A new Vox EU reviews the performance of more than 100 countries over the past 30 years. It finds that economic freedom and civil and political liberties are among the root causes of why certain countries achieve and sustain better economic outcomes than others.
Development as freedom: New empirical evidence (1975-2007), Jean-Pierre Chauffour, VOX EU, Commentary :In reviewing the distinctive characteristics of the 13 economies that have been able to grow at more than 7% for periods of more than 25 years since 1950, the Commission on Growth and Development (2008) found that sustainable high economic growth requires, among other things: leadership and governance; engagement with the global economy; high rates of investment and savings; mobile resources, especially labour; and inclusiveness to share the benefits of globalisation, provide access to the underserved, and deal with issues of gender inclusiveness.However, observing that successful economies display a number of commonalities and desirable features is of little help in understanding why and how those countries have been able to nurture and sustain these specific features over time. Why do some countries receive better governance than others, save and invest more, have more flexible markets, or achieve greater inclusiveness? Are there some admittedly more fundamental common characteristics that could explain why, on average, certain countries create better institutions, promote better policies, and achieve better outcomes?Although a general theory of economic growth continues to elude the economist profession (Easterly 2001), the idea that differences in societies’ institutional arrangements are the fundamental cause of differences in economic performance has gained enormous momentum in recent decades. Since the days of North and Thomas (1973), it has become clear that, although factor accumulation, innovation, and technological progress are the proximate factors that explain the mechanics of economic growth, they are not the causes of growth; they are growth. To locate the more fundamental determinants of growth, we need to push the question back one step and ask why factor accumulation and innovation advance at different rates in different countries or groups of countries; why countries differ in terms of level of schooling, quality of infrastructure, health of the population, and other proximate factors of economic growth. The growing consensus is that the answer has to do with differences in institutions (for example, the rule of law, property regime, and participatory process) and differences in geography and other exogenous factors. Analysing the genesis and development of institutions, some scholars have tried to push the issue back even farther to ask why institutions differ across countries in the first place. Could it be that certain norms, values, and organisational principles in societies are conducive to better institutions? For instance, Acemoglu et al. (2004) suggest that political institutions and the distribution of resources are the fundamental determinants of institutions and, therefore, of growth. Chauffour (2009) hypothesises that the extent to which political institutions and human interactions in society are formed around the concept of freedom constitutes one key determinant of growth – perhaps the ultimate cause for economic agents actually creating and accumulating.The hypothesisThe starting proposition is that economic development can simply be seen as the product of exogenous and endogenous factors. Exogenous factors are all factors that are not under the control of individuals, such as geography, natural resource endowment, ethnolinguistic homogeneity, and various other types of good and bad luck. Endogenous factors correspond to factors that are influenced by individuals –alone or in associations. Those endogenous factors, in turn, can be divided between factors that are mainly the expression of free individual choices leading to market solutions and factors that are the results of more coerced individual decisions leading to political solutions.Freedom conditions would include all forms of economic freedom, civil rights, and political liberties. These are essentially “negative” rights in nature and are mainly covered by the Universal Declaration of Human Rights and the UN International Covenant on Civil and Political Rights. In contrast, coercive conditions would include the regulations, taxations, and other forms of government interventions to provide for public goods and various entitlement rights. Beyond a certain threshold of government intervention, these entitlement rights are essentially “positive” rights in the spirit of the economic, social, and cultural rights as provided by the UN International Covenant on Economic, Social, and Cultural Rights.Of course, the problem of when exactly government intervention starts interfering with individual choices and the market is a subject open to reasoned debate. In the final analysis in a democratic context, it is often believed that the scope of the state is a matter for the democratic process to decide. However, although societies may reveal different preferences regarding the trade-off between state intervention and economic freedom, the majority rule may not necessarily lead to the optimal state, either from a normative or from a utilitarian perspective – especially when it violates the freedom of minorities (for example, through discrimination, expropriation, or confiscatory taxation). Friedman (1962) notoriously pointed out that market solutions (that is, voluntary cooperation among responsible individuals) permit “unanimity without conformity” (that is, a system of effective proportional representation), whereas political solutions (even in proportional representation) typically tend to produce the opposite, i.e. “conformity without unanimity”. From this position, he concluded that the wider the range of activities covered by the market, the fewer the issues on which explicitly political decisions were needed and, hence, required agreement. In turn, the fewer the issues on which agreement was necessary, the greater the likelihood of reaching agreement while maintaining a free society.In this understanding of the world, development could be subdued to three fundamental sets of circumstances: (1) a set of exogenous conditions; (2) the degree of individual freedom and market solutions; and (3) the degree of state intervention and political solutions, including the intervention needed to protect individual freedom itself. Certain countries may be able to sustain better institutions and outcomes over time because of a better mix of these circumstances.Empirical evidenceThe multifaceted concepts of economic freedom, civil and political rights, or entitlement rights are difficult to measure. The data used in any empirical analysis are necessarily imperfect proxies of the underlying concepts. Furthermore, the inevitable gaps between the conceptual frameworks and the measured concepts necessarily complicate the empirical verification of the hypothesis. This caveat notwithstanding, in a recent paper (Chauffour 2011), I provide new empirical analysis of a sample of more than 100 countries over the last 30 years. My study suggests that, for a given set of exogenous circumstances, the respect for and promotion of economic freedom and civil and political rights (measured by the Fraser Institute’s Economic Freedom of the World index and the indexes of civil rights and political liberties published by Freedom House) are, on average, strongly associated with a country’s per capita income growth over the long run:
- A one-unit change in the initial level of economic freedom on a scale of 1 to 10 (for example, the difference between Argentina and Turkey in 1975) is associated with an increase of almost 1 percentage point in the average economic growth rate during the period.
