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Freedom and Prosperity Jake Dubuque Dubuque 2 Abstract: The purpose of this project is to examine the relationship between freedom and economic prosperity on the theoretical and empirical level. An extensive review of literature defines the concept of freedom, which is broken into political and economic varieties and how these are related to wealth. Several similar empirical studies have been included for the purpose of analyzing their methodology and results, in order to provide a reasonable expectation for the results of this study. Then, data from 152 counties for 1995-2005 are statistically tested to determine whether a relationship between freedom and prosperity exists. Freedom House’s Freedom in the World index is used to measure political freedom, while The Index of Economic Freedom, produced by the Heritage Foundation and the Wall Street Journal measure the second variety of freedom. These indices are compared to the GDP per capita of each country. The results indicate that there is a significant correlation between each variety of freedom and wealth. Dubuque 3 1. Introduction Freedom is perhaps one of the most explored concepts in all of human history. Wars have been fought over it; philosophers have debated its nature and lawyers have argued its legal definition. The amount of material on the subject is beyond superlatives and yet the discussion of freedom remains one of humanity’s most enduring, engaging issues. While most frequently admired for its intrinsic value, it has also been suggested that freedom provides an economic value. The goal of this project is to examine recent history in an effort to ascertain if and to what extent a relationship exists between freedom and economic prosperity. Preparing to look into this possible correlation, one must first engage a variety of the material written on the subject. Then, once the concept of freedom has been sufficiently defined and other similar projects explored, pursuit of the main question can begin. Through analyzing recent economic data and multiple freedom indices, we can hopefully determine whether a relationship exists between the variables and to what extent they are correlated. The discussion inevitably begins with freedom and how to define it. In order to break down the larger concept into more manageable components, this study will distinguish between political freedom and economic freedom. While this distinction is necessary, it should not be implied that the two varieties are mutually independent of each other. By identifying and exploring each type, it will clarify how the two are interrelated and establish a strong foundation for analyzing the relationship between ‘freedom’ and economic prosperity. Dubuque 4 2. Defining Political Freedom On the subject of political freedom, a great deal has been written and one universally accepted definition has proved elusive. The one common political term used to identify freedom is ‘liberalism,’ although the meaning of this term has become as amorphous as the definition of freedom. The classic liberal from the nineteenth century had a definition of liberalism that differs from more recent American liberals. Some argue that this was merely an intellectual evolution, while others believe that anti-liberal forces usurped the term and fundamentally changed its meaning. Social scientist F.A. Hayek writes that “to the great apostles of political freedom the word had meant freedom from coercion, freedom from the arbitrary power of other men, release from the ties which left the individual no choice but obedience to the orders of a superior to whom he was attached.”1 This classic understanding of liberalism defines political freedom as freedom from oppression; a system of governance that maximizes individual rights. Milton Friedman expands on this point, saying that “the fundamental threat to freedom is power to coerce, be it in the hands of a monarch, a dictator, an oligarchy, or a momentary majority. The preservation of freedom requires the elimination of such concentration of power to the fullest possible extent and the dispersal and distribution of whatever power cannot be eliminated.”2 According to Friedman, concentration of power inevitably infringes on the freedom of others. Therefore, the only way to insure the protection of freedom is to limit the size and scope of government. Political scientist Francis Fukuyama adds to the discussion by identifying what type of philosophy liberalism encourages. He states that “political liberalism can be 1 2 Hayek, F.A. The Road to Serfdom. p. 25 Friedman, Milton. Capitalism and Freedom. p. 15 Dubuque 5 defined simply as a rule of law that recognizes certain individual rights or freedoms from government control.”1 According to liberalism then, freedom is not anarchy, but a system of laws that governs all citizens and protects their individual rights. In order to facilitate the dispersal of what power is granted to the government, a system of checks and balances ought to be put in place. In this ideal liberal state, Friedman believes that it is the duty of the government to provide “a means whereby we can modify the rules, [mediate] differences among us on the meaning of the rules, and to enforce compliance with the rules on the part of those few who would otherwise not play the game.”2 In this manner the government is an external force that upholds the principle of political freedom by establishing laws that protect individual rights, agrees to arbitrate disputes between individuals, and enforces the established rules. According to this philosophy, government is only considered to be liberal if it recognizes individual rights and freedoms while minimizing coercive authority. If the measurement of political liberalism is the extent to which the government protects individual freedom, then it is important to understand what those political rights and liberties are. Perhaps the most widely agreed upon definition of these rights can be found in the Universal Declaration of Human Rights, which was adopted 1948 by the General Assembly of the newly formed United Nations. Although there are some thirty articles that compose the declaration, most can be grouped together into three broad categories that embody classic liberalism. The first article states that “all human beings are born free and equal in dignity and rights.” This idea of equality includes the fact that everyone is entitled to the rights set forth in the declaration and that discrimination before 1 2 Fukuyama, Francis. The End of History and the Last Man. p. 42 Friedman. p. 25 Dubuque 6 the law is unacceptable. The second theme found in the declaration embodies the idea that everyone has personal rights, including the rights “to life, liberty and security of person,” in addition to the rights to privacy, education, religious freedom, freedom of expression, and the right to own property. Finally, everyone is entitled to participate in government, either directly or through elections. These three basic rights can be summed up as the right to be treated equally, the right to individual autonomy, and the right to participate in government. The philosophical idea of political freedom is grounded in these specific rights that according to the preamble of the declaration recognize the “inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world.” 1 According to Hayek and Friedman, this definition of liberalism was gradually eroded by socialists around the turn of the twentieth century. Seeking to equate egalitarianism with liberalism, the socialists identified new economic rights that they believed superseded the classic liberal rights. The UN declaration even included some of these in its articles, like the right to an adequate standard of living: “including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.”2 Fukuyama calls them second and third generation economic rights, but argues that “the problem with such an expanded list is that the achievement of these rights is not clearly compatible with other rights like those of property or free economic exchange.”3 Because liberals believed that the expanded list 1 Universal Declaration of Human Rights. http://www.unhchr.ch/udhr/lang/eng.htm Universal Declaration of Human Rights. Article 25. 3 Fukuyama. p.42 2 Dubuque 7 of rights the socialists proposed were not always reconcilable with their ‘first generation,’ individual rights, the debate became one of egalitarianism versus liberalism. For the classic liberal, equality was achieved through the idea of universal rights that treated all individuals equally. They “distinguish[ed] sharply between equality of rights and equality of opportunity, on the one hand, and material equality or equality of outcome on the other.”1 For the socialists, equality was measured through the latter definition; they believed that a minimum quality of life must be achieved before individual rights had any meaning. This minimum was identified as “freedom from necessity, release from the compulsion of the circumstances which inevitably limit the range of choice of all of us . . . [b]efore man could be truly free, the ‘despotism of physical want’ had to be broken, the ‘restraints of the economic system relaxed.’”2 This competing definition of freedom was based on the idea that physical deprivation was a powerful form of constraint on the individual’s ability to act. Unlike the classic liberals, the socialists saw government action as a necessary means to promote their new definition of freedom. For them, government was a tool for ensuring that a predetermined quality of life was achieved for all. Yet if the state is responsible for providing some degree of equality of means while continuing to protect individual rights, tension