Zealand	27,700	4,439,700	59	0.2%
48	Guatemala	5,200	14,713,763	59	0.2%
49	Tunisia	9,400	10,673,800	58	0.2%
50	Uganda	1,300	32,939,800	56	0.2%
51	Tanzania	1,400	43,188,000	50	0.2%
52	Portugal	23,000	10,561,614	49	0.2%
53	Hungary	18,800	9,985,722	43	0.2%
54	Azerbaijan	10,900	9,111,100	42	0.2%
55	Ukraine	6,700	45,644,419	42	0.2%
56	Hong Kong	45,900	7,103,700	42	0.2%
57	Ireland	37,300	4,581,269	40	0.1%
58	Sweden	39,100	9,482,855	40	0.1%
59	Czech Republic	25,600	10,548,527	38	0.1%
60	Oman	25,600	2,773,479	37	0.1%
61	Denmark	36,600	5,580,516	35	0.1%
62	Switzerland	42,600	7,870,100	32	0.1%
63	Dominican Republic	8,900	9,378,818	32	0.1%
64	Qatar	179,000	1,699,435	31	0.1%
65	Ecuador	7,800	14,483,499	30	0.1%
66	Slovakia	22,000	5,445,324	29	0.1%
67	Syria	4,800	21,465,000	29	0.1%
68	Zambia	1,500	13,046,508	29	0.1%
69	Kuwait	48,900	2,818,000	28	0.1%
70	Finland	35,400	5,405,300	28	0.1%
71	Panama	13,000	3,405,813	28	0.1%
72	Belgium	37,800	10,839,905	27	0.1%
73	Jordan	5,400	6,272,600	27	0.1%
74	Costa Rica	11,300	4,301,712	26	0.1%
75	Honduras	4,200	8,215,313	25	0.1%
76	Bahrain	40,300	1,234,571	22	0.1%
77	Rwanda	1,100	10,718,379	22	0.1%
78	Bulgaria	13,500	7,364,570	22	0.1%
79	Yemen	2,700	23,833,000	22	0.1%
80	El Salvador	7,200	6,227,000	21	0.1%
81	Cameroon	2,300	19,406,100	19	0.1%
82	Paraguay	5,200	6,337,127	19	0.1%
83	Bolivia	4,800	10,426,154	19	0.1%
84	Georgia	4,900	4,469,200	18	0.1%
85	Papua New Guinea	2,500	7,014,000	18	0.1%
86	Madagascar	900	20,696,070	17	0.1%
87	Nepal	1,200	26,620,809	16	0.1%
88	Botswana	14,000	2,031,000	16	0.1%
89	Lithuania	16,000	3,195,700	16	0.1%
90	Austria	40,400	8,419,776	16	0.1%
91	Serbia	10,900	7,120,666	15	0.1%
92	Côte d'Ivoire	1,800	21,395,000	14	0.1%
93	Uruguay	13,700	3,203,792	14	0.1%
94	Mozambique	1,000	23,049,621	14	0.1%
95	Burkina Faso	1,200	15,730,977	13	0.0%
96	Senegal	1,900	12,855,153	13	0.0%
97	Croatia	17,400	4,290,612	13	0.0%
98	Norway	54,600	4,997,000	13	0.0%
99	Cambodia	2,100	13,395,682	13	0.0%
100	Belarus	13,600	9,465,400	12	0.0%
101	Armenia	5,700	3,268,500	11	0.0%
102	Mali	1,200	14,517,176	11	0.0%
103	Lebanon	14,400	4,259,000	11	0.0%
104	Uzbekistan	3,100	28,000,000	11	0.0%
105	Mauritius	14,000	1,280,924	10	0.0%
106	Nicaragua	3,000	5,815,524	10	0.0%
107	Albania	8,000	2,831,741	10	0.0%
108	Cyprus	21,000	838,897	10	0.0%
109	Malawi	800	13,077,160	10	0.0%
110	Macedonia	9,700	2,057,284	10	0.0%
111	Namibia	6,900	2,324,000	9	0.0%
