EQx is a Political Economy
Global Index

The Index ranks the world’s countries by Elite Quality. Elite Power – i.e. the ability of elites to set up extractive business models in the future – as well as actual Value Creation vs Extraction in the Economic and Political dimensions, are measured on the basis of dozens of Indicators.  

How is the Index Structured ?

The Index is based on a 4-level architecture allowing for both an overall quantification of a country’s EQx,  as well as an in-depth analysis of specific political economy dimensions. 

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Level 1

Index (x1)

1 of 4
Level 2

Sub-Index (x2)

Index Areas (x4)

2 of 4
Level 3

Pillars (x12)

3 of 4
Level 4

Indicators (x72)

4 of 4

EQx Levels in Depth

Explore each level, its logic and components.

Index

Level 1

Elite Quality Index (EQx)

The Country Score and Global Rank provide an assessment of elite Value Creation (vs Value Extraction). The evidence-based, comparative Index aims to be a leading indicator of human development and economic growth.

What is the concept behind our Index?

Let’s assume that elite`s business models are key determinants of a nation’s future prosperity and human welfare. In any political economy, there are essentially two kinds of business models; on one hand, Value Creation models like new biotech drugs developed by innovative pharma or start-ups. On the other, Value Exraction models and rent seeking models, such as monopolies or trade barriers that result in higher prices. In 2019, Martin Wolf, Chief Economist of the Financial Times, suggested in a memorable FT article that even in liberal democracies there might be plenty of rent seeking models by “rentier capitalists”.

The EQx Index aims to operationalize political economy concepts by equating them to actual levels of Value Creation and Rent Seeking.

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Sub-Indices and Index Areas

Level 2

Power

Value

The Index can be divided in 2 Sub-Indices: Power and Value. Power is seen as a necessary condition for Value Extraction and rent seeking since Value Extraction business models require Power to operate. The Power Sub-Index I is thus the indicator of potential future Value Extraction.

Both Sub-Indices in turn include a Political and an Economic Dimension. This yields 4 Index Areas: on the Power Sub-Index, Political Power (i) and Economic Power (ii); on the Value Sub-Index, Political Value (iii) and Economic Value (iv).

Power Sub-Index I

Power refers to the elite’s capacity to enforce their preferences on the political economy; Power is thus an Indicator of potential future Value Extraction​.

Economic Power (ii)

Measure elite dominance in the economy: at the firm level, at the industry level, and in terms of creative destruction.

Political Power (i)

Measures the capture
of 3 kinds of rules: rules of the state, business regulations, and the rules of human labor.

Value Sub-Index II

Value Creation sees outputs more valuable than inputs. Elite business models are somewhere in the range between Value Creation, at one extreme, and Value Extraction/Rent Seeking on the other.

Economic Value (iv)

Measures Value Extraction from the economy's 3 markets: products and services, capital markets, and labor markets.

Political Value (iii)

Measures Value in the political dimension: as the state's unearned income, its taking of income, and its giving of income.

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Pillars

Level 3

The 12 EQx Pillars each capture a specific element of the Economic and Political Power/Value complex present in our countries. The purpose of the Pillars is to define and form conceptual lenses through which we can approach, understand and measure specific phenomena. They comprise a weighted sum of expertly chosen Indicators which numerically evidence present or future potential Value Creation or rent seeking.

Each Pillar is conceptually consistent with one of the four Index Areas. Each of the 3 Pillars forming an Index Area has been assigned its own weight within its Index Area.

Political Power (i)

State Capture (i.1)

Regulatory Capture (i.2)

Human Capture (i.3)

Economic Power (ii)

Industry Dominance (ii.4)

Firm Dominance (ii.5)

Creative Destruction (ii.6)

Political Value (iii)

Giving Income (iii.7)

Taking Income (iii.8)

Unearned Incomen (iii.9)

Economic Value (iv)

Producer Rent (iv. 10)

Capital Rent (iv.11.)

