Transcript Economic Freedom of the World: Annual Report 2004

Prof. Edward Peter Stringham
Hackley Distinguished Professor for the
Study of Capitalism and Free Enterprise
Fayetteville State University
North Carolina, United States
1
What Explains Growth?
Is it Resources? Location? Democracy? Or ……
North Korea vs. South Korea
Per Capita
Income
= $1,800
Per Capita
Income
= $24,200
Adam Smith’s Question:
Why Are Some Countries Rich and Others Poor?
An Inquiry into the Nature and Causes
of the Wealth of Nations (1776)

Policies and the system of economic organization (e.g.,
capitalism) matter more than things such as resources,
geography, education, democracy, etc.
Economic Freedom
Economic Freedom means that people are free to trade
with others, compete in markets, buy what they want,
earn a living in a job they choose, keep what they earn,
and own things privately.
Measuring Economic Freedom
• Economic freedom is complex and
multidimensional, but it can be measured:
• Personal choice
• Freedom to trade, domestically and
abroad.
• Freedom to enter and compete in
markets.
• Security of Property/Rule of Law
Motivation
 The key to changing policy in the world is changing
the climate of opinion about what works and what
does not work in encouraging world development
 The key to changing the climate of opinion is
providing the widest possible audience with good
information about the causes of development and
under-development
Economic Freedom of the World
Project
 Objective: find a way to measure economic
freedom and explore the connection between it
and other indicators
 20 year project
 Led by the late Milton Friedman, Rose
Friedman and Michael Walker
 Involved 60 of the world’s top scholars,
including three Nobel Laureates: Milton
Friedman, Douglass North, and Gary Becker
What is the Economic Freedom of
the World Index?
An annual compilation of data representing factors
which make a country economically free
Authors: James Gwartney, Robert Lawson, and Walter
Block
A compendium of 42 government policies affecting
economic freedom based on objective data or
independent surveys
A ranking of 141 countries representing 95% of the
world’s population according to the extent to which
they permit their citizens to be economically free
Now a collaboration of Institutes in 76 different
nations and territories
Components of the Economic Freedom
of the World Index
 Size of government and taxation
 Private property and the rule of law
 Soundness of money
 Trade regulation and tariffs
 Regulation of business, labour and capital markets
5 Areas of Economic Freedom of
the World (EFW) Index
1.
2.
3.
4.
5.
Size of Government: Expenditures, Taxes,
and Enterprises
Legal Structure and Security of Property
Rights
Access to Sound Money
Freedom to Trade Internationally
Regulation of Credit, Labor, and Business
Photos are compiled by Russel Sobel, Ph.D.
Example 1
 A country with VERY LOW economic freedom
Families in Guinea-Myanmar
Relief efforts in Guinea-Myanmar
26
Example 2
 A country with LOW economic freedom
Romania
Families in Romania
Families in Romania
Families in Romania
Families in Romania
Families in Romania
Families in Romania
Families in Romania
Families in Romania
Families in Romania
Example 3
 A Country with MEDIUM Economic Freedom
India
Families in India
Families in India
Example 4
 Another Country with Medium Economic Freedom
Mexico
Families in Mexico
Families in Mexico
Example 5
 A Country with HIGH Economic Freedom
Hong Kong
Families in Hong Kong
Families in Hong Kong
Families in Hong Kong
Overall Economic Freedom Index and
the Top 10
Hong Kong
Singapore
New Zealand
Average of top 10
Switzerland
United Kingdom
Chile
Canada
Australia
United States
Ireland
0
2
4
6
Score (out of 10)
Source: The Fraser Institute.
8
10
Overall Economic Freedom Index and the
Bottom Ten
Chad
Central Afr. Rep.
Guinea-Bissau
Congo, Dem. R.
Venezuela
Niger
Congo, Rep. Of
Myanmar
Angola
Zimbabwe
0
2
4
6
Score (out of 10)
Source: The Fraser Institute.
8
10
Why is Economic Freedom
Important?
 Economic rights are fundamental rights in the sense
that without them there can be no political or civil
freedoms
 They are a prerequisite for growth and development
 They are a prerequisite for broader human
development
The impact on economic growth
and development
Income (per person) of the Bottom Ten
Venezuela
Angola
Congo, Rep. Of
Chad
Myanmar
Central Afr. Rep.
