The Impact of Economic Freedom: A Focus on Prosperity and Poverty 14th Annual Texas Public Policy Foundation's Policy Orientation for the Texas Legislature
Fred McMahon Michael Walker Chair of Economic Freedom Research The Fraser Institute
Thanks to Chuck DeVore and Olivia Gustin
Plan of Attack § Overview of economic freedom § A look at the international evidence § What do we know about its effects on poverty in the United States.
What is Economic Freedom Individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. An index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions. James Gwartney et al. 1996
Components of the Economic Freedom of the World Index • • • • •
Size of government and taxation Private property and the rule of law Sound money Trade regulation and tariffs Regulation of business, labour and capital markets
Components of the Economic Freedom of North America • Size of government • Takings and Discriminatory Taxation • Regulation – A: Labor Market – B: Credit Market – C: Business Regulation
• Private property and the rule of law • Sound money • International Trade Thus, the index creates a map to free market reform for states and provides the scorecard.
Talk about making a difference ‌
Member Institutes of Economic Freedom of The World Network Afghanistan Economic and Legal Studies Organization (AELSO), Afghanistan Albanian Center for Economic Research (ACER), Albania Fundación Libertad, Argentina Centre of Political, Legal and Economic Researches and Forecasting (PLERF), Armenia Institute of Public Affairs, Australia TIGRA®, Austria Center for Economic and Political Research, Azerbaijan The Nassau Institute, Bahamas Making Our Economy Right (MOER), Bangladesh Scientific Research Mises Center, Belarus Centre for the New Europe, Belgium Politicas Publicas para la Libertad (POPULI), Bolivia Instituto Liberal do Rio de Janeiro, Brazil Institute for Market Economics, Bulgaria Le Centre des Affaires Humaines (CEDAH), Burkina Faso The Cambodia Institute of Development Study, Cambodia Instituto Libertad y Desarrollo, Chile Center for China & Globalization, China Instituto de Ciencia Politica, Colombia Instituto para la Libertad y el Análisis de Políticas, Costa Rica Audace Institut Afrique, Côte d’Ivoire The Institute of Economics, Croatia Liberální Institut, Czech Republic Center for Politiske Studier (CEPOS), Denmark Fundación Economía y Desarrollo Inc, Dominican Republic Instituto Ecuatoriano de Economía Política, Ecuador Institut Economique Molinari, France Society for Disseminating Economic Knowledge: New Economic School, Georgia
Liberales Institut, Germany The Institute of Economic Affairs, Ghana Centro de Investigaciones Económicas Nacionales, Guatemala InafEcon-Institute of African Economics, Guinea Institut de Recherche pour la Liberté Economique et la Prospérité (IRLEP), Haiti Centro de Investigaciones Economicas y Sociales (CIES), Honduras Hong Kong Centre for Economic Research, Hong Kong Szazadveg Foundation, Hungary Centre for Social and Economic Research (RSE), Iceland Centre for Civil Society, India The Institute for Development of Economics and Finance, Indonesia Open Republic Institute, Ireland Jerusalem Institute for Market Studies, Israel Centro Einaudi, Italy Young Entrepreneurs Association, Jordan Central Asian Free Market Institute, Kazakhstan African Research Center for Public Policy and Market Process, Kenya Center for Free Enterprise, Korea Group for Legal and Political Studies, Kosovo Economic Policy Institute-Bishkek Consensus, Kyrgyz Republic Lithuanian Free Market Institute, Lithuania D'Letzeburger Land, Luxembourg Institute for Democracy and Economic Affairs (IDEAS), Malaysia Centro de Investigación para el Desarrollo A.C., Mexico Open Society Forum, Mongolia The Center for Entrepreneurship and Economic Development, Montenegro The Prosperity Foundation, Nepal The New Zealand Business Roundtable, New Zealand
Initiative for Public Policy Analysis, Nigeria Center for Business and Society Incorporated (Civita), Norway International Research Foundation (IRF), Oman Alternate Solutions Institute, Pakistan Pal-Think for Strategic Studies, Palestine Fundación Libertad, Panama Centro de Investigación y Estudios Legales (CITEL), Peru The Center for Research and Communication, Philippines Centrum im. Adama Smitha, Poland Causa Liberal, Portugal Romania Think Tank, Romania Institute of Economic Analysis, Russia Free Market Center (FMC), Serbia The F.A. Hayek Foundation, Slovak Republic The Free Market Foundation of Southern Africa, South Africa Fundacio Catalunya, Spain Pathfinder Foundation, Sri Lanka Nile Institute of Economic Studies, Sudan Timbro, Sweden Liberales Institut, Switzerland Tajikistan Free Market Centre, Tajikistan Arthur Lok Jack Graduate School of Business, The University of the West Indies, Trinidad and Tobago Association for Liberal Thinking, Turkey The Ukrainian Center for Independent Political Research, Ukraine The Institute of Economic Affairs (IEA), United Kingdom CATO Institute, USA The Centre for the Dissemination of Economic Knowledge (CEDICE), Venezuela Research Center for Entrepreneurship Development, Vietnam Zambia Institute for Public Policy Analysis (ZIPPA), Zambia
Translations and Sub-national and Regional Indices
Economic Freedom of North America
Economic Freedom of the Arab World
Why is Economic Freedom Important? • Economic rights are fundamental rights in the sense that without them there can be no political freedom or civil freedoms • They are a prerequisite for growth and development • They are a prerequisite for broader human development
World Average Economic Freedom Over Time
Source: The Fraser Institute.
