62419 POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise JUNE 2011 • Number 59 Freedom, Entitlement, and the Path to Development Jean-Pierre Chauffour Twenty years after the revolutions of Central and Eastern Europe, the Arab Spring is again raising some fundamental questions about the place of freedom and entitlement in development. Depending on the balance between free choices and more coerced decisions, individual opportunities to learn, own, work, save, invest, trade, protect, and so forth could vary greatly across countries and over time. Reviewing the economic performance of more than 100 countries over the past 30 years, new empirical evidence tends to support the idea that economic freedom and civil and political liberties are the root causes of why certain countries achieve and sustain better economic outcomes. In contrast, entitlement rights do not seem to have any significant effects on long-term per capita income— except for a possible negative effect. These results tend to support earlier findings that, beyond core functions of government responsibility (including the protection of liberty itself), the expansion of the state to provide for various entitlements (including so-called economic, social, and cultural rights) may not make people richer in the long run; it may even make them poorer. The Scene Are there some admittedly more fundamental common characteristics that could explain why, on average, certain In reviewing the distinctive characteristics of the 13 countries create better institutions, promote better policies, economies that have been able to grow at more than 7 per- and achieve better outcomes? cent for periods of more than 25 years since 1950, the Com- Although a general theory of economic growth continues mission on Growth and Development (2008) found that to elude the economist profession (Easterly 2001), the idea sustainable high economic growth requires, among other that differences in societies’ institutional arrangements are things, leadership and governance; engagement with the the fundamental cause of differences in economic perform- global economy; high rates of investment and savings; mobile ance has gained enormous momentum in recent decades. resources, especially labor; and inclusiveness to share the Since the days of North and Thomas (1973), it has become benefits of globalization, provide access to the underserved, clear that, although factor accumulation, innovation, and and deal with issues of gender inclusion. However, observing technological progress are the proximate factors that explain that successful economies display a number of commonali- the mechanics of economic growth, they are not the causes ties and desirable features is of little help in understanding of growth; they are growth. To locate the more fundamental why and how those countries have been able to nurture and determinants of growth, one needs to push the question sustain these specific features over time. Why are certain back one step and ask why factor accumulation and innova- countries better governed than others, save and invest more, tion advance at different rates in different countries or have more flexible markets, or achieve greater inclusiveness? groups of countries; why countries differ in terms of level of www.worldbank.org/economicpremise POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK 1 schooling, quality of infrastructure, health of the population, ever, although societies may reveal different preferences re- and other proximate factors of economic growth. The grow- garding the trade-off between state intervention and eco- ing consensus is that the answer has to do with differences nomic freedom, the majority rule may not necessarily lead in institutions (for example, the rule of law, property regime, to the optimal state, either from a normative or from a util- and participatory process) and differences in geography and itarian perspective—especially when it violates the freedom other exogenous factors. Analyzing the genesis and develop- of minorities (for example, through discrimination, expro- ment of institutions, some scholars have tried to push the is- priation, or confiscatory taxation). Friedman (1962) notori- sue back even farther to ask why institutions differ across ously pointed out that market solutions (that is, voluntary countries in the first place. Could it be that certain norms, cooperation among responsible individuals) permit “una- values, and organizational principles in societies are con- nimity without conformity” (p. 33) (that is, a system of ef- ducive to better institutions? For instance, Acemoglu, John- fective proportional representation), whereas political solu- son, and Robinson (2004) suggest that political institutions tions (even in proportional representation) typically tend to and the distribution of resources are the fundamental deter- produce the opposite: “conformity without unanimity” (p. minants of institutions and, therefore, of growth. Chauffour 33). From this position, he concluded that the wider the (2009) hypothesizes that the extent to which political