Customizing The Index

Customizing the Index:

Placing Value on the Variables

 

The 63 variables in the Wealth of Nations Index are evenly weighted. GDP growth, for example, carries the same weight as access to safe drinking water and cellular phones per capital.Depending on ones perspective, however, one variable will hold more value than another. And some variables may be irrelevant.

To give a sense of how the Index might be used by different companies or institutions, the March 2002 Index was cross-cut and customized in two ways:

  • the creation of 5-variable subsets to focus on one distinct need or purpose
  • weighted with values provided by different practitioners.

FDI/Investor Scorecard:

Taking a Corporate Perspective

The following list shows the five variables chosen to represent Opportunity for Investors, Stability of Economic Platform, and General Business Climate. Each variable is equally weighted; the three subsets taken together form a general FDI/Investment ScorecardOpportunity for Investors: GNI (Gross National Income) per capita,Portfolio Investment (liability), Savings (GDPHousehold Consumption),Trade as % of GDP, IT/Telecom Expenditures as % of GDP.

Stability vs Risk: Territorial disputes, Interest rate spread over LIBOR (London Interbank Overnight Rate), Inflation, Press Freedom Index, Unemployment.

General Business Climate: Currency controls (Section VIII), Rule of Law, Corruption Perceptions Index, Economic Freedom Index, Commercial Property Protection.

Weighing the Variables:

Who Needs Safe Drinking Water?

 

A foreign director investor, a global asset manager, and an international development expert weighted the variables on a scale of 0 to 10. For example, the foreign direct investor ranked GDP growth as 9, and access to safe drinking water as 0. The development expert ranked life expectancy at 7, while the asset manager put it at 5 and the direct investor at 3.The Index was then recalculated three ways, based on weightings from the three experts.