- A one-unit increase in the economic freedom rating during the earlier decade results in an increase of more than a 1.3 percentage points in the average growth rate over the whole period, whereas a unit increase in the economic freedom rating during the later decade results in an increase of 0.9 percentage point in the average economic growth rate over the entire period.
- A one-unit change in initial civil and political rights conditions on a scale of 1 to 8 (for example, the difference between Mongolia and Chile in 1975) increases average economic growth by more than 0.3 percentage point during the period.
- A one-unit increase in the civil and political rights conditions during the period is only weakly associated with an increase in per capita GDP.In contrast, my analysis finds that the extent to which the state expands its scope to provide entitlement rights (measured by the Fraser Institute’s Economic Freedom of the World index) does not add significant explanatory power in estimating countries’ growth performance over the long run. In the estimates where it does add such power, the findings would suggest a negative effect of entitlement rights on economic growth. In line with earlier literature, this may indicate that the role of the state in economic growth is ambiguous. When the state limits itself to the core functions of government responsibility, including the protection of various forms of freedom and the provision of key public goods, it is likely to have a strong positive influence on growth. However, when the state grows beyond the size needed to fulfil these core functions, it may dampen economic growth (everything else being equal). This nonlinear effect between government intervention and economic growth is not easy to test because there is no guarantee (and, for that matter, little evidence) that governments necessarily prioritise the core functions of government responsibility over other forms of government intervention.As far as the exogenous circumstances are concerned, consistent with the economic theory and previous studies, poorer countries tend to grow faster; countries located in the tropical climate and far away from the world’s biggest markets tend to grow slower than otherwise-similar countries in different locations; countries with higher proportions of coastal population grow faster; and, controlling for all other variables, countries that possess subsoil assets tend to grow faster. In other words, when natural resource abundance does not lead to greater corruption and various forms of rights violations and inefficiencies, it leads to growth.ConclusionsNew empirical evidence suggests that fundamental freedoms are paramount to explain long-term economic growth. For a given set of exogenous conditions, countries that favour free choice – economic freedom and civil and political liberties – over entitlement rights are likely to achieve higher sustainable economic growth and to achieve many of the distinctive proximate characteristics of success identified by the Commission on Growth and Development (2008). In contrast, pursuing entitlement rights through greater state coercion is likely to be deceptive or self-defeating in the long run.These findings provide potentially important policy lessons for all countries. For developed countries, they suggest that prioritising economic freedom over social entitlements could be an effective way to reform the welfare state and make it more sustainable and equitable in the long run. For middle-income countries (such as countries in the midst of the Arab Spring and countries in Asia and Latin America), they indicate that the quest for civil and political rights and for economic freedom could create the conditions for new social contracts. For low-income countries, they provide an opportunity to reflect on the achievements under the Millennium Development Goals and the potential role that economic freedom and other fundamental freedoms could play in a post-2015 development agenda.ReferencesAcemoglu, Daron, Simon Johnson, and James A Robinson (2004), “Institutions as the Fundamental Cause of Long-Run Growth”, NBER Working Paper 10481.Chauffour, Jean-Pierre (2009), The Power of Freedom: Uniting Human Rights and Development, Cato Institute.Chauffour, Jean-Pierre (2011), “On the Relevance of Freedom and Entitlement in Development: New Empirical Evidence (1975–2007)”, Policy Research Working Paper 5660, World Bank.Commission on Growth and Development (2008), The Growth Report: Strategies for Sustained Growth and Inclusive Development, World Bank.Easterly, William (2001), The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics, MIT Press.Friedman, Milton (1962), Capitalism and Freedom, University of Chicago Press.North, Douglass C and Robert P Thomas (1973), The Rise of the Western World: A New Economic History, Cambridge University Press.