Niger
Guinea-Bissau
Congo, Dem. R.
0
10,000
20,000
30,000
40,000
GDP per Capita, 2006 (ppp)
Sources: The Fraser Institute; The World Bank, World Development Indicators,
2008.
50,000
Income (per person) of the Top 10
Singapore
United States
Ireland
Hong Kong
Switzerland
Canada
Australia
United Kingdom
New Zealand
Chile
$0
$10,000
$20,000
$30,000
$40,000
$50,000
GDP per Capita, 2006 (ppp)
Sources: The Fraser Institute; The World Bank, World Development Indicators,
2008.
Per Capita Income and Economic Freedom
Quartile
GDP Per Capita
(ppp), 2006
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Least Free
Quartile
3rd Quartile
2nd Quartile
Most Free
Quartile
Least Free ………………... Most Free
Sources: The Fraser Institute; The World Bank, World Development Indicators,
2008.
Foreign direct investment,
net inflows (% of GDP),
1990-2006
Foreign Direct Investment and Economic
Freedom Quartile
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Least Free
Quartile
3rd Quartile
2nd Quartile
Most Free
Quartile
Least Free ……………...…... Most Free
Sources: The Fraser Institute; The World Bank, World Development Indicators,
2008.
Economic freedom and
economic growth have
bestowed benefits across all
levels of society
59
Our Homes

Percent of homes with Heating & Air Conditioning
1956 = 6%
1996 = 81%

Percent of homes with only one bathroom
1956 = 71%
1996 = 9%
And They are Better: Our Showers
Our Cars
 We now have DVD players, Air Conditioning, Anti-
lock Brakes, Power windows
Our Phones
Our Entertainment
Our Science
Our Computers
Our Medicine
Our Music
But what about the poor?
69
Income Share of the Poorest 10% and
Income Share Held by
Lowest 10%, 1990-2006
Economic Freedom
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Least Free
Quartile
3rd
Quartile
2nd
Quartile
Most Free
Quartile
Least Free …………….. Most Free
Sources: The Fraser Institute; The World Bank, World Development Indicators,
2008.
Income Level of the Poorest 10% and
Income Level of the
Poorest 10%, 1990-2006
Economic Freedom
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
Least Free
Quartile
3rd
Quartile
2nd
Quartile
Most Free
Quartile
Least Free …………….. Most Free
Sources: The Fraser Institute; The World Bank, World Development Indicators,
2008.
73
A free society also has no barriers
to getting rich
 University of Michigan Panel Survey on Income
Dynamics data show that of Americans in the bottom
20 percent income bracket in 1975, only 5.1 percent of
them remained in that lowest income bracket by 1991.
 In fact, 29 percent of the lowest fifth of income earners
in 1975 had moved to the top 20 percent of income
earners in 1991.
74
The impact of Economic Freedom on
the UN’s Human Development Index
and other indicators of well-being
Human Development Index and Economic Freedom
Quartiles
United Nations
Human Development
Index
Higher ratings indicate higher levels of development
1.0
0.8
0.6
0.4
0.2
0.0
Least Free
Quartile
3rd Quartile
2nd Quartile
Most Free
Quartile
Least Free ……………. Most Free
Sources: The Fraser Institute; United Nations Development Programmme, Human
Development Indicators 2008, available at http://hdr.undp.org/.
Life Expectancy at Birth and Economic
Freedom Quartiles
80
Years
60
40
20
0
Least Free
Quartile
3rd Quartile
2nd Quartile
Most Free
Quartile
Least Free ……………. Most Free
Sources: The Fraser Institute; The World Bank, World Development Indicators,
2008.
Per 1,000 live births, 2006
Infant Mortality and Economic Freedom
Quartile
80
60
40
20
0
Least Free
Quartile
3rd Quartile
2nd Quartile
Most Free
Quartile
Least Free ………..………. Most Free
Sources: The Fraser Institute; The World Bank, World Development Indicators,
2008.
% of Population Using Improved Water
Sources
100
Percentage
80
60
40
20
0
Least Free
Quartile
3rd Quartile
2nd Quartile
Most Free
Quartile
Least Free ………………... Most Free
Sources: The Fraser Institute; The World Bank, World Development Indicators,
2008.