insti- range of activities covered by the market, the fewer the is- tutions and human interactions in society are formed around sues on which explicitly political decisions were needed and, the concept of freedom constitutes one key determinant of hence, required agreement. In turn, the fewer the issues on growth—perhaps the ultimate cause for economic agents to which agreement was necessary, the greater the likelihood of actually create and accumulate. reaching agreement while maintaining a free society. In this understanding of the world, development could be The Hypothesis subdued to three fundamental sets of circumstances: (1) a set of exogenous conditions; (2) the degree of individual The starting proposition is that economic development can freedom and market solutions; and (3) the degree of state in- simply be seen as the product of exogenous and endogenous tervention and political solutions, including the intervention factors. Exogenous factors are all factors that are not under needed to protect individual freedom itself. Certain coun- the control of individuals, such as geography, natural re- tries may be able to sustain better institutions and outcomes source endowment, ethnolinguistic homogeneity, and vari- over time because of a better mix of these circumstances. ous other types of good and bad luck. Endogenous factors correspond to factors that are influenced by individuals— Economic Freedom alone or in associations. Those endogenous factors, in turn, can be divided between factors that are mainly the expres- The main dimensions of economic freedom generally include sion of free individual choices leading to market solutions the freedom to hold and legally acquire property; the freedom and factors that are the results of more coerced individual to engage in voluntary transactions, inside or outside a nation’s decisions leading to political solutions. borders; the freedom from government control of the terms Freedom conditions would include all forms of economic on which individuals transact; the freedom from government freedom, civil rights, and political liberties. These are essen- expropriation of property (for example, by confiscatory taxa- tially “negative” rights in nature and are mainly covered by tion or unanticipated inflation); and the freedom to move the Universal Declaration of Human Rights and the United freely within and across international boundaries. There are Nations International Covenant on Civil and Political Rights. several theoretical reasons why institutions and policies guar- In contrast, coercive conditions would include the regula- anteeing economic freedom conceivably have the capacity to tions, taxations, and other forms of government interven- provide growth-enhancing incentives: they promote a high re- tions to provide for public goods and various entitlement turn on productive efforts through low taxation, an independ- rights. Beyond a certain threshold of government interven- ent legal system, and the protection of private property; they tion, these entitlement rights are essentially “positive” rights enable talent to be allocated where it generates the highest in the spirit of the economic, social, and cultural rights as value; they foster a dynamic, experimentally organized econ- provided by the United Nations International Covenant on omy in which a large amount of business trial and error and Economic, Social, and Cultural Rights. competition among different players can take place because Of course, the problem of when exactly government in- regulations and government enterprises are few; they facilitate tervention starts interfering with individual choices and the predictable and rational decision making by means of a low market is open to reasoned debate. In the final analysis in a and stable inflation rate; and they promote the flow of goods, democratic context, it is often believed that the scope of the capital, labor, and services to where preference satisfaction and state is a matter for the democratic process to decide. How- returns are the highest (Berggren 2003). Figure 1 illustrates 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise the relationship between economic freedom (as measured by growth. Rodrik (2000) conjectures that democratic coun- the Fraser Institute) and per capita GDP in more than 100 tries would favor higher-quality growth—that is, a more pre- countries in 2007. dictable long-term growth rate, greater short-term stability, better resilience to adverse shocks, and a more equitable dis- Figure 1. Economic Freedom vs. Per Capita Income, 2007 tribution of wealth. Civil and political liberties would also usually be associated with greater gender equality, higher 12 levels of female education, lower reproduction and infant 11 mortality—all factors contributing to economic growth. Fig- ln GDP per capita (PPP) 10 ure 2 shows the relationship between civil and political 9 rights (as measured by Freedom House) and per capita GDP 8 in more than 100 countries in 2007. 