Labor Rent (iv.12)

Political Power Pillars

Measure the capture of three kinds of rules:
The rules of the state, the rules of business regulation, and the rules for labor markets and civil service jobs

State Capture

Pillar i.1, State Capture focuses on the direct capture by distributional coalitions of the state and its government branches. This Pillar measures diverse manifestations of elite power ranging from political centralization to gender parity at the state’s top echelons. Specific Indicators measure Social Mobility (MOB, i.1) and any evidence that the state has been captured, as for instance evidenced by Political corruption (COR, i.1).​

Regulatory Capture

Pillar i.2, Regulatory Capture measures the extent to which rules and regulation, or the making thereof, have been captured by special interests. The Pillar includes Administrative decentralization (AED, i.2) and Crony capitalism (CRO, i.2), derived from an index proposed by The Economist1, which measures wealth derived by billionaires from rent-heavy industries as a signal of the successful capture of regulators or legislators. It also incorporates the World Bank’s widely-recognized Ease of Doing Business Index which measures the quality of a country’s institutions and regulatory environment.​

Human Capture

Pillar i.3, Human Capture attempts to measure the power of labor and civil service coalitions, including their privileges in the political system. This might be reflected by their ability to influence their own wages and working conditions. In this Pillar, evidence of their Political Power is measured by Unionization rates (UNI, i.3), or Public sector employees as % of total employment (PSE, i.3). Other areas of human capture are operationalized by the Women, Business and the Law (WBL, i.3) Indicator, or the extreme phenomena of modern slavery by the Global Slavery Index (GSI, i.3).​

Economic Power Pillars

Measure elite dominance in the economy:
First at the industry level, then at the single business level, and lastly, the opposite of dominance, i.e. creative destruction.

Industry Dominance

Pillar ii.4, Industry Dominance
measures a national economy’s diversity. Influence of a
country’s dominant industries in the political economy is assessed by Indicators measuring, for instance, the relative export volumes, revenues, or profits of leading industries as percentage of GDP. The Pillar also includes Indicators like the Economic Complexity Index
(ECI, ii.4) measuring the “amount of productive knowledge”2
implied in a country’s export structures.

Firm Dominance

Pillar ii.5, Firm Dominance measures the degree of power concentration in the hands of a nation’s leading firms. To that effect, the Pillar examines, for instance, the Top 10 firms market capitalization as % of GDP (FKG, ii.5), as well as the number of Small and medium sized enterprises per 1,000 people (SME, ii.5). Indicators further considered will be measurements of policies designed to maintain healthy levels of competition and limits to Economic Power.

Creative Destruction

Pillar ii.6, Creative Destruction estimates the pressures for renewal and disruption in an economy. Borrowing Schumpeter’s concept3, one focus is entrepreneurs whose role is to challenge incumbents and drive economic growth. The  Pillar first considers the“destruction” part of the process for instance by measuring the Listed firms turnover, long run 15 years / short run 3 years (TUL/TUS, ii.6) and the Firm entry/exit ratio (ENR/EXR, ii.6). Then, it considers the forces fostering “creation” in the economy, such as the all-important level Entrepreneurship (ENT, ii.6) or VC (venture capital) finance (VCK, ii.6).​

Political Value Pillars

Measure Value Creation (≠ Extraction) in the political dimension:
Political rent is conceptualized as the state’s unearned income, as well as the state’s taking and giving of income.

Giving Income

Pillar iii.7, Giving Income focuses on how the government uses and manages public finances. Redistribution of state income in the form of Subsidies and transfers as % of expenses (SNT, iii.7) is an important Indicator of this Pillar; many of these processes often divert resources away from most efficient uses and create hidden cost 4. The Pillar also evaluates Indicators conducive to Value Creation, like public education provision or health including Covid-19 safety (COV, iii.7), that increase competition in many markets and act to curb rent seeking behaviors.​

Taking Income

Pillar iii.8, Taking Income measures rent extraction occurring as the state collects income from productive citizens and other wealth generators, fails to protect these, or endorses wealth transfers carried out by powerful coalitions. The Pillar includes tax system properties such as the Corporate tax rate deviation from optimum (DCT, iii.8). Other Indicators reflect external peace and internal security levels, such as in Homicide Rate (HOM, iii.8). Plans for future Indicators include a Housing affordability survey (HAS, iii.8) since land prices are often determined by the government on behalf of narrow coalitions with pernicious effects on the young and working classes.​

Unearned Income

Pillar iii.9, Unearned Income mainly focuses on the exploitation or Value Extraction of natural and various resources, including the future. For instance, environmental footprints are conceptualized as wealth provided by nature – i.e. wealth that is not earned in full. In addition, low Environmental Performance Index (EPI, iii.9) represents intergenerational wealth transfers, as does Government debt as % of GDP (DBT, iii.9). State ownership,
control and involvement in business (SOE, iii.9) is another Indicator here – the license to operate is self – issued rather than earned.

Economic Value Pillars

Measure the Value Creation vs. Extraction in the economy’s 3 markets:
The products and services market, the capital market and the labor market.