inevitably develops between these two obligations. Of course the argument cannot be simplified to a disagreement between those that prefer the good of the individual and those that favor the good of society. Indeed both ideological camps believe that the freedom their rights engender makes both the individual and society better off. It is not enough to take socialism to simply mean the 1 2 Friedman. p.195 Hayek. p.26 Dubuque 8 ideal of greater equality; it is also a philosophy of how to achieve those ideals. Hayek finds that “[n]early all the points which are disputed between socialists and liberals concern the methods common to all forms of collectivism and not the particular ends for which socialists want to use them.”1 In order to achieve social justice, equality, and freedom from ‘necessity,’ socialists almost always believe that a “rational utilization of our resources requires central direction and organization of all our activities according to some consciously constructed ‘blueprint.’”2 This method certainly conflicts with the liberal definition of political freedom in that it concentrates coercive power in the state, or whatever body is set up to determine the organization and regulation of economic activity. If the socialist ideal of economic security for all is realized through a centrally administered economy, then freedom from necessity does not create freedom in any real sense of the term. While socialists can argue that physical depravation severely constrains individual freedom, the material security that their philosophy provides does not liberate the individual. Instead they are made dependent on the state. Even though the state’s motives might be altruistic, it still must have the power to enforce the regulations or central plan of the economy. With such a concentration of power in government and the state of dependency it creates, the individual cannot be described as politically or economically free. It doesn’t matter whether the government is a dictatorship or democratically elected by the majority; the state is totalitarian. The achievement of social justice and equality under the socialist system comes at a price: and that price is freedom. 1 2 Hayek. p.34 Hayek. p.35 Dubuque 9 3. Defining Economic Freedom If socialism is the ‘road to serfdom’ as Hayek argues, then a closer look must be given to the concept of economic freedom and its relationship with political freedom. As Milton Friedman writes, “fundamentally, there are only two ways of co-ordinating the economic activities of millions. One is central direction involving the use of coercion – the technique of the army and of the modern totalitarian state. The other is voluntary cooperation of individuals – the technique of the marketplace.”1 This simple characterization pointedly distinguishes between the two philosophies of economic organization available to governments. That’s not to say either of these systems exist in their purest form anywhere in the world; even the most liberal of economies have a large state sector and the most totalitarian socialist state has a black market. What is important is to identify how liberalism or ‘capitalism’ differs from state control. Fukuyama writes that “[i]n its economic manifestation, liberalism is the recognition of the right of free economic activity and economic exchange based on private property and markets.”2 Like political freedom, capitalism is the idea of individual rights and liberties within the economic sphere. Equality is found in the rights and opportunities of individuals, not in the outcome of material wealth. The idea of individualism is not a philosophy of selfishness or disregard for the greater good of society. Rather, its proponents suggest that deferring to the individual is the only way or at least the best way for achieving the greatest good. The argument is made that scales of value are relative to the individual. Whereas one individual might prefer one good over another, a different person has different preferences. Because of 1 2 Friedman. pp. 13-14 Fukuyama. p. 44 Dubuque 10 this, “the individualist concludes that the individuals should be allowed, within defined limits, to follow their own values and preferences rather than somebody else’s; that within these spheres the individual’s system of ends should be supreme and not subject to any dictation by others.”1 This argument holds weight for defending both political and economic freedom. Whereas for political liberalism the individual ought to be free from state coercion and empowered within government, in capitalism the individual should not be denied economic choices, but empowered to make them. The greatest good is not giving to everyone what a few people value most, but allowing everyone the opportunity to decide and act on their own preferences. Individualism does not require or assume that individuals are selfish, but rather recognizes that they are the ones most able to judge their own needs and work to fulfill them. Capitalism is the philosophy of empowering the individual in the marketplace. Unfortunately, capitalism is commonly misrepresented by the term ‘laissez-faire,’ the philosophy of a hands-off approach by government in regards to economic matters. Milton Friedman disagrees with this characterization writing: “the existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the ‘rules of the game’ and as an umpire to interpret and enforce the rules decided on.”2 This metaphor aptly compares free market economics to a game, not to trivialize it, but to illustrate its characteristics. A game is not a game if the outcome is already predetermined, or ‘centrally directed.’ What makes a game unique is that players interact with each other knowing in advance the rules and that any disputes that will be settled by a third party. Free market capitalism 1 2 Hayek. p. 59 Friedman. p.15 Dubuque 11 is not about a ‘laissez-faire’ or hands off approach by the government, but a system where government sets the rules, enforces them and arbitrates disputes, but does not actively influence or coerce players. Hayek continues, “of course every state must act and every action of the state interferes with something or other. But that is not the point. The important question is whether the individual can foresee the action of the state and make use of the knowledge as a datum in forming his own plans . . . The state controlling weights and measures (or preventing fraud and deception in any other way) is certainly [observing liberal principles].”1 In this regard, the state’s coercive power is limited by pre-established rules and therefore shapes the dynamics of the game but goes no further. The capitalist wants the state to empower its citizens to make their own economic decisions, not make those choices for them. One of the key arguments made by socialists is that individuals are not free to make their own political or economic decisions until they have been empowered with economic security. In a capitalist system some measure of security can be provided to the very poorest of society without a massive scheme of redistribution of wealth. As Hayek sees it, there are: “two kinds of security: the limited one, which can be achieved for all, and which is therefore no privilege but a legitimate object of desire; and absolute security, which in a free society cannot be achieved for all.”2 He defines the limited type of security as security from “severe physical privation” and absolute security as the security of a “given standard of life.” Thus the liberal believes it is the duty of the state to provide the economic means to sustain life if the individual is incapable or unable to do so on their own. However, if the state takes it upon itself to guarantee a certain quality 1 2 Hayek. pp. 80-81 Hayek. p. 119 Dubuque 12 of life for all its citizens or attempts to value what quality of life different groups deserve, then it has eliminated much of the competitive nature of the free market. In order to guarantee a certain quality of life for some, the state will have to find resources elsewhere. Most people would agree that some taxation is not only inevitable and desirable for services rendered, but taxation is also an example of the coercive power of the state. If the state was to step in and bail out the auto-industry in order to protect those high paying manufacturing jobs with excellent benefits, other professions would demand the same state-sponsored security. The resources to provide that security would inevitably come from those sectors that weren’t protected, thereby encouraging them to demand protection instead of paying out. It is therefore impossible to provide the more extensive form of security without controlling the market or abolishing it all together and in the process reducing individual freedom. Despite the theoretical discussion of the proper role of government in managing a liberal economy, the fundamental definition of economic freedom has proved elusive. Perhaps the most colorful term used to describe the idea of economic freedom comes from journalist Thomas Friedman of The New York Times, who calls the set of policies the government must adopt the ‘golden straightjacket.’ Some of his golden rules follow: . . . making the private sector the primary engine of its economic growth, maintaining a low rate of inflation and price stability, shrinking the size of its state bureaucracy . . . eliminating and lowering tariffs on imported goods, removing restrictions on foreign investment, getting rid of quotas and domestic monopolies, increasing exports, privatizing state-owned industries and utilities, deregulating capital markets, making its currency Dubuque 13 convertible . . . deregulating its economy to promote as much domestic competition as possible, eliminating government corruption, subsidies and kickbacks as much as possible . . .1 His list is certainly extensive and illustrates in better detail the broader theme of government setting the rules and then stepping back to arbitrate. The first step is to have the state adopt the philosophy of a private market as the principle driving force of its economy. Once that philosophical decision is made, the other policies of economic freedom are the tools that build a strong private economy. Friedman’s straightjacket recognizes the importance of creating a stable business environment by controlling inflation and maintaining price stability. By doing this, the government provides a degree of security that encourages individuals to interact within the marketplace and produce wealth. Policies that bust monopolies, reduce government subsidies and open the market to foreign producers promote competition and limit unfair advantages. Monopolies, subsidies, kickbacks, and some forms of government regulation provide security to a limited number of companies but discriminate against the rest. Economic freedom means promoting equal opportunities within the market rather than ensuring special security for some. 4. The Relationship between Political and Economic Freedom So far economic freedom has been implicitly linked to political freedom; now it’s time to take a more thorough look at the suggested theoretical relationship. Milton Friedman addresses the issue appropriately with the statement that, “the relationship 1 Friedman, Thomas. The Lexus and the Olive Tree. p. 103 Dubuque 14 between political and economic freedom is complex and by no means unilateral.”1 Literature on the subject is divided as to what phenomenon causes the other: which comes first, political or economic freedom? The two classic examples used to buttress each side of the debate are the countries of India and China. Whereas India gained political independence and democracy first, it took nearly forty years for the country to begin to adopt more liberal economic policies. On the other hand China’s Communist Party has maintained a tight one-party dictatorship for decades while transforming its socialist economy into a competitive market based on the principles of economic freedom. Considering the size and importance of these countries, it is impossible to ignore the implications of their respective histories. While keeping in mind these two examples and the counterpoints they provide, it’s important to take a closer look into the theoretical relationship between political and economic freedom. For some academics, capitalism’s liberalizing influence in the marketplace directly influences citizens’ drive for democracy and political freedom. Hayek quotes the ‘prominent old communist,’ Max Eastman as saying that “[Marx] is the one who informed us, looking backwards, that the evolution of private capitalism with its free market had been a precondition for the evolution of all our democratic freedoms. It never occurred to him, looking forward, that if this was so, these other freedoms might disappear with the abolition of the free market.”2 What Eastman had come to realize was that economic freedom not only encourages the growth of political liberalism, but was a vital condition for the long term success of democracy. This hinges on the idea that freedom gained in the marketplace influences the desire for freedom in politics. In a 1 2 Friedman, Milton. p.10 Eastman, Max. Reader’s Digest. July, 1941. p. 39. quoted in Hayek pp.104-5 Dubuque 15 capitalist economy consumers are presented with a wide variety of choices and the ability to act on their desires. According to this theory, the autonomy granted to them in the market provides the knowledge and framework for demanding autonomy in politics. The liberalization of China’s economy has prompted many to predict the inevitable liberalization of politics as well. An editorial last year in USA Today argued that “business develops precisely the traits that make democracy work. It requires independence, much effort, and self-discipline—but also the ability to collaborate.” Recognizing that China has adopted market capitalism, the author argues that “this has created opportunity, prosperity and de facto personal liberty. The question now is whether it will lead to democracy…”1 China in a sense has become the ultimate test for the theory, the principles of economic liberalism have been in place for some time now, yet the state continues to maintain a firm grip on political power. For skeptics, China has already proven the theory defunct; for idealists China remains the Holy Grail. There are other countries that have liberalized politically after doing so economically. Gary Becker, an economist at the University of Chicago writes that “the history of different countries during the past century strongly indicates that economic freedoms over time typically push societies toward political freedoms.” He cites as recent examples South Korea, Taiwan and Chile; three countries whose governing dictatorships gave up centrally directed economies in favor of free market economics. Becker adds that within two decades of adopting liberal economic policies, “all three nations had achieved, or were moving rapidly toward, political democracies, with vibrant competition for elections among competing parties, and a mainly free press.” 2 While 1 2 Scramm, Carl and Robert Litan. “Why Democracy is America’s Second most Valuable Export.” Becker, Gary S. “Economic and Political Freedom: Does One Lead to the Other?” Dubuque 16 China remains a pipe dream for the theory, these three countries offer credible evidence in support of the thesis. On the other hand, another theory argues the relationship operates in the opposite direction; that political liberalism and democracy are the forces that have created capitalism. Hayek was one who believed that economic freedom was the unforeseen consequence of political freedom. He found that as the individual gained autonomy from the state, there was a “conscious realization that the spontaneous and uncontrolled efforts of individuals were capable of producing a complex order of economic activities could come only after this development had made some progress. The subsequent elaboration of a consistent argument in favor of economic freedom was the outcome of a free growth of economic activity which had been the undersigned and unforeseen by-product of political freedom.”1 According to this line of reasoning, the primary focus of early liberalization was political. When this new freedom inevitably spilled over into the economic sphere, individuals began exchanging goods and creating businesses in a free market environment. This sequence of liberalization was observed in India: political followed by economic liberalization. However, Becker finds that, “the path from political to economic freedom . . . is slower and more uncertain. It took India over four decades to begin to loosen its extensive controls over private companies, labor markets, start-ups, imports from abroad, and numerous other activities.”2 Even though the country gained political independence from Great Britain in 1947, a significant amount of time passed before the government adopted liberal economic policies. Although it might be in 1 2 Hayek. p.15 Becker Dubuque 17 the best interests of the country to promote the free market, politically liberated democracies often have powerful special interest groups that promote their own interests and lobby hard to retain their economic security. Also, since liberalizing economic reforms that tend to have significant long-term benefit often have short-term costs, these policy changes are difficult to implement in democracies because of the unpopularity of the short-term costs. For example, when economic liberalization exposes inefficient sectors to increased competition, hard restructuring and lay-offs will most likely follow. Needless to say, these short-term costs would be very unpopular with those affected. Given the real costs of economic liberalization, it’s important to understand why such reforms are worth pursuing. 5. The Relationship between Freedom and Economic Prosperity For the liberal, political and economic freedom are desirable in their own right, but many intellectuals have come to believe that one or both of these influence, or are influenced by, economic prosperity. The addition of this third variable is critical for empirical analysis. Again, much has been written on the subject, hopefully a few selected studies will help clarify the discussion. One of the seminal studies was conducted by Seymour Martin Lipset and published in 1959. He noted that “from Aristotle down to the present, men have argued that only in a wealthy society in which relatively few citizens lived in real poverty could a situation exist in which the mass of the population could intelligently participate in politics.”1 His study is an effort to empirically test this hypothesis in the geographical regions of Europe and Latin America. To measure economic prosperity, he uses per capita income as well as the number of 1 Lipset, Seymour Martin. “Some Social Requisites of Democracy.” p. 75 Dubuque 18 people per car and per doctor in society, the number of radios, telephones and newspapers for every thousand people. According to his findings, there is a significant difference between the relative wealth of ‘more democratic’ countries and ‘less democratic’ ones. In Europe there were 126 more people per car in the less democratic countries and 175 more people per car in Latin America’s less democratic countries than its more democratic ones. Similarly the less democratic countries in both regions had an average per capita income significantly lower than the average per