The index of economic freedom: methodological matters

Abstract

Purpose The purpose of this paper is to deal with methodological issues in the Index of Economic Freedom (IEF) building by using principal components analysis (PCA) and benefit of the doubt (BOD) methods to generate component- and country-specific weights in computing the scores. Design/methodology/approach The paper uses endogenous model and country-specific weight system to generate country-specific score unlike the equal weight used by the Heritage Foundation. Findings The PCA and BOD analyses provide consistent results that differ dramatically with the baseline ones (results using equal weights). Research limitations/implications The limitation of the paper is that the results change depending on the method used. Practical implications Given results provided by the PCA and BOD analysis, the IEF would receive broad legitimacy basing the calculation of its scores on endogenous weighting models. Social implications As composite indicators are essential in public debates and policies, their construction must be objective and well-known by a large public, making the methodological matters in composite indexes building one of the big challenge to researchers and a major democratic issue. Originality/value The originality of the paper is to use endogenous approach to generate weights and countries’ scores.