Sunday, December 13, 2009

Do economic freedom and governance indicators tell similar stories about human flourishing?

This follows on from my last post: Do all well-being indicators tell similar stories about human flourishing? The indicators that I looked at did tend to tell similar stories – countries that have high average income levels also tend to have high rankings on other well-being indicators.

The purpose of this post is to extend the analysis to consider the institutions that are associated with human flourishing. There is a great deal of evidence that economic freedom is associated with high income levels and other aspects of human flourishing such as health and education. Evidence on the effects of democratic institutions is less clear, although the opportunity for citizens to participate in political processes may itself be viewed as an aspect of human flourishing.
A recent study by Michael Stroup (‘Economic freedom, democracy and the quality of life’ World Development, 35(1) 2007) has examined interactions between economic freedom and democracy on measures of health, education and disease prevention. The study found that while greater economic freedom consistently enhances a range of well-being measures, democracy has a smaller positive influence.

I accept that leaders (and potential leaders) of non-democratic countries with low levels of economic freedom may need to consider whether they should give higher priority to democracy or economic freedom when devising strategies to improve the well-being of citizens. There are good reasons, however, why democracy and economic freedom should be viewed as complementary rather than competing objectives. For example, rule of law is less problematic if there is a mechanism for political leaders who are suspected of considering themselves to be above the law to be voted out of office. Similarly, control of corruption is easier in a democracy where the public has power to dismiss corrupt leaders. It is possible for democratic rights to result in greater rent-seeking and less economic freedom, but non-democratic rulers do not necessarily promote economic freedom and widespread prosperity – some seek to benefit themselves and their cronies by impoverishing the general public.

The following table presents indicators of the performance of various societies in relation to two indexes of economic freedom and the World Bank’s governance indicators. As in the table in the preceding post, countries have been ranked by per capita income levels. The ratings of countries with performance in the top quartile for each indicator are shown against a green background, those for the second quartile are shown in yellow, the third quartile in orange and the fourth quartile in red.
The table shows that all the institutional indicators tend to tell a similar story about performance of various countries. There are, however, a few exceptions for ‘Voice and accountability’, reflecting particularly an absence of democratic institutions in some high-income and upper-middle income countries. In the case of United Arab Emirates and Kuwait this is associated with relatively poor performance in a range of well-being indicators, but that is less evident the case in Singapore and Hong Kong (as can be seen by comparing information in this table with the one in the preceding post).
All the indicators are strongly correlated with per capita income levels. A few countries manage to have high per capita incomes without a high level of economic freedom and good governance – but only by producing a huge amount of oil.
Indicators are defined and information sources are presented below the table. Hint: Click on the table for a clearer picture.

Income index: Real GDP per capita (rgdpl) for 2007 from the Penn World Table, expressed as a fraction of per capita GDP in the United Arab Emirates, the country with highest per capita GDP. Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.3, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, August 2009.
Economic Freedom (Fraser): According to the Fraser Institute’s definition, 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. Data from the 2009 report (for 2007).
Economic Freedom (Heritage): The Heritage Foundation defines economic freedom as the right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself. Data from the 2009 report.
Voice and accountability: Index compiled by the World Bank capturing perceptions of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association and a free media.
Government effectiveness: Index compiled by the World Bank capturing perceptions of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.
Regulatory quality: Index compiled by the World Bank capturing perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.
Control of corruption: Index compiled by the World Bank capturing perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as ‘capture’ of the state by elites and private interests.

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