7 Figure 2. Civil and Political Rights vs. Per Capita Income, 2007 6 5 12 4 11 ln GDP per capita (PPP) 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 10 index of 1–10 9 Sources: Fraser Institute and World Bank. 8 Note: PPP = purchasing power parity. 7 6 Economic freedom and free markets give spontaneous 5 satisfaction to people’s demands and constitute the main en- 4 gine for technological progress and economic growth. In 0 1 2 3 4 5 6 7 8 turn, sustained and vigorous economic growth creates the index of 1–8 conditions for achieving various human development goals, including economic, social, and cultural ones. Friedman Sources: Freedom House and World Bank. Note: PPP = purchasing power parity. (2005) argues that economic growth gives benefits far be- yond the material: it brings “greater opportunity, tolerance of diversity, social mobility, commitment to fairness and ded- A number of theoretical arguments have been advanced ication to democracy” (p. 4). And, conversely, when there is to make the case that civil and political freedom and eco- economic stagnation or decline, the citizen’s “moral charac- nomic freedom are mutually reinforcing. Civil and political ter” tends to decline accordingly, there being less tolerance, freedom is expected to facilitate the functioning of the mar- less openness, and less generosity to poor and disadvantaged ket economy by developing a more predictable and stable people. Economic freedom is the recognition that being institutional framework for engaging in productive transac- forced not to behave according to one’s preferences is utility tions, including better protection of property rights. This has reducing and costly. a positive influence on economic growth through higher sav- ings and investment rates and through lower rents associated Civil and Political Liberties with corruption, government controls, and the lack of re- spect for the rule of law. Also, political rights and civil liber- Economic freedom is only one dimension of individual free- ties are usually conducive to faster economic growth be- dom. Other dimensions—such as those related to civil rights cause of the need for political legitimacy of the government and political liberties—are equally fundamental. All three di- undertaking economic reforms with possible short-term mensions of freedom essentially aim at freeing human beings costs, the need for an independent judicial system to carry from various types of state and nonstate violence and “un- out a successful economic liberalization, and the fact that re- freedoms.” Sen (1999) takes the view that securing econom- spect for property rights is most often achieved in societies ic rights will not achieve the expected economic benefits in where civil liberties and political rights are guaranteed. case of civil and political rights violations. When the state does not refrain from physically harming its citizens Entitlement Rights (through means ranging from arbitrary imprisonment to po- litically motivated killings), the resulting climate of fear and To ensure the protection of the various forms of economic, anxiety is unlikely to be conducive to investment and civil, and political freedoms discussed above requires an ef- www.worldbank.org/economicpremise POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK 3 ficient state—that is, a state able to effectively fulfill the core Figure 3. Entitlement Rights vs. Per Capita Income, 2007 functions of government responsibility (such as the protec- 12 tion of persons, contracts, and properties; the maintenance 11 ln GDP per capita (PPP) of the rule of law and justice; and the provision of public 10 goods). However, political circumstances (being democratic 9 or undemocratic) often lead the state to take on a more am- bitious range of activities to directly foster growth, promote 8 development, and achieve a number of social objectives 7 (such as reducing inequality or promoting social justice). 6 Typically, those activities would involve political solutions— 5 as opposed to market solutions—that entail an enlargement 4 of the scope of the state and the creation of entitlements (for 2 3 4 5 6 7 8 9 10 instance, to social security, health, education, food, housing, index of 1–10 work, an adequate standard of living, and so forth). To deliv- Sources: Fraser Institute and World Bank. er those entitlements, the state interferes with the market— Note: PPP = purchasing power parity. for instance, to directly produce manufacturing goods (through state-owned enterprises), to supply services (such as education, health, energy, transport, telecommunications, and culture), to control prices (through wages, interest rates, the hypothesis. This caveat notwithstanding, new empirical rents, and commodities) or quantities (via credits, quotas, li- analysis in a sample of more than 100 countries over the last censing, and other barriers to entry), and to redistribute in- 30 years suggests that, for a given set of exogenous circum- come (through taxes, subsidies, and transfers). stances, the respect for and promotion of economic freedom The relationship between the size of government and and civil and political rights (measured by the Fraser Insti- economic growth has