Economic Freedom and Prosperity Presented at the Liberal Thinkers Friedrich Naumann Foundation Hamburg, Germany November 17,2007 Michael Walker Senior Fellow The Fraser Institute www. fraserinstitute.ca www.freetheworld.comT'm very pleased to have the opportunity to participate in the Friedrich ‘Naumann Foundation Thinkers Conference. For many years the Fraser Institute has been fortmate enough to partner with the Friedrich Naumann Foundation in countries around the world pursuing the ideal of greater economic freedom for citizens. We have always found our collaboration with the Foundation to be effective, efficient and while highly productive also enjoyable. T grew up in Canada's poorest province at a time when it was still a British colony dependent mostly on fishing and forestry. Many of the valuesand much of the lore associated with the island people were imparted to me by my grandfather in the form of stories. I've always therefore appreciated the value of stories as a way of conveying information that is readily retained, And so I would like to start my remarks about economic freedom with a few stories. ‘The purpose in doing so is to give you some background about the economic freedom Project but also to convey why I think economic freedom is really the most fundamental set of human freedoms, 25 years ago while trying to finance the activities of the Fraser Institute T promoted a children’s board game called Poleconomy. It tumed out to be one of the most successful business board games in Canadian history and left a residue of more than $1 million to the Institute as well as covering what would otherwise have been deficits in the Institute's operation for two years. When then I wanted to help an Institute in Mexico to get funding for its programs I naturally suggested the board game. In proposing the game to my Mexico colleagues I pointed out that not only could they make a lot of money selling the advertising spaces on the gameas wwe had done but because their printing costs would be very much cheaper they ‘Oh no”, they pointed would make more money selling the game than we diout, “costs for doing such things in Mexico are very high because of the cost of the paper and the cost of the ink”. “Why”, I asked, “ate the costs so high?” “Because of the protectionism imposed by the government’, they replied. “But ‘Mexico has no domestic pulp and paper industry to protect noris it a significant manufacturer of ink-- why then are there high tariffs L asked”. “The tarff3 are not high”, they replied, “ there are just import licenses for ink and paper”. But why would a government have that sort of protectionism in place if there really is no domestic industry to protect? My Mexican colleagues fell mute and during the ensuing silence could not at first understand what they were trying to convey with their silence. But of course eventually it dawned on me that the reason why a government would want to have licenses for the importation of paper and inkhad nothing to do with narrow economic interests but the broader ramifications of political opponents of the government being able to get access to supplies of paper and ink wih which to publish newspapers and magazines. While I am embarrassed to this day by the naiveté I displayed in that interaction, the experience sits in my mind is an ongoing reminder of the direct connection between economic regulation and freedom. I have come subsequently fo understand that many economic regulations whether by design or incidentally have significance for othor freedoms. A few examples are useful fo cement the point. Exchange controls inhibit foreign travel, telecommunications regulations alleged to protect local culture also isolate local populations and stifle free speech and the competition of ideas. Foreign investment controls allegedly protecting local business effectively convey to the government control over all domestic business assets. Regulations under the tax act requiring the reporting of a social insurance number with every transaction eliminate the right to privacy. Extensive employment ingovernment service deprives citizens of a fundamental independence upon which a free society depends. In the fall of 2005 I went to Kenya at the invitation of James Shikwati to attend meetings of the Aftican Resource Bank which I believe is also a creation of ‘The Friedrich Naumann Foundation. ‘The meetings were held near Lake Bogoria, about half.a day's drive from Nairobi. The drivealong the ‘NakurwNyabururu road necessarily takes a route through the immense farm then owned by former President Daniel Arap Moi. The 3000 acre farm is a small portion of the hundreds of thousands of acres of land which the Moi family has stolen from the people of Kenya. Moi who is despised by the people has the nickname Nyayo meaning in the footsteps -- in the footsteps of Jomo Kenyatta whom he succeeded as president. Moi also leamed his Kleptomania from Kenyatta, whose extended family holdings at the time of his, death were estimated to be more than $00,000 acres. ‘The northern boundary of the Moi farm more or less coincides with the arable land in the region. Land to the north is in the shadow of the mountains and has insufficient rainfall to support agriculture. The conditions there are not ‘unusual as farmers in many parts of the world encounter just this sort of land. ‘They solve the problem by itrigating with water obtained from underground streams, So why don't the farmers here drill boreholes and ittigate, I asked? ‘The best answer was provided by my driver whose own family had been dispossessed by the expansion of Moi’s holdings. There's no point in doing that he said because as soon as the landis made fertile some friend of the government will get it away ftom you and leave you with a debt for the boreholes, And so vast areas of Kenya which could produce a high level of income for farmers, if made arable by irrigation, are left untouched while foodaid is perennially trucked into the region to prevent starvation of the inhabitants. While