Environmental Performance and Economic Freedom
Quartile
Higher ratings indicate higher levels of environmental performance
Index (out of 100)
100
80
60
40
20
0
Least Free
Quartile
3rd Quartile
2nd Quartile
Most Free
Quartile
Least Free ………..……….. Most Free
Sources: The Fraser Institute; The World Bank, World Development Indicators,
2008.
Can a nation improve their
level of economic freedom?
81
Economic Freedom Over Time
Economic Freedom Score
10
8
6 6.1
5.5 5.4 5.5 5.7
6.0
6.4 6.4 6.4 6.4 6.4 6.6 6.6
4
2
0
1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006
Source: The Fraser Institute.
Case Study: Zimbabwe
• Legal Structure/Property
10
•
6
4
•
2
•
05
20
00
20
95
19
90
19
85
19
80
0
19
EFW Rating
8
•
Rights rating has fallen to
3.7 from 5.5.
Annual inflation has
increased to 349% from
6.5%.
Foreign currency bank
accounts are illegal.
Tariff rates increased to
16.7% from 8.7%.
Price control rating = 0.0!
GDP per capita growth, 1995-2005 = -3.43%
Case Study: Venezuela
• Government
10
•
6
•
4
•
2
•
05
20
00
20
95
19
90
19
85
19
80
19
75
19
70
0
19
EFW Rating
8
consumption increased
to 20.3% from 14.4%.
Transfers & subsidies
increased to 15% from
2%.
Inflation remains high at
16%.
Foreign currency
accounts restricted.
Military interference
rating fallen to 0.8 from
5.6.
GDP per capita growth, 1995-2005 = -0.36%
Case Study: Ireland
10
• Transfers & Subsidies fell
to 11.7% from 21.8%.
• Top marginal tax rates
fell to 42% from 65%.
• Tariff rate fell to 2.7%
from 8.8 %.
• Sound Money rating
increased to 9.7 from 5.8.
6
4
2
05
20
00
20
95
19
90
19
85
19
80
19
75
19
70
0
19
EFW Rating
8
GDP per capita growth, 1995-2005 = 5.97%
Case Study: Estonia
10
• Transfers & Subsidies fell
6
4
2
05
to 11.7% from 15.3%.
• Inflation fell to 1.6% from
33.7%.
• Credit market regulation
rating increased to 9.7
from 4.3.
• Legal Structure/Property
Rights rating increased
to 7.7 from 6.5.
20
00
20
95
0
19
EFW Rating
8
GDP per capita growth, 1995-2005 = 7.27%
Case Study: Chile
10
• Top marginal tax
rates fell to 40% from
58%.
• Tariff rate fell to 4.9%
from 30%.
• Inflation rate fell to
6
4
3.1% from 30.7%.
• Capital market
controls lifted.
2
05
20
00
20
95
19
90
19
85
19
80
19
75
19
70
0
19
EFW Rating
8
GDP per capita growth, 1995-2005 = 2.99%
Case Study: China
10
• Freer trade: tariffs
reduced to 9.2% from
49.5%.
• Capital market
deregulation: rating
improved to 6.5 from
6
4
2
05
20
00
20
95
19
90
19
85
19
80
0
19
EFW Rating
8
0.0.
• Note: China varies
tremendously
internally.
GDP per capita growth, 1995-2005 = 8.21%
Case Study: India
10
• Government
investment and SOEs
are less important:
The rating in this area
increased to 8 from 0.
• Tariffs have fallen to
6
4
2
05
20
00
20
95
19
90
19
85
19
80
19
75
19
70
0
19
EFW Rating
8
17%. from 98.8%
• Many capital market
controls have been
lifted.
GDP per capita growth, 1995-2005 = 4.68%
Case Study: Botswana
10
• Improved monetary
stability: 5.3 to 9.0
rating.
• Fewer regulations: 5.9
to 7.6 rating.
• Improved legal
structure rating: 6.3
to 7.4 rating.
6
4
2
05
20
00
20
95
19
90
19
85
19
80
0
19
EFW Rating
8
GDP per capita growth, 1995-2005 = 6.14%
GDP per capita by country
91
Economic Freedom by Country
92
Conclusions
Economic Freedom is associated with
 Lower rates of homicide
 Reduced poverty
 Increased prosperity for rich and poor
Prof. Edward Peter Stringham
Lloyd Hackley Endowed Professor of
Capitalism and Free Enterprise Studies
Fayetteville State University
94
Latest research
 Economic freedom and crime
95
 The Encyclopedia of Murder and Violent Crime states,
“Killing and violent behavior has permeated the
development of America,” attributing this in large part
to “the inevitable clash of capitalism” (Hickey, 2003,
pp.xxxi-xxxii).
