Free Market Road Show 2011 /Edward Stringham

How to create growth: The benefit of economic freedom to citizens in Europe and around the world

Prof. Edward Peter Stringham

Hackley Distinguished Professor for theStudy of Capitalism and Free Enterprise

Fayetteville State UniversityNorth Carolina, United States

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 FreedomEconomic 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

MotivationThe 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 WalkerInvolved 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 taxationPrivate property and the rule of lawSoundness of moneyTrade regulation and tariffsRegulation of business, labour and capital

markets

5 Areas of Economic Freedom of the World (EFW) Index

1. Size of Government: Expenditures, Taxes, and Enterprises

2. Legal Structure and Security of Property Rights

3. Access to Sound Money 4. Freedom to Trade Internationally 5. Regulation of Credit, Labor, and

Business

A Quick Tour of The WorldPhotos are compiled by Russel Sobel, Ph.D.

Example 1

A country with VERY LOW economic freedom

Families in Guinea-Myanmar

26

Relief efforts in Guinea-Myanmar

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

0 2 4 6 8 10

Score (out of 10)

Hong Kong

Singapore

New Zealand

Average of top 10

Switzerland

United Kingdom

Chile

Canada

Australia

United States

Ireland

Source: The Fraser Institute.

Overall Economic Freedom Index and the Bottom Ten

0 2 4 6 8 10

Score (out of 10)

Chad

Central Afr. Rep.

Guinea-Bissau

Congo, Dem. R.

Venezuela

Niger

Congo, Rep. Of

Myanmar

Angola

Zimbabwe

Source: The Fraser Institute.

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

0 10,000 20,000 30,000 40,000 50,000

GDP per Capita, 2006 (ppp)

Venezuela

Angola

Congo, Rep. Of

Chad

Myanmar

Central Afr. Rep.

Niger

Guinea-Bissau

Congo, Dem. R.

Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008.

Income (per person) of the Top 10

$0 $10,000 $20,000 $30,000 $40,000 $50,000

GDP per Capita, 2006 (ppp)

SingaporeUnited States

IrelandHong KongSwitzerland

CanadaAustralia

United KingdomNew Zealand

Chile

Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008.

Per Capita Income and Economic Freedom Quartile

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

GD

P P

er C

apit

a (p

pp

), 2

006

Most FreeQuartile

2nd Quartile3rd QuartileLeast FreeQuartile

Least Free ………………... Most FreeSources: The Fraser Institute; The World Bank, World Development Indicators,

2008.

Foreign Direct Investment and Economic Freedom Quartile

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Fo

reig

n d

ire

ct

inv

es

tme

nt,

ne

t in

flo

ws

(%

of

GD

P),

19

90

-20

06

Most FreeQuartile

2nd Quartile3rd QuartileLeast FreeQuartile

Least Free ……………...…... Most Free

Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008.

59

Economic freedom and economic growth have bestowed benefits across all levels of society

Our Homes

Percent of homes with Heating & Air Conditioning1956 = 6% 1996 = 81%

Percent of homes with only one bathroom1956 = 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?

Economic Freedom,the Poor, andInequality

Income Share of the Poorest 10% and

Economic Freedom

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Inco

me S

hare

Held

by

Lo

west

10%

, 1990-2

006

Most FreeQuartile

2ndQuartile

3rdQuartile

Least FreeQuartile

Least Free …………….. Most FreeSources: The Fraser Institute; The World Bank, World Development Indicators,

2008.

Income Level of the Poorest 10% and

Economic Freedom

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

Inco

me L

evel

of

the

Po

ore

st

10%

, 1990-2

006

Most FreeQuartile

2ndQuartile

3rdQuartile

Least FreeQuartile

Least Free …………….. Most FreeSources: The Fraser Institute; The World Bank, World Development Indicators,

2008.

74

A free society also has no barriers to getting richUniversity 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.

The impact of Economic Freedom on the UN’s Human Development Index and other indicators of well-being

Human Development Index and Economic Freedom QuartilesHigher ratings indicate higher levels of development

0.0

0.2

0.4

0.6

0.8

1.0

Un

ited

Nat

ion

s H

um

an D

evel

op

men

t In

dex

Most FreeQuartile

2nd Quartile3rd QuartileLeast FreeQuartile

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

0

20

40

60

80

Yea

rs

Most FreeQuartile

2nd Quartile3rd QuartileLeast FreeQuartile

Least Free ……………. Most Free

Sources: The Fraser Institute; The World Bank, World Development Indicators,

2008.

Infant Mortality and Economic Freedom Quartile

0

20

40

60

80

Per

1,0

00 li

ve b

irth

s, 2

006

Most FreeQuartile

2nd Quartile3rd QuartileLeast FreeQuartile

Least Free ………..………. Most Free Sources: The Fraser Institute; The World Bank, World Development Indicators,

2008.

% of Population Using Improved Water Sources

0

20

40

60

80

100

Per

cen

tag

e

Most FreeQuartile

2nd Quartile3rd QuartileLeast FreeQuartile

Least Free ………………... Most Free Sources: The Fraser Institute; The World Bank, World Development Indicators,

2008.

Environmental Performance and Economic Freedom QuartileHigher ratings indicate higher levels of environmental performance

0

20

40

60

80

100

Ind

ex (

ou

t o

f 10

0)

Most FreeQuartile

2nd Quartile3rd QuartileLeast FreeQuartile

Least Free ………..……….. Most Free Sources: The Fraser Institute; The World Bank, World Development Indicators,

2008.

Can a nation improve their level of economic freedom?

