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Konzervatívny inštitút M. R. Štefánika v partnerstve s Friedrich August von Hayek Institut, Austrian Economics Center, ECEG a s podporou ďalších partnerov organizoval v Bratislave dňa 13. mája 2011 medzinárodnú konferenciu v rámci Free Market Road Show 2011 na tému Budúcnosť Európy. Viac na www.konzervativizmus.sk
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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
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