capita income in the more democratic countries.1 Not only did Lipset find that democratic countries had a higher degree of material wealth, but he also noticed that these countries were more developed as well. In measuring levels of industrialization, he found that fewer people worked in agricultural sectors in the more democratic countries compared to the less democratic ones. Also, all of the indices that measure urbanization concluded that the more democratic countries had a greater percentage of their populations residing in urban areas. As for education, literacy rates also appeared to be correlated with levels of democratization. The more democratic countries of Europe were almost completely literate while the less democratic ones averaged 85 percent. In Latin America the difference was even more significant: 74 percent compared to only 46 percent.2 Given all of this information, Lipset makes the statement: Increased wealth is not only related causally to the development of democracy by changing the social conditions of the workers, but it also affects the political role of the middle class through changing the shape of 1 2 Lipset. p. 75-77. Lipset p. 78-89 Dubuque 19 the stratification structure so that it shifts from an elongated pyramid, with a large lower-class base, to a diamond with a growing middle-class. A large middle class plays a mitigating role in moderating conflict since it is able to reward moderate and democratic parties and penalize extremist groups.1 His conclusions find that economic development influences democratization indirectly through ‘social’ development. By increasing industrialization, urbanization and education, greater accumulation of wealth increases the size of the middle class and this class is able to diffuse the natural tension between the rich and the poor. In turn, a more secure, stable, and educated society not only demands democracy, but also has the capability to maintain a stable democratic government. Economist Jagdish Bhagwati agrees with Lipset that “economic prosperity produces a middle class. This emerging middle class creates, however haltingly, an effective demand for democratization of politics: the new bourgeoisie, with wallets a little fatter, seeks a political voice, not just one in the marketplace.”2 At the same time he cautions that democracies are not the only form of government capable of producing economic prosperity and cites Chile, Brazil, Spain and China as examples of dictatorships that have significantly increased the level of wealth within the country. Nevertheless, as the level of wealth increases in society, Bhagwati agrees that there is a corresponding rise in pressure for democratization. Political scientist Larry Diamond examined Lipset’s theory with updated data and concluded that: “This review of the evidence more than three decades later has demonstrated that Lipset (1960) was broadly correct both in his 1 2 Lipset p. 83 Bhagwati, Jagdish. In Defense of Globalization. p. 94 Dubuque 20 assertion of a strong causal relationship between economic development and democracy and in his explanations of why development promotes democracy.”1 He also adds that in countries where democracy already exists, economic development increases the security and stability of liberal governments and development in totalitarian states leads to an increasing probability of a successful transition to democracy. Another comprehensive study examines the relationship of economic prosperity and political freedom using a different method. In search of an answer, UCLA professors Roll and Talbott employ an events-study technique, commonly used by financial economists to study the effects of a particular event. They identified democratic and antidemocratic events in a wide range of countries and studied the impact these events had on each country’s gross national income (GNI). Some examples of their democratic events include Chile freely electing a president in 1990, democracy returning to Peru in 1980, and the establishment of democracy in South Korea in 1987. On the other hand, some antidemocratic events include a military junta in Myanmar in 1962, Marcos declaring martial law in the Philippines in 1972 and the Pinochet dictatorship established in 1973 in Chile.2 After assembling the data on GNI, Roll and Talbott used statistical tests to analyze individual countries and the average trends in all countries around democratic and antidemocratic events. According to their data, the average sample country experienced a 0.67 percent rate of gross national income (GNI) per capita growth per year, for the ten year period prior to experiencing a democratic event. Following this event the rate that per capita income was increasing jumped to 2.2 percent for the next five years, then 1.7 percent for 1 2 Diamond, Larry. “Economic Development and Democracy Reconsidered.” p. 125 Roll, Richard and John Talbott. “Political Freedom, Economic Liberty and Prosperity.” Dubuque 21 the five years after that, and finally 2.7 percent for the next ten years. Looking at their data, it seems evident that democratic events had a positive influence on the rate of per capita income growth. Simply put, the countries in their survey on average had more economic growth following a democratic event than preceding it. Therefore, the authors draw the conclusion that there is a causal relationship between political freedom and economic growth. The data suggests that democratic rights bring about increased economic prosperity.1 When examining the ‘antidemocratic events,’ the data revealed some interesting results. The growth rates following those events were mostly flat for the first five years, followed by a decline in the rate of growth (although not an absolute decline in wealth) in the next five years, followed by a rate of growth of just 0.85 percent per year for the next decade.2 While the antidemocratic event on average did not reduce the economic wealth of the country, it appeared to severely restrict the country’s rate of income growth. Further, according to the authors’ analysis, every year after a democratic event experienced a higher growth rate than every year after an antidemocratic event. Given all of this, the data certainly appears to support the idea that political freedom positively affects economic growth. However, their analysis also found that on average, a country experiencing a democratic event had about an 80 percent higher income leading up to the event than the average country experiencing an antidemocratic event, although they do add the caveat that both had average incomes that were very low by our standards.3 This could be interpreted as an indication that economic prosperity is also a precursor of political 1 ibid Roll and Talbot 3 ibid 2 Dubuque 22 freedom. The relationship therefore appears to run in both directions: democratic events (political freedom) triggers economic growth and economic prosperity triggers democratic events. Although this might frustrate attempts to determine an independent and dependent variable, it indicates that there is a strong interdependent correlation between economic prosperity and political rights and freedom. In order to better illustrate the trends of economic growth and level of prosperity surrounding these events, one of their graphs has been included below. 1 Although the survey is thorough, it is by no means exhaustive (as is readily admitted by the authors). Concerned with personal biases, Roll and Talbot had a third individual from the Hoover Institute assess their list for omissions and mischaracterizations. As with any survey, there is certainly a degree of error associated with the sample size, and concern as to whether the sample is an accurate representation of the population. Despite this, it seems that Roll and Talbot offer legitimate statistics indicating that there is a correlation between economic prosperity and political freedom. Their data further suggests a degree of interdependence where economic prosperity is a 1 Roll and Talbot Dubuque 23 precursor for democratic events, and the events themselves cause an increase in economic growth in the country. Thus far, quite a bit has been investigated on the nature of democracy, political liberalism and economic prosperity; it’s time now to shift the focus to studies examining the relationship between economic freedom and prosperity. The specific policies promoting free market capitalism have already been discussed, but one phenomenon has thus far been left out: globalization. Classic liberal economics encourages free trade as a method for increasing competition, which in turn increases efficiency, productivity, and quality; but the original idea of free trade has more of a passive connotation: knock down the walls around your economy. Today globalization has taken free trade to the next level: how can you integrate your economy into the global market? This global market is built on the principles of economic liberalism and in order to successfully integrate the state economy into the global one, governments must adopt policies promoting economic freedom. Recall Thomas Friedman’s ‘Golden Straitjacket’ of economic reforms; he says “[a]s your country puts on the Golden Straitjacket, two things tend to happen: your economy grows and your politics shrinks. That is, on the economic front the Golden Straitjacket usually fosters more growth and higher average incomes – through more trade, foreign investment, privatization and more efficient use of resources under the pressure of global competition.”1 There are several studies that agree with this claim. One of the more thorough ones was conducted by two economics professors from the University of Illinois that sought to not only validate the effectiveness of economic freedoms in the aggregate, but also identify which particular freedoms had the most impact on economic growth. 