Want More Prosperity? Choose Freedom

Economists and social scientists have discussed freedom and prosperity issues for centuries. Quantitative measurements of freedom, however, are less than half a century old. Freedom House started publishing its first indices in 1972. Quantification of economic freedom, in particular, began almost 30 years ago with indices by the Fraser Institute in Canada and the Heritage Foundation. In 2007 Legatum Institute (U.K.) began publishing its Human Prosperity Index. The new Freedom and Prosperity Center at the Atlantic Council, a U.S. think tank, incorporates information from several indices and sources to produce its new Freedom and Prosperity Indexes.

These new indices provide evidence of the importance of freedom for prosperity and encourage those who work to improve the lot of the poor and marginalized to promote economic, legal, and political freedom. The Center will also use the index to encourage policies supported by its findings.

The indices and links to all data sets appear in the Center’s online report. The publication’s authors, Dan Negrea and Matthew Kroening have different but complementary backgrounds. Negrea, the new Center’s director, has an investment background and more recently served at the U.S. Department of State as special representative for commercial and business affairs (2018-2021). Kroenig is a professor of government at Georgetown University and deputy director of the Atlantic Council’s Scowcroft Center for Strategy and Security.

How do these new indices differ from others, and what can we learn from them?

Of the 25 highest-ranked countries in the new Atlantic Council index, 22 also appear in the top 25 of the 2021 Legatum Prosperity Index. Of the Atlantic Council’s top 25, 21 have a “free” or “most free” ranking in Heritage’s Index of Economic Freedom. And 23 of the Atlantic Council’s top 25 appear among the freest countries in Fraser’s Economic Freedom of the World Index. All 25 are ranked “free” by Freedom House.

In the above table, I show the 25 highest-scoring countries in both freedom and prosperity. Among the 25 freest countries, nineteen are also among the most prosperous. Thirty-one countries total appear on these lists. We find only one Latin American country (Uruguay) and none from Africa. Most are from Europe, in this case, 21 out of 31. Freedom and prosperity, though, are determined not by geography but by institutions, cultures, and civil societies willing to sustain those institutions. The publication correctly notes, “The idea that institutions are the key to long-run economic growth is well established in contemporary economic theory. Institutions provide the rules of the game. Rules that incentivize entrepreneurship, hard work, long-term planning, and broad access to economic opportunities tend to produce wealthier societies. Rules that stifle innovation, discriminate against certain segments of society, and do not guarantee that individuals will be able to enjoy the fruits of their labors and creations tend to produce poorer societies.”

When we compare the indicators of all these independent organizations located in three different countries, we can see that when we look at the best-performing countries, the results are very consistent. Freedom and prosperity tend to go hand in hand. But do all studies reach the same conclusions? Southern Methodist University economics professor Robert Lawson, who has devoted more study to economic freedom than perhaps any other economist, has examined 721 empirical papers (published between 1996 and 2022) using the Economic Freedom of the World index. The study, titled Economic Freedom in the Literature – What Is It Good (Bad) For? will soon be published as a chapter in the Fraser Institute’s annual report on economic freedom. More than 50 percent of the articles reported good correlations between economic freedom and good normative outcomes (faster economic growth, higher living standards, reduced conflict, etc.). About 45 percent reported mixed/null/uncertain results. Only one in 20 papers reported bad outcomes from economic freedom. Lawson’s work deserves a more thorough analysis; he points at ideological bias in many pieces and complains that rather than taking Fraser’s Economic Freedom of the World index as a whole, analysts disaggregate the information and pick and choose how to evaluate it. I can leave the answer to the methodological question for another piece. However, despite these issues, most papers still show that economic freedom leads to good outcomes.

The Atlantic Council recognizes that further refinements will be necessary to improve the descriptive quality of these indices. There is a need for new empirical research on the data collection and what leads countries to respect the conditions necessary for freedom and prosperity. Academics from leading universities are looking into this and proposing new research. Think tanks will be looking into how to apply some of the lessons at a local level.

Negrea’s team opted for including only some of the components of other indices. To do so, they had to discern what is essential for freedom and prosperity and disregard different facets that might already be part of other measurements. Take the case of monetary policy. The Fraser Institute’s index includes a measure for sound money, and the Heritage index one on monetary freedom, but neither is included directly in the Atlantic Council index. But this new index includes measurements of protection of private property rights, freedom of trade, and moving capital across borders, all of which presuppose a stable medium of exchange, so one might say that monetary policy is included indirectly.

I appreciate that the authors are careful with how they frame their conclusions. They use words such as “often,” “tend,” or “suggest” in describing cause-and-effect relationships. Those who value freedom want to show that respecting this fundamental right leads to prosperity. Still, we must avoid being simplistic in our assessment of how freedom and prosperity are related. Lawson’s review of the literature and his upcoming publication will also help to improve our understanding of the relationship between freedom and prosperity.

A new conclusion from Atlantic Council’s research is the authors’ noting that “a country’s level of prosperity today is better explained by its level of freedom in 2006 than by its current freedom. In this analysis, we are concerned with the general trend over time, not the absolute differences from year to year. The 2006 Freedom Index, the earliest measure of freedom calculated for this report, is most strongly associated with levels of prosperity in 2021. While the relative differences may seem small, they are in a consistent direction. This rough test does not provide definitive proof that advances in freedom produce subsequent prosperity, but it is suggestive of such a dynamic and worthy of further investigation.”

To test their hypothesis, the authors looked into which countries had the most significant change in their Freedom Index between 2006 and 2021. Bhutan, which moved from an absolute monarchy to a constitutional monarchy, rose the most. Venezuela decreased the most due to “Hugo Chavez’s increasing political repression and embrace of socialist and populist economic policies.” The authors conclude, “The country was once among the wealthiest and most developed in Latin America, but now scores poorly on Health, Income and Happiness.”

The authors also note how countries with similar histories, such as the former Soviet republics, have followed different paths. Table 2, for instance, shows how much better Estonia, Latvia, Lithuania, and Romania have performed compared to Belarus and Russia.

The study does not shy away from addressing outliers; countries that score very low in one aspect of freedom still rank high. The United Arab Emirates, for instance, ranks very low in political freedom but much higher in economic and legal freedoms. UAEUAE
ranks as the thirty-fourth most prosperous country. Another outlier is Singapore; despite a low score in political freedom, it ranks so high in economic and legal freedom that it ranks as a mostly free country with a high level of prosperity. The authors mention that the Singaporean experience might be difficult to replicate. It depends on having “fairly wise autocrats who have continually prioritized economic and legal freedom.” These autocrats applied these policies in a relatively small territory, a city-state. But since “political power in the country is concentrated…there is always the risk that future leaders would choose to rein in these freedoms.” The authors offer a recommendation that would help align Singapore with other prosperous countries: “Allowing more political freedom in Singapore would provide guardrails against arbitrary changes to Singapore’s successful economic model, and better ensure its future prosperity.”

This new Atlantic Council initiative will give a new impulse to further studies. So far, independent think tanks, as mentioned in this piece, have played the leading role in measuring economic liberties. Part of the goals of this new Center at the Atlantic Council is to engage more universities in the endeavor. Those who promote prosperity with high respect for human freedom will look forward to their results.