Producer Rents

Pillar iv.10, Producer Rent identifies rents extracted by producers and suppliers in the market for goods and services. Rents are extracted, for example, through barriers as implied in Trade Freedom (TRF, iv.10), Barriers to entry (BTE, iv.10) or Foreign direct investment as % of GDP (FDI, iv.10). Protectionist measures against entry enable Value transferring business models to be established, usually to the benefit of domestic producers and investors, inducing welfare losses well-documented in economics.​

Capital Rents

Pillar iv.11, Capital Rent focuses on rents extracted though direct or indirect financial market participation. Data from markets, including Neutral interest rate (DNI, iv.11), M&A as % of GDP (DMA, iv.11), Gold demand as % of GDP (GOL, iv.11) or Currency appreciation (CUA, iv.11), are assessed to determine Value Extraction. More complex forms of rent seeking in capital markets will also be considered in the future, like the difference between return on assets (ROA) and total factor productivity (TFP).​

Labor Rents

Pillar iv.12, Labor Rent seeks to determine all rents arising from interventions in or related to labor markets by participants on both supply and demand sides. For this purpose, the Pillar will include the Unemployment rate (UEM, iv.12) and other measures which often are the result of intra-labor rent seeking. Value Extraction phenomena in which rent seeking can a priori occur on either the employers or employee side are also measured, like the Delta real wage vs labor productivity (WLP, iv.12). More clear-cut Value Extraction models considered are the Gender wage gap (GWG, iv.12) and the planned Cost of Thriving Index (CTI, iv.12).​

Sources

1) Comparing crony capitalism around the world. (2016, May 5). The Economist.
Retrieved from https://www.economist.com/graphic-detail/2016/05/05/comparing-crony-capitalism-around-the-world
2) Hausmann, R., Hidalgo, C., Bustos, S., Coscia, M., Chung, S., Jimenez, J.,& Yildirim, M. (2011). The Atlas of Economic Complexity: Mapping Paths to Prosperity.
Retrieved from: https://oec.world/static/pdf/atlas/AtlasOfEconomicComplexity.pdf
3) Schumpeter, J. (1942). Capitalism, Socialism and Democracy. New York: Harper & Brothers
4) Clements, B. & Parry, I. (2018, September). Subsidies: Some Work, Others Don’t. Finance & Development, 56–57.
Retrieved from: https://www.imf.org/external/pubs/ft/fandd/2018/09/pdf/what-are-subsidies-basics.pdf

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Indicators

Level 4

Indicators are the underlying datasets from which the Index is constructed. The datasets are collected, conceptually validated and collated. They mainly come from renowned international organisations such as the World Bank and the IMF, the finance industry or other indices. Selected Indicators are developed by the EQx team of researchers and collaborators. Each Indicator is based on a specific dataset quantitatively capturing Power, as well as Value Creation vs. Extraction phenomena in the political economy.

The EQx2020 is based on 72 Indicators. The new incorporation, adjustment and update of Indicators, as well as the elimination of unsatisfactory datasets, is a fundamental part of the ongoing EQx research project. For details on single EQx Indicators such as the rationale behind their inclusion in the Index, please consult the EQx Indicators Table.