1 Friedman, Thomas. p. 103 Dubuque 24 Professors Ayal and Karras examined a sample size of 58 countries with data from the years 1975 to 1990. Using the Fraser Institute’s index of economic freedom and each country’s GDP adjusted for population (per capita), they found a positive correlation between the level of economic freedom and extent of economic growth. “The results reported above are very supportive of the proposition that aggregate ‘economic freedom’ enhances growth both via increasing total factor productivity and via enhancing capital accumulation.”1 They also identified thirteen ‘components’ of economic freedom to individually test for impact on economic growth. Of the thirteen, Ayal and Karras found eight that are statistically significant in increasing wealth. The eight components were grouped into three broad categories: providing a “stable monetary environment, small government participation, and freedom for citizens to transact with foreigners.”2 While finding that ‘economic freedom’ broadly defined tended to increase economic growth, policies that fit into these three categories were the most effective. Indeed most surveys on the subject find economic freedom in a broad sense to positively influence economic growth, while at the same time individual components of ‘economic freedom’ have varying levels of effectiveness. 6. Methodology After examining other research on the subject of the relationship between political freedom, economic freedom and economic prosperity, it’s time to set up this particular study and identify the data that will be used. In order to analyze the subject, reliable indices of political and economic freedom are needed as well as a method for determining 1 2 Ayal and Karras. “Components of Economic Freedom and Growth.” p. 336 Ayal and Karras. p. 336-7 Dubuque 25 prosperity in a cross-country analysis. When it comes to political freedom, there is one index that is frequently referenced in the media, utilized in academic studies and helps the U.S. State Department analyze other nations. “While definitions of freedom can be as slippery as mercury, the Freedom in the World study gained greater credibility in part because it uses criteria that most Westerners agree are appropriate indicators.”1 This praise is awarded to Freedom House’s political freedom index, arguably the most comprehensive and well respected index available. The index compiled by Freedom House breaks political freedom into two components: political rights and civil liberties. Their measurement of political rights examines “to what extent the system offers voters the opportunity to choose freely from among candidates and to what extent the candidates are chosen independently of the state.”2 While the formal system of election laws is important to the survey, also important are real world influences which might negate legislated political rights. If the military has a political role in elections, or the royal family maintains considerable influence, then the survey takes those factors into account. Then, once elected the government is rated on its level of “accountability, openness and transparency between elections.”3 In its attempt to quantify the amorphous concept of freedom, the results of the survey are based on a checklist of questions that is applied uniformly to all countries and answered by regional observers/experts. These questions fall under the categories of “Electoral Process,” “Political Pluralism and Participation,” and “Functioning of Government.” A few examples of questions include ones asking if “there fair electoral Lehrer, Eli. “Scorecards That Rank Freedom” www.freedomhouse.org 3 www.freedomhouse.org 1 2 Dubuque 26 laws, equal campaigning opportunities, fair polling, and honest tabulation of ballots?” Another one asks if “there a significant opposition vote, de facto opposition power, and a realistic possibility for the opposition to increase its support or gain power through elections?” Questions also ask to what extent minorities are allowed to participate in government and the extent to which corruption exists. The complete checklist is available on the organization’s website. The second component of the survey examines to what extent civil liberties are present in each country. This measurement takes into account what the country has for laws on the books, but gives more weight to actual conditions on the ground as a more accurate indication of civil liberties. Like political rights, Freedom House carefully defines civil liberties through their checklist of questions to consider. These fall under the categories of “Freedom of Expression and Belief,” “Associational and Organizational Rights,” “Rule of Law,” and “Personal Autonomy and Individual Rights.” Under the first heading the questions ask if there is a free and independent media; to what extent religious institutions and expressions are free from the state; and if the education system practices academic freedom or state indoctrination. Under the second heading, the survey asks if there is the freedom to assemble and demonstrate; if trade unions exist; and if other private and public organizations are allowed. Under the third heading fall the questions relating to the independence of the judiciary, if the police are under civilian control, and if citizens are treated equally under the law. The last category determines to what extent individuals are free to choose their own residences, jobs, and travel plans. Additionally the survey evaluates to what extent individuals and genders are treated equally. Dubuque 27 In order to quantify their findings, the organization awards points in both categories based on positive responses to the questions and the highest total raw scores are given the lowest ratings. A rating of 1 to 2.5 gives the country a designation of politically free; 3 to 5 are partially free and 5.5 to 7 are designated not free. This study will use the combined numerical ratings in its analysis. While Freedom House’s survey of political freedom is widely accepted for its broad criteria, most indices of economic freedom are criticized for their ideological slant. This is does not imply that economic freedom indices are any lest rigorous in their methodology, rather the definition of this type of freedom is hotly debated. One critic, Wheaton economics professor John Miller, assails the index used in this study saying that “in the hands of the Wall Street Journal and the Heritage Foundation, Washington’s foremost right-wing think tank, . . . an economic freedom index merely measures corporate and entrepreneurial freedom from accountability. . . The index does not even pretend that its definition of economic freedom has anything to do with political freedom.”1 He refers to obvious discrepancies between the Freedom in the World Survey and the economic freedom index published by the Heritage Foundation. He accurately observes that countries the Heritage Foundation designates as ‘economically free’ are far from ‘politically free.’ The coordinator, Bryan Johnson, of the Heritage index agrees with the critics that this survey is ideologically based. When interviewed, he explained, “We’re trying to measure the extent to which countries show respect for classical liberal economic principles. . . It’s not a noncontroversial way of measuring, but we think these measures are the right ones.”2 It seems that most of the controversy around this index is 1 2 Miller, John. “Free, Free at Last.” Lehrer, Eli. “Scorecards That Rank Freedom.” Dubuque 28 whether or not it measures the right criteria for a successful economy; by comparing the index to the economic performance of each country this study will hopefully evaluate whether classic liberal economic freedom does indeed positively influence prosperity. As far as methodology goes, this economic freedom index “[works] with the same basic methodology as Freedom House, the Heritage Foundation also assigns its researchers to pore through economic accounts on the world’s nations.”1 In their effort to identify to what extent countries adhere to the classic liberal economic philosophy the index identifies fifty independent economic variables that can be grouped into ten principles categories, weighted equally. These ten categories are: trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation, and informal market activity.2 Similar to Freedom House, every county is rated in each category on a scale from one to five; the lower a score, the closer that country’s economic environment and set of policies adhere to the index’s definition of economic freedom. After the country has been rated in all ten areas, its score in each are combined and averaged to produce a final rating. Scores under 1.99 are free, while those above a 4.00 are designated repressed; those in between are either mostly free or mostly unfree. A succinct overview of the criteria used to rate countries in each category follows. A complete description of the index’s methodology can be found in chapter five of the Heritage Foundation’s 2006 Index of Economic Freedom report. In determining a score for ‘trade policy,” the index uses the country’s weighted average tariff. The higher the tariff the worse the country scores in economic freedom. 