The impact on prosperity and development
Per Capita Income and Economic Freedom Quartile GDP Per Capita (ppp), 2012
$42,000 $39,000 $36,000 $33,000 $30,000 $27,000 $24,000 $21,000 $18,000 $15,000 $12,000 $9,000 $6,000 $3,000 $0 Most Free Quartile
2nd Quartile
3rd Quartile
Least Free Quartile
Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators,
2013
Economic Freedom, the Poor, and Inequality
Income Share of the Poorest 10% and Economic Freedom
Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.
Income of the Poorest 10% and Economic Freedom
Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.
Literacy (% of population) Male Female 100 90 80 70 60 50
Most Free Quartile
2nd Quartile
3rd Quartile
Least Free Quartile
Most Free ……………. Least Free Sources: The Fraser Institute; World Development Indicators 2013
Economic Freedom, Governance, and Democracy
Economic Freedom and Political Rights 8.0
Political Rights (out of 10)
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Most Free Quartile
2nd Quartile
3rd Quartile
Least Free Quartile
Most Free ……………. Least Free
Sources: The Fraser Institute; Freedom House, Freedom in the World Country Ratings, 2012, available at http://www.freedomhouse.org/.
Economic Freedom and Civil Rights 8.0 7.0
Civil Liberties (out of 10)
6.0 5.0 4.0 3.0 2.0 1.0 0.0 Freest Quartile
2nd Quartile
3rd Quartile
Least Free Quartile
Most Free ……………. Least Free Sources: The Fraser Institute; Freedom House, Freedom in the World Country Ratings, 2012, available at http://www.freedomhouse.org/.
The impact of Economic Freedom on other indicators of well-being
Economic Freedom and Corruption High scores indicate low corruption 70
Corruption Rating (out of 100)
60 50 40 30 20 10 0 Most Free Quartile 2nd Quartile
3rd Quartile Least Free Quartile
Most Free ……………. Least Free Sources: The Fraser Institute; Transparency International, Corruption Perceptions Index, 2014 available at http://www.transparency.org.
Life Satisfaction of of 10
Economic Freedom and Life Satisfaction 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0
Most Free Quartile
2nd Quartile
3rd Quartile
Least Free Quartile
Most Free ……………. Least Free Sources: The Fraser Institute; Happy Planet Index 2014
Life Expectancy at Birth and Economic Freedom Quartiles 85 80 75 70 65 60 55 50 45 Most Free Quartile
2nd Quartile
3rd Quartile
Least Free Quartile
Most Free ……………. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.
Economic Freedom of North America
New Hampshire South Dakota Texas Florida Tennessee Virginia Missouri Nebraska Arizona Maryland North Dakota Colorado Kansas Oklahoma Georgia Massachusetts Nevada Idaho Indiana Louisiana Wyoming Pennsylvania Connecticut Alabama North Carolina Montana Iowa Utah Michigan Washington Rhode Island Delaware South Carolina New Jersey Illinois Maine Minnesota Arkansas Wisconsin Ohio Oregon Mississippi Vermont Kentucky West Virginia New Mexico Hawaii Alaska California New York
US state economic freedom scores
0
2
4
6
8
10
North American Economic Freedom 8.5 8 7.5
Canada United States
7
Mexico
6.5 6
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Proven effects of Economic Freedom: World and North America • • • • • • •
Creates prosperity Boosts economic growth Reduces poverty Does not increase inequality but may not reduce it Enhances job growth Encourages entrepreneurship Increases in-migration
A Labor Market Comparison: Why the Texas Model Supports Prosperity Vance Ginn, Ph.D., October 2015
Research on Economic Freedom relevant to poverty in the United States: Inequality • Webster, Bradely, International Business and Economics Research Journal, 2013 – No inequality relationship
• Ashby, Sobel, Public Choice, 2008 – [Positive] changes in economic freedom are associated with higher income levels and growth (across the board), and with reductions in relative income inequality.