112	Kyrgyzstan	2,200	5,477,600	9	0.0%
113	Mongolia	3,600	2,736,800	9	0.0%
114	Jamaica	8,300	2,705,800	9	0.0%
115	Niger	700	16,274,738	9	0.0%
116	Benin	1,500	9,100,000	8	0.0%
117	Latvia	14,700	2,049,500	7	0.0%
118	Luxembourg	82,600	511,840	7	0.0%
119	Bosnia and Herzegovina	6,600	3,839,737	6	0.0%
120	Gabon	14,500	1,534,000	6	0.0%
121	Slovenia	28,200	2,056,680	6	0.0%
122	Estonia	19,100	1,316,541	5	0.0%
123	Tajikistan	2,000	7,616,000	5	0.0%
124	Moldova	2,500	3,560,400	5	0.0%
125	Congo DRC	300	67,758,000	5	0.0%
126	Sierra Leone	900	5,997,000	4	0.0%
127	Togo	900	5,753,324	4	0.0%
128	Angola	8,200	20,609,294	3	0.0%
129	Haiti	1,200	10,085,214	3	0.0%
130	Trinidad and Tobago	21,200	1,317,714	3	0.0%
131	Guinea	1,000	10,217,591	3	0.0%
132	Brunei	51,600	422,700	2	0.0%
133	Bahamas	28,700	353,658	2	0.0%
134	Fiji	4,400	868,000	2	0.0%
135	Gambia	1,900	1,776,000	2	0.0%
136	Congo	4,100	4,140,000	2	0.0%
137	Montenegro	10,100	620,029	2	0.0%
138	Iceland	38,300	319,575	2	0.0%
139	Greece	29,600	10,787,690	1	0.0%
140	Belize	8,400	312,698	1	0.0%
141	Mauritania	2,100	3,340,627	1	0.0%
142	Lesotho	1,700	2,194,000	1	0.0%
143	Sudan	2,300	30,894,000	1	0.0%
144	Swaziland	4,500	1,203,000	1	0.0%
145	Equatorial Guinea	36,600	720,000	1	0.0%
146	Liberia	500	3,476,608	1	0.0%
147	Guyana	7,200	784,894	1	0.0%
148	Bhutan	5,500	708,265	1	0.0%
149	Antigua and Barbuda	16,400	89,138	1	0.0%
150	Solomon Islands	2,900	542,287	1	0.0%
151	Laos	2,500	6,348,800	1	0.0%
152	Cape Verde	3,800	491,575	1	0.0%
153	Suriname	9,700	529,000	1	0.0%
154	St. Vincent and the Grenadines	10,300	100,892	0	0.0%
155	Samoa	5,500	184,032	0	0.0%
156	Vanuatu	5,100	234,023	0	0.0%
157	Comoros	1,000	754,000	0	0.0%
158	Guinea-Bissau	1,100	1,520,830	0	0.0%
159	Maldives	6,900	317,280	0	0.0%
160	Kiribati	6,200	101,000	0	0.0%
161	Seychelles	23,200	90,945	0	0.0%
162	Djibouti	2,800	906,000	0	0.0%
163	Tonga	6,100	103,036	0	0.0%
164	Dominica	10,400	71,685	0	0.0%
165	Burundi	300	8,575,000	0	0.0%
166	St. Kitts and Nevis	13,700	51,970	0	0.0%
167	Grenada	10,200	110,821	0	0.0%
168	Central African Republic	700	4,487,000	0	0.0%
169	Sao Tome	1,800	169,000	0	0.0%
170	Eritrea	600	5,415,000	(1)	0.0%
171	Chad	1,600	11,274,106	(1)	0.0%
172	Zimbabwe	500	12,754,000	(1)	0.0%
173	Afghanistan	900	24,485,500	(2)	0.0%
174	Iraq	3,800	33,330,000	(7)	0.0%
175	Myanmar	1,400	48,337,000	(11)	0.0%
176	Venezuela	12,700	27,150,095	(13)	0.0%

endoflist