The Cato Institute held an interesting event today, “How Nations Prosper: Economic Freedom and Doing Business around the World,” featuring James Gwartney and Robert Lawson, co-authors of the Economic Freedom of the World Annual Report (co-published by Fraser Institute and Cato Institute) and Simeon Djankov, creator of the World Bank’s Doing Business report.
The first two speakers focused on analyzing the implications of the 2008 edition of the Economic Freedom report and its historical trends. The findings clearly demonstrate the connection between economic freedom and greater prosperity. Private investment as a share of GDP is higher in countries with more economic freedom. In turn, investment increases long-term economic growth rates, and sustained growth over time leads to higher GDP per capita. Not surprisingly, countries in the most free quartile have GDP per capita 8 times higher than those in the least free quartile. The findings also emphasize the importance of the quality legal structure. Countries that scored above 7 (out of 10) have incomes 12 times higher than those with least effective legal structures.
But probably the most intriguing finding was presented by Simeon Djankov. Unlike Economic Freedom of the World project that spans several decades, Doing Business report is a much younger (since 2004) and more narrowly focused on the specifics of business environments rather than overall levels of economic freedom in different countries. Djankov’s research suggests that on average democracies reform more than non-democracies in all areas rated by the Doing Business report. What is more, the reform effect is more pronounced in poorer countries: the poorer the country, the more democracy matters for economic reforms. Why? One reason seems quite clear. Although in theory it is easier for a benevolent dictator to institute economic reforms, in practice such reform-minded autocrats are rare; instead, economic reforms in authoritarian countries can be much more easily undone.
That is not to say that this research establishes a directional causality and sequencing between political reforms (i.e., democratization) and economic reforms – it doesn’t. That was not the focus of the study, which looks at small-scale reforms rather than systemic changes. But it does suggest that more transparent and accountable policymaking process in democracies is more conducive to sustained step-by-step economic reforms than unpredictable authoritarian rule.
Published Date: November 24, 2008