1 2 Lehrer. Beach, William W. and Mark A. Miles. “Explaining the Factors of the Index of Economic Freedom.” p. 2 Dubuque 29 Additionally, the index considers import quotas, licensing requirements and other nontariff barriers as well as corruption within customs services in assessing and determining the trade policy score of the country. When examining the fiscal burden of the government the index looks at the marginal tax rate for on income and corporations, and the yearly change of government expenditure relative to GDP. The lower these rates are, the better the score in this area. The third category examines government intervention in the economy. The variables examined are: government consumption as a percentage of the economy, government ownership of businesses, share of government revenue from state owned enterprises, and finally economic output produced by the government. A better score is awarded to those countries with less government intervention. The fourth factor of monetary policy is rated based on average inflation: lower inflation and a stable monetary environment yield better scores. Looking at capital flows and investment in the next category analysts examine a wide variety of factors in an attempt to determine the ease with which foreigners can do business in the country. Variables here include restrictions on foreign ownership and investing and to what extent foreign and domestic companies are treated equally. In the next category a private banking system is considered essential for economic freedom. Under this heading the index looks at to what extent the government regulates and restricts private banking and to what extent government influences who receives credit. The next grouping considers wages and prices. In this section the index measures to what extent governments control prices either directly or through subsidies and to what extent the state regulates wages using minimum wage laws. Dubuque 30 One of the most important categories is the eighth one: property rights. Not only are laws protecting private property and defining legally valid contracts important, but so too is an independent judiciary capable of arbitrating disputes. Any government expropriation of private property or corruption of the judiciary reduces the country’s score in this area as well. The second to last category is relatively broad and controversial in its examination of government regulation. Any licensing requirements to operate a business, labor regulations, environmental, consumer safety and worker health regulations detract from a country’s economic freedom score. Corruption in the state’s regulatory bureaucracy counts against it as well, while ease of obtaining a business license improves the score. Basically, the index considers any regulation to negatively impact economic freedom. The final category looks at the impact of ‘informal markets’ on the country’s economy. These black markets could potentially positively impact economic freedom by offering an avenue for entrepreneurship that otherwise would not exist in a very repressed economy. However it also has the potential to devastate the economy due to corruption and piracy of intellectual property rights. To measure and rate the existence of informal markets the index relies on Transparency International’s Corruption Perceptions Index. In general higher levels of black market activity lower the overall economic freedom in the country and the survey adjusts its score accordingly. Even in this brief overview of the index’s criteria, it’s easy to see how its position on various economic policies can be considered controversial. The previous theoretical discussion of economic freedom ought to help explain the rationale for selecting these variables for an economic freedom index. To what extent a positive correlation exists Dubuque 31 between a country’s economic freedom score and its economic prosperity remains to be seen in the analysis of the collected data. Of course before that analysis can occur, the data used for the dependent variable must be identified. The decision to examine the relationship between political freedom, economic freedom and economic prosperity to some extent sidesteps a larger issue. Increasing wealth is widely considered to be an important part of development; in the poorest nations increased economic prosperity means being able to afford to eat and drink clean water and provide some degree of shelter. For middle-tier countries, increased economic prosperity means being able to afford luxuries beyond basic survival necessities. However in the richest countries, increasing wealth may be considered of secondary importance when compared with other quality of life factors like leisure time or protection of the environment. While ‘economic prosperity’ implies an improved quality of life, wealth is not desirable for intrinsic reasons, but in its ability to provide a desirable life. In his study of Development and Democracy in the Third World, Abbas Pourgerami notes that the United Nations “combines nine social and seven economic indicators to compute an index of development” and that “[s]everal studies seek to construct composite indicators of development that can measure not only outcomes of the development process, but also improvements in the quality of human life over time.”1 Various indicators like the United Nations index on social development and the Physical Quality of Life Index measure a more comprehensive idea of development. According to Pourgerami, “Test results indicate that correlations between the conventional and alternative development and growth indicators are not sufficiently high in order for them 1 Pourgerami, Abbas. Development and Democracy in the Third World. pp. 12-13 Dubuque 32 to be interchangeable.”1 This means that wealth is not interchangeable with quality of life indices. However, these alternative indices measure a subjective quality of life as opposed to an objective level of wealth. This problem was considered earlier in the discussion of freedom and individualism: everyone has a different scale of value, therefore it is impossible to determine a universal set of preferences. While the possession of wealth does not guarantee a certain quality of life, increased wealth does offer an increased means for attaining what is desirable. Because of that, this study will imply that increased wealth is desirable. Of course it is important to remember that the purpose of this study is to evaluate the relationship between political freedom, economic freedom and wealth; any implications that arise from this research are secondary to that purpose. In selecting a measure of wealth with which to compare countries, it’s important to identify a measure that is widely available and easily standardized for cross-country analysis. The obvious choice and the one most commonly used in this type of study is the measurement of gross domestic product. Its textbook definition reads: “The total income earned domestically, including the income earned by foreign-owned factors of production; the total expenditure on domestically produced goods and services.”2 In effect, GDP is the measurement of all economic activity over a given time period. While this figure is widely available for most countries, GDP alone does not allow for a good cross-country analysis. Because larger countries can produce a greater amount of wealth than smaller countries, it is important to factor in population size in order to standardize the comparison. GDP per capita does that by dividing a country’s total gross domestic 1 2 Pourgerami. p. 20 Mankiw, N. Gregory. Macroeconomics 6th ed. p.558 Dubuque 33 product by its population size, yielding an average amount of wealth per person. In order to compare the relative wealth of say one American to one Indonesian, the monetary figure must be expressed in the same currency. Purchasing-power parity (PPP) is the preferred method for standardizing currencies, which is based on normalizing a basket of goods so that they cost the same amount in each country. For an analysis over time all data must be expressed in time-specific currency as well. This survey draws its data from the World Bank’s World Development Index (2006 edition), in the form of GDP per capita (PPP) in current international dollars. Using Freedom House’s political freedom index, the Wall Street Journal and Heritage Foundation’s economic freedom index, and the World Bank’s GDP per capita data, this empirical study will use correlation analysis in an effort to determine if and to what extent a relationship exists between the variables. The statistical method of bivariate correlation is a tool used to measure the linear relationship between two variables, with the strength of the relationship determined by the Pearson correlation coefficient (r). A value close to zero implies that there is no linear relationship between the variables, while a value closer to positive or negative one indicates a stronger relationship. Positive values indicate a positive relationship while negative values indicate a negative relationship. Because both the economic and political freedom indices define 1 as the most free and increasing scores as less free, the expected coefficient is negative. That is, as freedom scores decrease, economic prosperity is hypothesized to increase. Additionally, while data is not available for all countries, 152 are represented in this study over the time period of 1995 to 2005. All of the original data tables from this analysis are available in the appendix. Dubuque 34 7. Empirical Evidence / Results The data set used in this analysis is comprised of 152 countries, all of which have been measured by each index and have reliable data available for GDP per capita (PPP). Several countries were not included in this survey because of unavailable data for GDP or they were not ranked by one or both of the indices. Perhaps the most notable exclusions are Afghanistan, Cuba, North Korea, and Iraq; the rest are small countries like Andorra, Barbados, Comoros and Vanuatu. Despite these omissions, the vast majority of the global population has been included in the survey. Some general characteristics of the data set follow. The mean GDP per capita is $8,884.95 (roughly equivalent to Malaysia), Sierra Leone has the lowest measured prosperity of $549.10, and Luxembourg has the high of $53,730.98. The mean political freedom score is 3.45 (the score of Lesotho), 17 countries have the best score possible: 1, and three (Turkmenistan, Sudan, and Syria) share the most repressed score of 7. For economic freedom, the mean score is Colombia’s 3.12, with a best score of 1.42 (Hong Kong) and a worst score of 4.62 (Laos). To begin with a macro analysis of the data, the following results illustrate the comparison of average GDP per capita for each of the 152 countries with those countries’ averaged economic and political freedom scores. A significant degree of correlation was found between each index and the measurement of wealth. When the average GDP per capita over the eleven year period was compared with the average economic freedom score, a Pearson correlation coefficient of -.788 was observed. This correlation is significant at the 0.01 level, demonstrating an obvious relationship between the variables. The positive relationship between economic freedom and average GDP per capita is Dubuque 35 graphically illustrated in the following diagram. (Recall the best score in each freedom index is 1). 