Economic Freedom Over Time

6.15.5 5.4 5.5 5.7 6.0

6.4 6.4 6.4 6.4 6.4 6.6 6.6

0

2

4

6

8

10

Eco

no

mic

Fre

edo

m S

core

1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006

Source: The Fraser Institute.

Case Study: Zimbabwe

0

2

4

6

8

10

EF

W R

atin

g

• Legal Structure/Property 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

0

2

4

6

8

10

EF

W R

atin

g

• Government 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

0

2

4

6

8

10

EF

W R

atin

g

• 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.

GDP per capita growth, 1995-2005 = 5.97%

Case Study: Estonia

0

2

4

6

8

10

EF

W R

atin

g

• Transfers & Subsidies fell 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.

GDP per capita growth, 1995-2005 = 7.27%

Case Study: Chile

0

2

4

6

8

10

EF

W R

atin

g

• Top marginal tax rates fell to 40% from 58%.

• Tariff rate fell to 4.9% from 30%.

• Inflation rate fell to 3.1% from 30.7%.

• Capital market controls lifted.

GDP per capita growth, 1995-2005 = 2.99%

Case Study: China

0

2

4

6

8

10

EF

W R

atin

g

• Freer trade: tariffs reduced to 9.2% from 49.5%.

• Capital market deregulation: rating improved to 6.5 from 0.0.

• Note: China varies tremendously internally.

GDP per capita growth, 1995-2005 = 8.21%

Case Study: India

0

2

4

6

8

10

EF

W R

atin

g

• Government investment and SOEs are less important: The rating in this area increased to 8 from 0.

• Tariffs have fallen to 17%. from 98.8%

• Many capital market controls have been lifted.

GDP per capita growth, 1995-2005 = 4.68%

Case Study: Botswana

0

2

4

6

8

10

EF

W R

atin

g

• 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.GDP per capita growth, 1995-2005 = 6.14%

GDP per capita by country

Economic Freedom by Country

ConclusionsEconomic Freedom is associated withLower rates of homicideReduced povertyIncreased prosperity for rich and poor

94

How to create growth: The benefit of economic freedom to citizens in Europe and around the world

Prof. Edward Peter StringhamLloyd Hackley Endowed Professor of

Capitalism and Free Enterprise StudiesFayetteville State University

Latest researchEconomic freedom and crime

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).

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.”

(homicide rate) = 1

+ 2(economic freedom)

+ 3(incarceration rate)

+ 4(death penalty)

+ 5(gini)

+ 6 (literacy rate) + ,

Variable Obs Mean Std. Dev. Min MaxHomicide rate (per 100k) 63 6.64 9.33 0.5 61.6Economic Freedom (Fraser) 115 6.00 1.23 3.44 9.08Economic Freedom (Heritage) 61 2.65 0.71 1.56 4.28Incarceration rate (per 100k) 63 202.76 145.95 58 714Death penalty 63 0.52 0.50 0 1Gini index 58 35.50 8.72 23.2 59.7Literacy rate 55 96.25 5.54 67.5 100Ethnic fractionalization 61 0.34 0.20 0.00 0.71English legal origin 56 0.14 0.35 0 1Unemployment rate 58 9.07 6.54 0.72 46.24Percent rural 61 32.36 16.76 0 75GDP per capita 62 11623 12097 160 44440

Table 1: Summary Statistics

(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 50R-squared 0.432 0.332Notes: p-values are in parentheses; * is significant at 10%** significant at 5%; *** significant at 1%

TABLE 3: Baseline RegressionsDependent Variable: Homicides Per 100,000 People

FIGURE 1: Partial Regression Plot for Regression 1 (dependent variable: homicide rate) with Economic Freedom data from Fraser (higher scores indicate more economic freedom)

-20

02

04

06

0e

( h

om

icid

e | X

)

-4 -2 0 2 4e( freedom | X )

coef = -3.6992051, se = 1.1085175, t = -3.34

Case studies

44

.55

5.5

Eco

no

mic

Fre

ed

om

(F

rase

r)

10

20

30

40

50

Hom

icid

e r

ate

s p

er

10

0k

1990 1995 2000 2005 2010year

Homicide rates per 100k Economic Freedom (Fraser)

Venezuela

5.2

5.4

5.6

5.8

Eco

no

mic

Fre

ed

om

(F

rase

r)

18

20

22

24

26

28

Hom

icid

e r

ate

s p

er

10

0k

1990 1995 2000 2005year

Homicide rates per 100k Economic Freedom (Fraser)

Colombia

5.5

66

.57

7.5

Eco

no

mic

Fre

ed

om

(F

rase

r)

68

10

12

Hom

icid

e r

ate

s p

er

10

0k

1990 1995 2000 2005 2010year

Homicide rates per 100k Economic Freedom (Fraser)

Latvia

55

.56

6.5

77

.5E

cono

mic

Fre

ed

om

(F

rase

r)

81

01

21

4H

om

icid

e r

ate

s p

er

10

0k

1990 1995 2000 2005 2010year

Homicide rates per 100k Economic Freedom (Fraser)

Lithuania

5.5

66

.57

7.5

Eco

no

mic

Fre

ed

om

(F

rase

r)

40

50

60

70

Hom

icid

e r

ate

s p

er

10

0k

1990 1995 2000 2005 2010year

Homicide rates per 100k Economic Freedom (Fraser)

South Africa

108

Moving forward

109

110

Economic Freedom of the Worldwww.freetheworld.com

Economic Freedom of the Worldwww.freetheworld.com

112

The Importance of Economic Freedom

Prof. Edward Peter StringhamLloyd Hackley Endowed Professor of

Capitalism and Free Enterprise StudiesFayetteville State University