Level 2 - Index Area Level 3 - Pillars TLA Level 4 - Variable Name
Political Power i.1 State Capture COR Political corruption
Political Power i.1 State Capture MOB Social Mobility
Political Power i.1 State Capture PDE Political decentralization
Political Power i.1 State Capture ADE Administrative decentralization
Political Power i.1 State Capture PGL Political globalization
Political Power i.1 State Capture WPI Women Power Index
Political Power i.1 State Capture GRC Government's responsiveness to change
Political Power i.2 Regulatory Capture DBI Institutional quality
Political Power i.2 Regulatory Capture CRO Crony-capitalism
Political Power i.2 Regulatory Capture EXP Expropriation risk
Political Power i.2 Regulatory Capture PMI Protecting Minority Investors
Political Power i.2 Regulatory Capture ECR Ease to Challenge Regulations
Political Power i.3 Human Capture UNI Unionization rate
Political Power i.3 Human Capture PSE Public sector employees as % of total employment
Political Power i.3 Human Capture CBC Collective Bargaining Coverage
Political Power i.3 Human Capture GSI Global Slavery Index
Political Power i.3 Human Capture WBL Women - Business and the Law
Economic Power ii.4 Industry Dominance IEE Top 3 industries exports as % of GDP
Economic Power ii.4 Industry Dominance IRE Top 3 industries as % of GDP
Economic Power ii.4 Industry Dominance ECI Economic Complexity Index
Economic Power ii.4 Industry Dominance IVA Top 3 industries as % of VA
Economic Power ii.5 Firm Dominance PRO Top 10 firms profitability
Economic Power ii.5 Firm Dominance SME SMEs per 1
Economic Power ii.5 Firm Dominance ATX Antitrust exemptions
Economic Power ii.5 Firm Dominance BIW Billionaires' wealth as % of GDP
Economic Power ii.5 Firm Dominance FKG Top 10 firms market cap as % of GDP
Economic Power ii.5 Firm Dominance FRG Top 3 firms revenues as % of GDP
Economic Power ii.5 Firm Dominance FRR Top 30 firms revenues as % of GDP
Economic Power ii.5 Firm Dominance LIB Lerner Index banking sector
Economic Power ii.6 Creative Destruction TUL Listed firms turnover
Economic Power ii.6 Creative Destruction TUS Listed firms turnover
Economic Power ii.6 Creative Destruction ENT Entrepreneurship
Economic Power ii.6 Creative Destruction VCK VC finance
Economic Power ii.6 Creative Destruction RND R&D % GDP
Economic Power ii.6 Creative Destruction BTS Barriers to start-ups
Economic Power ii.6 Creative Destruction ENR Firm entry ratio
Economic Power ii.6 Creative Destruction EXR Firm exit ratio
Political Value iii.7 Giving Income SNT Subsidies and transfers as % of expenses
Political Value iii.7 Giving Income REG Regional redistribution as % of government budget
Political Value iii.7 Giving Income EDU School life expectancy
Political Value iii.7 Giving Income GPS Expenditure on general public services as % of GDP (dev. fm optimum)
Political Value iii.7 Giving Income GHS Global Health Security
Political Value iii.7 Giving Income COV Covid-19 safety
Political Value iii.8 Taking Income DCT Corporate tax rate (dev. fm optimum)
Political Value iii.8 Taking Income DKI Delta capital gains tax vs income tax
Political Value iii.8 Taking Income HOM Homicide rate
Political Value iii.8 Taking Income INE Top 10% share of pre-tax national income
Political Value iii.8 Taking Income FDE Fiscal descentralization
Political Value iii.8 Taking Income DTR Tax revenue as % of GDP (dev. fm optimum)
Political Value iii.8 Taking Income BRD Battle-related deaths per 100
Political Value iii.9 Unearned Income DUT Dutch disease propensity
Political Value iii.9 Unearned Income SOE State ownership
Political Value iii.9 Unearned Income EPI Environmental Performance Index
Political Value iii.9 Unearned Income DBT Government Debt as % of GDP
Economic Value iv.10 Producer Rent BTE Barriers to entry
Economic Value iv.10 Producer Rent FDI FDI net Inflows as % of GDP
Economic Value iv.10 Producer Rent BTF Barriers to FDI
Economic Value iv.10 Producer Rent EGL Economic globalization
Economic Value iv.10 Producer Rent DHC Health Care as % of GDP (dev. fm optimum)
Economic Value iv.10 Producer Rent OFB Open for Business
Economic Value iv.11 Capital Rent DNI Neutral interest rate (dev. fm optimum)
Economic Value iv.11 Capital Rent DOI Inflation (dev. fm optimum)
Economic Value iv.11 Capital Rent CUA Currency appreciation
Economic Value iv.11 Capital Rent GOL Gold demand as % of GDP
Economic Value iv.11 Capital Rent DMA M&A as % of investment (dev. fm optimum)
Economic Value iv.12 Labor Rent UEM Unemployment rate
Economic Value iv.12 Labor Rent LFP Labor force participation rate
Economic Value iv.12 Labor Rent WLP Delta real wage vs labor productivity increases
Economic Value iv.12 Labor Rent LDR Labor dependency ratio
Economic Value iv.12 Labor Rent YUN Youth unemployment rate
Economic Value iv.12 Labor Rent GWG Gender wage gap
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Methodology

EQx is an ongoing research project

In the initial ‘Concept’ phase (2 steps), EQx constructs, architecture and theoretical aspects are developed. 

The ‘Input’ phase (4 steps) starts with the collection of the datasets underlying individual EQx Indicators. These are selected on the basis of a theoretical fit and culled from diverse sources. The datasets then undergo methodological transformation, normalization, aggregation and weighting procedures. 

The ‘Output’ phase (3 steps) sees the determination of the EQx Country Scores and Global Rank. The final phase includes statistical testing and validation, followed by the publication of results.

The Elite Quality Index (EQx) applies a methodology grounded in relevant academic literature. EQx’s methodological position is described in the Methodology Paper, available for reference and review by pressing the download button below. Criticism and comments are very welcome.

You can write us at research@elitequality.org