60000.00 Average GDP per capita 50000.00 40000.00 30000.00 20000.00 10000.00 0.00 1.00 2.00 3.00 4.00 5.00 Average Economic Freedom Similar results were observed in the analysis of average GDP per capita and average political freedom. Although the Pearson coefficient was less robust at a -.607, this still indicates a correlation significant at the 0.01 level and offers evidence of the existence of a relationship between the variables. The following graph illustrates the relatively weaker relationship between these two variables. 60000.00 Average GDP per capita 50000.00 40000.00 30000.00 20000.00 10000.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 Average Political Freedom Unlike the previous graph, this one illustrates several outlier countries that have extremely poor political freedom scores, yet have much greater wealth than countries Dubuque 36 with similar scores. Looking at the residuals, these countries are: the United Arab Emirates, Singapore, Bahrain, Saudi Arabia, Kuwait, and Oman. Interestingly, one characteristic shared by all of these countries (except for Singapore) is that they all export a significant amount of fuel. The World Bank development indicator’s database has a data series of “fuel exports as a percentage of merchandise exports.” Using partial correlation and controlling for fuel exports; the correlation between GDP per capita and political freedom increases from -.607 to -.628, indicating a marginally stronger correlation. The same happens when economic freedom is controlled for fuel exports: the correlation increases from -.788 to -.795. Unfortunately, while marginally improving the quality of the relationship, fuel exports do not substantially readjust either relationship. Yet given the level of significance of the original analysis and the controlled test, it is possible to state that both economic freedom and political freedom are directly related to economic prosperity. One characteristic that distinguishes the graph of political freedom from economic freedom is that for countries earning above average political freedom scores, their scores appear to be more closely correlated than countries in the bottom half. This observation is validated by statistical analysis. Whereas the correlation between political freedom and economic prosperity for all countries was determined to have a Pearson coefficient of -.607, countries with an above average freedom score have a coefficient of -.754, (still significant at the 0.01 level); countries with a below average freedom score demonstrated no correlation with a insignificant coefficient of 0.055. Given that the mean political freedom score of 3.45 is very close to the scale’s median of 3.50, the data indicates that in general for countries that tend to be more repressive than free, the actual degree of Dubuque 37 political freedom does not impact the wealth of the country. On the other hand, for those countries that are described as more free than not, there is significant correlation between their actual level of political freedom and economic prosperity. This suggests that when a repressive regime controls a country, the level of economic prosperity is determined by the unique characteristics of its policies and cannot be determined based on what small amounts of political freedom exist. On the other hand, once the population is more or less free, increasing political freedom positively impacts prosperity. Breaking the data down in a different way, the strength of the correlation seen in the complete sample is not found when levels of wealth are grouped into thirds. Those countries in the bottom third of economic prosperity showed only a -.140 coefficient when average GDP per capita was compared with average economic freedom and a .073 coefficient when wealth was compared to political freedom. Both figures are not only close to zero but also are statistically insignificant; indicating that there is no measurable existence of a relationship among the variables. On the other hand, the middle tier countries had some evidence of correlation, -.292 for economic freedom and -.331 for political freedom. These two coefficients indicate that correlation is significant at the 0.05 level. However, it was the wealthiest third that saw the most correlation: -.651 for economic freedom and -.340 for political freedom. The relationship between economic freedom and wealth was significant at the 0.01 level while political freedom demonstrated significance at the 0.05 level. Although this does not dismiss the findings of the entire sample, it does indicate that the relationship between economic and political freedom and wealth is most evident in the top tier of wealth while the bottom third exhibited no significant correlation. Dubuque 38 If relative freedom in impoverished countries is not correlated to relative wealth, then it appears that there is some wealth threshold that must be crossed before freedom will positively impact prosperity. Also, given that progressively more correlation was observed as wealth increased, this could imply that a linear relationship may not be the best fit for all countries. To test whether a power relationship is more appropriate, the square root of the average GDP per capita was taken and analyzed in comparison with economic and political freedom. The results indicate that there is a greater degree of correlation in this relationship than the previously observed linear correlation. The Pearson coefficient for measuring the relationship between economic freedom and prosperity increased from -.788 to a -.821, while remaining significant at the 0.01 level. Similarly for political freedom and wealth, the coefficient increased from -.607 to -.635 (significant at the 0.01 level). This indicates that a power relationship provides a better explanation for the relationship between freedom and prosperity. When conducting this type of statistical work, it is important to keep in mind that political and economic freedom are not the only factors that potentially influence economic prosperity. Of course selecting control variables to further isolate the relationship between freedom and prosperity is certainly a subjective endeavor. After carefully explaining the reasoning behind exploring the relationship between political and economic freedom and prosperity, selecting other variables that would influence prosperity without adequate explanation appears arbitrary, yet is nonetheless important to determining the significance of the relationship between the original variables. The following selected control variables would intuitively be correlated to economic prosperity, without being correlated to freedom. According to the Solow Growth Model Dubuque 39 in economic theory, increased national saving should enhance prosperity. Thus the first control variable is gross domestic savings (as a % of GDP), taken again from the World Bank database. Education is another often cited factor important in producing wealth, so the measurement of literacy rates has been included as a rough proxy variable. To measure the health of the population (and by extension the health of a country’s workers), life expectancy has been included as another control variable. The second and third variables have been taken from United Nations statistics. For reasons of availability of data, the controlling year is 2004. Using partial correlation testing, when the power relationship between economic freedom and per capita GDP is controlled for gross domestic savings, literacy and life expectancy, significant correlation is still observed (significant at the 0.01 level). The correlation coefficient is a -.624. When the same relationship between political freedom and per capita GDP is controlled with the same variables, a lesser degree of correlation is observed, only -.384, while still significant at the 0.01 level. Given that both correlation coefficients are smaller than before, it is reasonable to assume that the previous analyses included external factors that affected economic prosperity besides freedom. As a final comment on the data, average political freedom and economic freedom for the decade are highly correlated; they have a correlation coefficient of .716, which is significant at the 0.01 level. Because of the strength of this relationship, controlling for one type of freedom would prove impractical. Instead, it should be noted that the data offers clear evidence that freedom in general is positively correlated with economic prosperity, but