• Bennett, Vedder, Regional Analysis and Policy, 2013 – [W]e find evidence of an … U-shaped curve between income inequality and economic freedom. This suggests that beginning from a low level of economic freedom, increases initially generate more inequality as the upper part of the income distribution benefits relatively more than the lower part; however, as enhancements of economic freedom continue, this reverses and the lower part of the distribution experiences larger relative income gains.
Research on Economic Freedom relevant to poverty in the United States: Inequality 2 • Antony Davies, James R. Harrigan, Megan Teague, Cambridge University Press, 2015 – The more free states exhibited less income inequality than the less free states in three out of the four years for which data is available. The reduced income inequality among the more free states is not statistically significant, however…. What the data do suggest, however, is that economic freedom promotes less inequality of outcome than do systems that repress economic freedom. – Corporations were being created in the more free states at more than twice the rate in the less free states. – Average annual GDP growth among the more free states is a full percentage point higher than for the less free states
• Apergis, Dincer, Payne, Contemporary Economic Policy, 2014 – [I]nequality may cause states to implement redistributive policies causing economic freedom to decline. As economic freedom declines, income inequality rises even more. In other words, it is quite possible for a state to get caught in a vicious circle of high income inequality and heavy redistribution.
Research on Economic Freedom relevant to poverty in the United States: Jobs • Garrett, Rhine, Federal Reserve Bank of St. Louis, 2011 – [S]tates with greater overall economic freedom have greater rates of employment growth. Generally, a one-unit increase in the economic freedom index (roughly equal to one standard deviation) increases employment growth by 1 to 4 percentage points… In addition, roughly 2 to 5 percent of the variation in employment growth across the states is explained by economic freedom.
• Heller, Stephanson, Contemporary Economic Policy, 2014 – [T]his article examines the relationship between economic freedom and the unemployment rate, the labor force participation rate, and the employmentpopulation ratio. After controlling for a variety of state-level characteristics, the results from most specifications indicate that economic freedom is associated with lower unemployment and with higher labor force participation and employmentpopulation ratios.
The most important social program is – a job!
Research on well-being and Economic Freedom in the United States • Jeffrey J. Yankow, Journal of Analysis and Policy, 2014 – [T]his study establishes an empirical relationship between wages at the individual level and the degree of state economic freedom. In OLS models, a one standard deviation improvement in the state economic freedom score is found to increase wages by 2.5 percent. Models that control for both person-specific and state-level fixed effects reveal a wage increase of more than 8 percent.
• Cebula, Richard, and Gigi Alexander, Applied Economic Letters, 2015. – Initial empirical support for this hypothesis [labour market freedom elicits an increase in the female labour force participation rate] is provided in this study … The findings imply that a 1% increase in the labor market freedom would lead to a 0.294% increase female participation.
• Belasen and Hafer, Regional Policy and Analysis, 2012 – Our empirical evidence suggests that changes in economic freedom help explain observed levels of well-being amongst the states. Increases in freedom generally are positively and significantly correlated with our measure of well-being…The results based on adding regional variables suggest that there are important aspects about the clustering of well-being and economic freedom that deserve further analysis.
Policy Conclusions Sub-national Economic Freedom Proven • Increases prosperity and growth • Improves quality of life • Boosts job creation
Highly probable • Has unknown but small impact on inequality • Because economic freedom spurs growth and job creation, it reduces poverty, particularly in the long-run.
Economic freedom audits
Jordan Audit Follow-up
Briefing Materials Improving the Economic Freedom of the People of Jordan
Findings of the Economic Freedom of the World Report 2015 The Fraser Institute Amman, December 2015
Per capita income 2001 = 100 150 140 130 120 110 100 90 2001200220032004200520062007200820092010201120122013 Arab League
World
South America
Africa
Jordan
Nepal Audit
www.freetheworld.com www.fraserinstitute.org