 “The only source of crime is capitalism” (Lynch and
Groves, 2000, p.336).
96
 Crime and Capitalism (Greenberg, 1993)
contains thirty chapters arguing how markets
cause crime.
 Wenger and Bonomo (1993, p.420) “[T]he
relationship between crime and the terminal
crisis of capitalism has become the subject of
considerable debate….[But] the debate does not
concern the role of capitalism in producing
crime—to all but the reactionary or the naïve,
such questions have long been settled.”
97
 (homicide rate) = 1
 + 2(economic freedom)
 + 3(incarceration rate)
 + 4(death penalty)
 + 5(gini)
 + 6 (literacy rate)
 + ,
98
Table 1: Summary Statistics
Variable
Obs
Mean Std. Dev.
Homicide rate (per 100k)
63
6.64
9.33
Economic Freedom (Fraser)
115
6.00
1.23
Economic Freedom (Heritage)
61
2.65
0.71
Incarceration rate (per 100k)
63
202.76
145.95
Death penalty
63
0.52
0.50
Gini index
58
35.50
8.72
Literacy rate
55
96.25
5.54
Ethnic fractionalization
61
0.34
0.20
English legal origin
56
0.14
0.35
Unemployment rate
58
9.07
6.54
Percent rural
61
32.36
16.76
GDP per capita
62
11623
12097
Min
0.5
3.44
1.56
58
0
23.2
67.5
0.00
0
0.72
0
160
Max
61.6
9.08
4.28
714
1
59.7
100
0.71
1
46.24
75
44440
99
TABLE 3: Baseline Regressions
Dependent Variable: Homicides Per 100,000 People
(1)
(2)
Economic Freedom (Fraser)
-3.699 ***
(0.00)
Economic Freedom (Heritage)
4.659 **
(0.02)
Incarceration rate
0.005
0.006
(0.66)
(0.57)
Death Penalty
-2.484
0.013
(0.45)
(1.00)
Gini index
0.61 ***
0.512 ***
(0.00)
(0.01)
Literacy rate
0.11
0.094
(0.71)
(0.75)
Constant
-2.093
-34.116
(0.95)
(0.31)
Observations
41
50
R-squared
0.432
0.332
Notes: p-values are in parentheses; * is significant at 10%
** significant at 5%; *** significant at 1%
100
-20
0
20
40
60
FIGURE 1: Partial Regression Plot for Regression 1 (dependent variable: homicide rate) with Economic Freedom
data from Fraser (higher scores indicate more economic freedom)
-4
-2
0
e( freedom | X )
2
4
coef = -3.6992051, se = 1.1085175, t = -3.34
101
Case studies
102
5
4.5
4
10
20
30
40
Economic Freedom (Fraser)
5.5
50
Venezuela
1990
1995
2000
year
Homicide rates per 100k
2005
2010
Economic Freedom (Fraser)
103
5.6
5.4
5.2
18
20
22
24
26
Economic Freedom (Fraser)
28
5.8
Colombia
1990
1995
2000
2005
year
Homicide rates per 100k
Economic Freedom (Fraser)
104
7
6.5
6
6
5.5
8
10
Economic Freedom (Fraser)
12
7.5
Latvia
1990
1995
2000
year
Homicide rates per 100k
2005
2010
Economic Freedom (Fraser)
105
7
6.5
6
5.5
5
8
10
12
Economic Freedom (Fraser)
14
7.5
Lithuania
1990
1995
2000
year
Homicide rates per 100k
2005
2010
Economic Freedom (Fraser)
106
7
6.5
6
5.5
40
50
60
Economic Freedom (Fraser)
70
7.5
South Africa
1990
1995
2000
year
Homicide rates per 100k
2005
2010
Economic Freedom (Fraser)
107
Moving forward
108
109
 Economic Freedom of the World
www.freetheworld.com
110
 Economic Freedom of the World
www.freetheworld.com
111
Prof. Edward Peter Stringham
Lloyd Hackley Endowed Professor of
Capitalism and Free Enterprise Studies
Fayetteville State University
112