Bill Easterly points out in his book, The White Man's Burden, that part of the problem is the attempt to overlay a European property rights system on top of tribal and traditional property systems, both that and the kleptocracy point to the importance of security of property tights as being the key to achieving higher levels of human development in Attica. The final story I want to tell before presenting you with some current information about economic freedom in the world, relates to why we started the project of measuring economic freedom in the firstplace. And I believe that this story is very helpful in interpreting economic freedom in a broader context and seeing why many of us who have done research in the area believe that economic freedom is indeed the most important kind of human freedom. In the summer of 1984 the Mont Pelerin society meetings were held at Cambridge University and of course one of the subjects discussed was George Orwell's famous novel 1984, The main paper was given by historian Paul Johnson who had just published his widely acclaimed historical analysis, Modern Times, Mr. Johnson, perhaps reflecting the thinking he had done for Modern Times, focused on the political aspects of Orwell's novel and concluded that 1984 was not # good predictor of the way in which the post Second World War World would unfold, Big brother, he pointed out, had more of the features of a child's bogeyman than modem big government. Asa side light to our discussion, I cannot help but wonder if we had all had at the time a better understanding of how things were unfolding inside the former Soviet Union, Mr. Johnson might not have had a different view of things. The recent award-winning German film, The Lives of Others, which chronicles theactivities of the Staci before the collapse, is a poignant reminder of the extent to which the apparatus of government can emulate the worst fears expressed in 1984, Thad been asked by the organizers of the meeting at Cambridge to respond to ‘Mr. Johnson's paper. In preparing my response [noted that Orwell had been influenced in his thinking as he approached the writing of 1984 by important book, The Road to Serfilom, by Austrian economist Friedrich Hayek, The principal preoccupation of Hayek was to war of the unintended consequences that would follow from the pursuit of more socialist economic policy consequences for personal and economic freedom So when commenting on Johnson's rather benign assessment of the way things were in the summer of 1984 I took a less favorable view because | felt that the historian had failed to take due account of the changes which have occurred in the economic sphere. T pointed out that governments were generally nearly fifty percent larger than they had been at the time Orwell wrote his book and that the pursuit of the tax revenues to finance this level of government were causing increasing intrusions into the ordinary lives of citizens, ‘There was of course the very high rates of taxation but also the fact that the policing of the revenue system had led governments to require a social insurance number be assigned to every individual and that this number be reported when any significant transaction was undertaken. The effective consequence of this requirement though driven by a technical fiscal motive was to impair the privacy of every individual in the nation, While there could be no question that economic freedom had been reducedit ‘was possible to argue that this at all been done for good reason and with goodeffect, To counter this potential response I employed a quotation from Milton and Rose D. Friedman's pathbreaking book, Capitalism and Freedom, to the effect that Democratic societies did not tend to emerge unless they were predominantly market societies - that is to say societies with high levels of economic freedom. I concluded that we could therefore not have a sanguine outlook for even political freedom in an environment where economic freedoms were being curtailed and where the tax obligations to government were the single largest expenditure of every family. ‘What was very interesting was the conversation which then ensued amongst the members of the society. ‘The focus was on the connection between economic freedom and political freedom but some members noted that a tripartite distinction was really required since one could find situations like the then British colony of Hong Kong which citizens were economically free ard enjoyed very high levels of civil freedoms but did not have the ability to change their government which was effectively appointedin the form of Governor, from England, What became evident was that even though the room contained many of the leading lights of the modera liberalism movement we lacked a vocabulary to effectively discuss the connections between economic freedom, political freedom and civil freedom, Not only that but when differences of view emerged, aside from anecdotes about Fong Kong and Singapore, there appeared to be no empirical basis forresolving the differences. Given the importance of the topic I felt that a further deeper and more purposeful conversation about the connection between the three basic freedoms was required, I therefore approached Neil MacLeod, the then President of Liberty Fund, to ask whether he would finance a meeting at which top-level people could discuss the topics further. also approached Milton and Rose Friedman and asked them whether they would be prepared to cohost those meetings withme. They readily agreed and the partnership between them, Liberty Fund and some 80 of the leading intellects in the world at that time has produced a worldwide enterprise of measuring, analyzing, commenting upon and publishing measurements of economic freedom at the national and sub national level. What I propose to do today is to discuss some of the features of The Economic Freedom of the World Index and to discuss some of the evidence that has been compiled relating economic growth and development as well as other aspects of the