Mark D. White
Today we continue our preview of Accepting the Invisible Hand: Market-Based Approaches to Social-Economic Problems with Chapter 3, "Economic Freedom and Global Poverty," by James D. Gwartney and Joseph Connors. (Chapter 2 by John Meadowcroft was discussed here, Chapter 1 by me was discussed here, and the preface was posted here.)
From the chapter:
Over the period 1980–2005 many developing countries achieved remarkable increases in economic growth. Real per capita income increased substantially in countries that had experienced only modest increases in living standards for a century or more prior to 1980. Recent scholarship has pointed to the adoption of institutional and policy changes more consistent with economic freedom as an important, if not the most important, explanatory factor underlying the recent economic growth of developing countries. But economic growth and increases in real per capita GDP only provide information on how average income figures are changing. They may be a misleading indicator of what is happening to the living standards of the poor. Did the rapid growth of 1980–2005 lead to lower poverty rates? How does economic freedom affect poverty? What can be done to accelerate reductions in poverty rates? This chapter will address all of these issues. (p. 43)
Gwartney and Connors use recent World Bank data on extreme and moderate poverty to analyze the effect of institutional factors associated with economic freedom--"personal choice, voluntary exchange, open markets, and protection of privately owned property" (pp. 47-8)--on poverty rates in various regions of the world.
While economic freedom is commonly held to be associated with higher growth (for reasons reviewed on pages 47-9), the authors also recognize concerns that this higher growth does not increase the well-being of the poorest members of these societies. After analyzing the data from the World Bank together with the Economic Freedom of the World index (and controlling for factors such as foreign aid), they find that increased levels of economic freedom are correlated with lower poverty rates:
Compared to those that were less free, countries with higher economic freedom ratings during 1980–2005 had lower rates of both extreme and moderate poverty in 2005. More importantly, countries with higher levels of economic freedom in 1980 and larger increases in economic freedom during the 1980s and 1990s achieved larger poverty rate reductions than economies that were less free. (p. 56)
This chapter provides valuable empirical support to arguments (such as in Amartya Sen's book Development as Freedom) that changes in institutions and governance that enhance people's freedom and capabilities are crucial to ameliorating global poverty.