among the two types of freedom analyzed, economic freedom more strongly influences wealth than political freedom. Dubuque 40 8. Conclusions After significant theoretical discussion and empirical analysis, it’s time to take stock of where we stand in answering the question of whether a relationship exists between freedom and prosperity and to what extent that relationship is observed. From defining a theoretical construct of freedom in both its political and economic varieties to observing previous empirical studies of freedom’s relationship to wealth, it appears evident that such a correlation exists. Additionally, analysis of the data from 152 countries during the period of 1995 to 2005 offers statistically significant evidence that such a relationship exists. It is probably best to define the correlation as a power relationship where both economic and political freedoms positively affect the wealth of a country. This means that as freedom increases, economic prosperity increases at an increasing rate. Interestingly, while both varieties of freedom are closely correlated, the degree of economic freedom has a greater affect on wealth than the degree of political freedom. Based on previous theoretical discussions, this makes sense. Politically repressive regimes are capable of implementing sound economic policies, just like liberal democracies. In fact, such regimes might be able to follow such a path easier than representative governments because they are capable of unilaterally removing privileges for special interest groups that also ‘protect’ the economy from increasing its potential wealth. Almost inevitably though, the data indicates that politically and economically repressive regimes dwell in the third tier of global wealth. In this group the average GDP per capita is only $1,376, with an average economic freedom score of 3.69 out of 5 and political freedom score of 4.66 out of 7. At the other end, the top tier countries enjoy an Dubuque 41 average GDP per capita of $20,103, with a better average economic freedom score of 2.39 out of 5, and a much better average political freedom score of 1.96 out of 7. It seems then that a politically repressive regime with a high level of economic wealth is more of an exception than a rule. As Americans debate global inequality, the data indicates that we should stop blaming ‘capitalist’ tendencies as the main factor in keeping poor nations poor, and instead start talking about how these countries’ repressive political and economic systems prevent the poorest nations from expanding their wealth potential. If anything, perhaps our pursuit of freer trade, greater protection of private property, and advocacy of representative democracy and political rights has helped economically disadvantaged countries overcome some of their structural constraints that have inhibited from maximizing their production potential. Based on the data, America’s revolutionary approach to encouraging greater political and economic freedom ought to help increase global prosperity, not detract from it. Dubuque 42 Appendix Table 1 - Descriptive Statistics N Minimum Maximum Mean Std. Deviation Average Economic Freedom 152 1.42 4.62 3.1198 .69919 Average Political Freedom 151 1.00 7.00 3.4497 1.82962 Average GDP per capita 152 549.10 53730.98 8884.9532 9673.50328 Valid N (listwise) 151 Table 2 - Correlations between avg. economic freedom and per capita wealth Average Economic Freedom Average GDP per capita Pears on Correlation Sig. (2-tailed) N Pears on Correlation Sig. (2-tailed) N Average Economic Freedom 1 Average GDP per capita -.788** .000 152 152 -.788** 1 .000 152 152 **. Correlation is s ignificant at the 0.01 level (2-tailed). Table 3 - Correlations between avg. political freedom and per capita wealth Average Political Freedom Pears on Correlation Sig. (2-tailed) N Average GDP per capita Pears on Correlation Sig. (2-tailed) N Average Political Freedom 1 Average GDP per capita -.607** .000 151 151 -.607** 1 .000 151 152 **. Correlation is significant at the 0.01 level (2-tailed). Dubuque 43 Table 4 - Partial Correlations beteen avg. PF and GDP controlled for fuel exports Control Variables Fuel exports (% of merchandis e exports ) Average GDP per capita Average Political Freedom Correlation Significance (2-tailed) df Correlation Significance (2-tailed) df Average GDP per capita 1.000 . 0 -.628 .000 144 Average Political Freedom -.628 .000 144 1.000 . 0 Table 5 - Partial Correlations beteen avg. EF and GDP controlled for fuel exports Control Variables Fuel exports (% of merchandis e exports ) Average GDP per capita Average Economic Freedom Correlation Significance (2-tailed) df Correlation Significance (2-tailed) df Table 6 - Correlations for above avg. political freedom Average Political Freedom avgGDP Pears on Correlation Sig. (2-tailed) N Pears on Correlation Sig. (2-tailed) N Average Political Freedom 1 avgGDP -.754** .000 79 79 -.754** 1 .000 79 80 **. Correlation is s ignificant at the 0.01 level (2-tailed). Average GDP per capita 1.000 . 0 -.795 .000 145 Average Economic Freedom -.795 .000 145 1.000 . 0 Dubuque 44 Table 7 - Correlations for below avg. political freedom Average Political Freedom avgGDP Pears on Correlation Sig. (2-tailed) N Pears on Correlation Sig. (2-tailed) N Average Political Freedom 1 72 .055 .645 72 avgGDP .055 .645 72 1 72 Table 8 - Correlations in bottom third GDP, between EF and wealth Average GDP per capita Average Economic Freedom Pears on Correlation Sig. (2-tailed) N Pears on Correlation Sig. (2-tailed) N Average GDP per capita 1 50 -.140 .332 50 Average Economic Freedom -.140 .332 50 1 50 Table 9 - Correlations in bottom third GDP, between PF and wealth Average GDP per capita Pears on Correlation Sig. (2-tailed) N Average Political Pears on Correlation Freedom Sig. (2-tailed) N Average GDP per capita 1 50 .073 .614 50 Average Political Freedom .073 .614 50 1 50 Dubuque 45 Table 10 - Correlations in middle third of GDP, between EF and wealth Average GDP per capita Average Economic Freedom Pears on Correlation Sig. (2-tailed) N Pears on Correlation Sig. (2-tailed) N Average GDP per capita 1 51 -.292* .038 51 Average Economic Freedom -.292* .038 51 1 51 *. Correlation is s ignificant at the 0.05 level (2-tailed). Table 11 - Correlations in middle third of GDP, between PF and wealth Average GDP per capita Pears on Correlation Sig. (2-tailed) N Average Political Pears on Correlation Freedom Sig. (2-tailed) N Average GDP per capita 1 51 -.331* .018 51 Average Political Freedom -.331* .018 51 1 51 *. Correlation is significant at the 0.05 level (2-tailed). Table 12 - Correlations in top third of GDP, between EF and wealth Average GDP per capita Average Economic Freedom Pears on Correlation Sig. (2-tailed) N Pears on Correlation Sig. (2-tailed) N Average Economic Freedom -.651** .000 51 51 -.651** 1 .000 51 51 Average GDP per capita 1 **. Correlation is s ignificant at the 0.01 level (2-tailed). Dubuque 46 Table 13 - Correlations in top third of GDP, between PF and wealth Average GDP per capita Pears on Correlation Sig. (2-tailed) N Average Political Pears on Correlation Freedom Sig. (2-tailed) N Average GDP per capita 1 51 -.340* .016 50 Average Political Freedom -.340* .016 50 1 *. Correlation is significant at the 0.05 level (2-tailed). Table 14 - Correlations between square root of GDP and EF s qrgdp Average Economic Freedom Pears on Correlation Sig. (2-tailed) N Pears on Correlation Sig. (2-tailed) N Average Economic s qrgdp Freedom 1 -.821** .000 152 152 -.821** 1 .000 152 152 **. Correlation is significant at the 0.01 level (2-tailed). Table 15 - Correlations betewen square root of GDP and PF s qrgdp Average Political Freedom Pears on Correlation Sig. (2-tailed) N Pears on Correlation Sig. (2-tailed) N Average Political s qrgdp Freedom 1 -.635** .000 152 151 -.635** 1 .000 151 151 **. Correlation is s ignificant at the 0.01 level (2-tailed). 50 Dubuque 47 Table 16 - Measuring controlled correlation of power relationship between EF and GDP Control Variables Gross domestic Average Economic s avings (% of GDP) Freedom & % literacy above 15 & life expectancy s qrgdp Correlation Significance (2-tailed) df Correlation Significance (2-tailed) df Average Economic Freedom 1.000 . 0 -.624 .000 81 s qrgdp -.624 .000 81 1.000 . 0 Table 17 - Measuring controlled correlation of power relationship between EF and GDP Control Variables Gross domestic Average Political s avings (% of GDP) Freedom & % literacy above 15 & life expectancy s qrgdp Correlation Significance (2-tailed) df Correlation Significance (2-tailed) df Average Political Freedom 1.000 . 0 -.404 .000 81 Table 18 - Correlations between PF and EF Average Political Freedom Average Economic Freedom Pears on Correlation Sig. (2-tailed) N Pears on Correlation Sig. (2-tailed) N Average Political Freedom 1 Average Economic Freedom .716** .000 151 151 .716** 1 .000 151 152 **. Correlation is significant at the 0.01 level (2-tailed). s qrgdp -.404 .000 81 1.000 . 0 Dubuque 48 Works Cited: "2006 Index of Economic Freedom." Heritage Foundation. Jul 2006 <http://www.heritage.org/index/>. Ayal, Eliezer, Georgios Karras.. "Components of Economic Freedom and Growth: an Empirical Study." Journal of Developing Areas 32(1998): 327-339. Beach, William W., Mark A. Miles. "Explaining the Factors of the Index of Economic Freedom.." 2006 Index of Economic Freedom (2006). p. 2 Becker, Gary S. “Economic and Political Freedom: Does One Lead to the Other?” Blog entry. 6 Mar 2005. 11 Nov 2005. < http://www.becker-posnerblog.com/archives/2005/03/economic_and_po.html>. Bhagwati, Jagdish. In Defense of Globalization. New York: Oxford University Press, 2004.. p. 94 Diamond, Larry. "Economic Development and Democracy Reconsidered." 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