human condition to the level of economic freedom.Economic Freedom and a Prosperity + ey aman es + Homes + Novena 72097 = Neate Some stories about Economic sal Freedom What is Economic Freedom a Economie freedom i the right tobe fee o wor, Keep whal you ean, to acquire and trade property, tobe protecied by law fom fraud and violence, obe free fom the atbivary exercise of poner and regulations by bureaucrats, tobe free rom theft of your property trough inflation taxes and io be fee {o fade goods, fhancal instruments and ‘money wih foreigners. Every human boing is ome economically fee. that reedom is removed by the ations o governments. “Therefore we moasuto the existonce of Economie Freedom by nating wher ithae been ernoved : Economic Freedom of the Wor Project + Objective: find a vay to measure economic freedom and explore the connection between itand other variables 20 year project Led ly the late Miton Friedman, Rose Friedman and Michael Walker + Involved 60 of the world's top scholars What is The Economic Freedom of the World Index? ‘#2 annual complation of data representing feciore which moke a county economcaly free Authors: James Gwartney and Robert Lawson ‘A.compenalum of 42 government poes, ‘iecig economic freedom based on objective date oridepensent surveys ‘#Aranking of 141 counties reprsenting 25% of ‘he worlds popullon accering to tho oon fo what ay potter ckzon obo eonomealy ee ‘9Nou a colatraton et inatuts in 74 atorent The Premise of the Project + The 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‘Components of The Economic a Freedom of the World Index + Size of government and taxation «+ Private property and the rule of law + Soundness of Money + Trade regulation and tariffs + Regulation of business, labour and capital markets + Based entirly on objective or third party deta for 141 countries Index is published and promoted in 72 countries by Institutes who are members of the Economic Freedom of the World Network imple of Press Coverage for raver nstte! Econcmic Freedom of the Word 2008 SSS eee es oS + This media coverage which now amounts (throes wove te ge a something new. There were essentially no stories talking about economic freedom ‘Sub-national and Regional Indices until the Index gave journalists a means to discuss the concepts around economic freedom.Economic Freedom of the Arab World eonomie Freedom Indox of Indian States aadaya Economist eee woes |) Hom e eon reo tthe Wert ‘Overall Economic Freedom Mdex and the Top 10 Overall Economic Freedom Index and the Bottom Ten Sou otet i) Economic Freedom Over Time a ‘Economie Freedom Score Economic Freedom and the Top 10Lagat System and Property RIGhS Size of Government and the Top 10 and the Top 10 seo tat tnie SO OA c see tetion HO est) Freedom to Trade Internationally and the Top 10 sagt acon Seon totmetainn Smite) ° Bee ea eee seneefnartaine SUE ° Regulations and the Top 10 Credit Market Regulations and the Top 10 epee apace eee sore Tafa SONU . serene)Tabor Market Regulations and the Top 10 Business Regulations and the Top 10 titre 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 The impact on economic growth and development Economically Successful...and “Twas searching the world or ideas on how to make Russia then | found the Economic Freedom of the World Index. is the Recipe for Economic Success” Dr. Andre lilarionov Chief Adviser to President Viadimir Putin ItThe International Monetary Fund's View of why countries get rich + The IMF is the much criticized but powerful ‘country doctor which bails out countries in trouble + One of ts briefs is to try to understand why ‘some countries succeed and other countries fail + In its last annual review of the world it concluded that the main determinant of variations in growth between countries is the quality oftheir economic policy choices» Income (per person) of the ps Bottom Ten least free T (0? pac Cal, 20890) Income (per person) of the Top 10 a P per Cat, 2050) Soe ate ain Ne Movie no isco "ar Capita Income and Economic Freedom Quartile ‘2000 ‘28000 s2n9%0 s15000/ s1n000 1500 (oorh 2008 ‘ODP Por Cate Least Free: Most Fi Sor Tawa ee Ba Walp Tes CORO ‘Growth in Real GDP Per Capita and Economic Freedom Quartile Least Free wu Most Free ~~ Forelgn Direct Investment an Economic Freedom Quartile Soe: te The Wald WattDeiyect tn arPer Caplta Income and Eeonomle Freedom Economic Freedom and Investment Per Worker, 1980-2000 == riper tp wa 31239 5) 12000 19.000 000 5000 000 2020 Investment per worker ~ the key i transition for low income Countri Agricultural Employment a zeeeee Eo Income Per Person a 10; sem} ‘sus rue 04 amon 00a ‘| Tractors per Agricultural WorkerTeedom also WOIKS fo eliminal income differences in high incom| countreis Economic Freedom,the Poor, and Inequality Income Share of the Poorest 10% and a Economic Freedom Teast Free... Most Free Sem Tie Tt et Netty eD- 2 feat Per Capita Income of Poorest 10% Economic Freedom Teese ete TT ice uta (23, Least Fr00 wns Most Free Soe Tsao Wl ik Wad go Se #9 | Economic Freedom, Other Freedoms and Democracy cosaEconomic Freedom Versus Corruption Economic Freedom and Political Rights lgher va nlcatas lower level of corupton a eta lira ell “a | | Least Free «Most Free Least Free Son iene Cri a, [ew i a ea TushuSigubesenmcre = Wott cette atap esse “ Economic Freedom and Civil Liberties Lower ratings idea higher vel fo betes The impact of Economic Freedom on the UN's Human Development Index and other indicators of well-being ‘Sane "seein Least Free sus Most Free Se Tie hn oa Fn We Cae Noses ilawin i aniteapimenasesasace . Human Development Index and Economic Freedom Quartiles Life Expectancy at Birth anc Economic Freedom Quartiles — RRS se Least Free ‘noe Ta a sna pect brmeen Tans Ser inlet la Wilting poate “Sinan seen2 i z i E Lee Fee ns Manto See ay We ik Meteo ie of Population Using Improve Water Sources. Conclusions Economic Freedom + Increases prosperity for ail + Reduces poverty + Increases other freedoms + Improves quality of life www. freetheworld.com www. fraserinstitute.ca a