been extensively studied and tested in tute’s Economic Freedom of the World index and the indexes the literature, using many different econometric techniques, of civil rights and political liberties published by Freedom empirical settings, and samples of countries. But results pre- House) are, on average, strongly associated with a country’s sented in the literature have been mixed and inconclusive per capita income growth over the long run (Chauffour (Bayraktar and Moreno-Dodson 2010). In his seminal paper, 2011): Barro (1991) concludes that government expenditure is pos- • A one-unit change in the initial level of economic free- itively linked to economic growth when the share of govern- dom on a scale of 1 to 10 (for example, the difference ment expenditure (and, consequently, the tax rate) is low; between Argentina and Turkey in 1975) is associated but it then turns negative because of increasing inefficiencies with an increase of almost 1 percentage point in the as the share of expenditure increases, indicating a nonlinear average economic growth rate during the period (p. relationship between government expenditure and growth. 19). Such findings could be explained by the key initial role of • A one-unit increase in the economic freedom rating the state in providing some fundamental public goods to during the earlier decade results in an increase of more protect liberty itself—economic freedom and civil and po- than a 1.3 percentage points in the average growth rate litical rights. However, when the scope of the state expands over the whole period, whereas a unit increase in the to cover many economic and social areas, its impact on eco- economic freedom rating during the later decade re- nomic growth could turn negative. Figure 3 illustrates the re- sults in an increase of 0.9 percentage point in the av- lationship between entitlement rights (as measured by the erage economic growth rate over the entire period (p. Fraser Institute) and per capita GDP in more than 100 coun- 20). tries in 2007. • A one-unit change in initial civil and political rights conditions on a scale of 1 to 8 (for example, the differ- Empirical Evidence ence between Mongolia and Chile in 1975) increases average economic growth by more than 0.3 percentage The multifaceted concepts of economic freedom, civil and point during the period (p. 20). political rights, and entitlement rights are difficult to measure; • A one-unit increase in the civil and political rights con- and the data used in any empirical analysis are necessarily im- ditions during the period is only weakly associated perfect proxies for the underlying concepts. Furthermore, the with an increase in per capita GDP (p. 20). inevitable gaps between the conceptual frameworks and the In contrast, the analysis finds that the extent to which the measured concepts complicate the empirical verification of state expands its scope to provide entitlement rights (mea- 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise sured by the Fraser Institute’s Economic Freedom of the make it more sustainable and equitable in the long run. For World index) does not add significant explanatory power in middle-income countries (such as countries in the midst of estimating countries’ growth performance over the long run. the Arab Spring and countries in Asia and Latin America), In the estimates where it does add such power, the findings they indicate that the quest for civil and political rights and would suggest a negative effect of entitlement rights on eco- for economic freedom could create the conditions for new nomic growth. In line with earlier literature, this may indi- social contracts. For low-income countries, they provide an cate that the role of the state in economic growth is ambigu- opportunity to reflect on the achievements under the Mil- ous. When the state limits itself to the core functions of lennium Development Goals and the potential role that eco- government responsibility, including the protection of vari- nomic freedom and other fundamental freedoms could play ous forms of freedom and the provision of key public goods, in a post-2015 Millennium Development Goals develop- it is likely to have a strong positive influence on growth. ment agenda. However, when the state grows beyond the size needed to fulfill these core functions, it may dampen economic growth References (everything else being equal). This nonlinear effect between government intervention and economic growth is not easy Acemoglu, Daron, Simon Johnson, and James A. Robinson. 2004. “Institu- tions as the Fundamental Cause of Long-Run Growth.” Working Paper to test because there is no guarantee (and, for that matter, 10481, National Bureau of Economic Research, Cambridge, MA. little evidence) that governments necessarily prioritize the Barro, Robert J. 1991. “Economic Growth in a Cross-Section of Countries.” core functions of government responsibility over other forms Quarterly Journal of Economics 106 (2): 407–43. of government intervention. Bayraktar, Nihal, and Blanca Moreno-Dodson. 2010. “How Can Public Spend- As far as the exogenous circumstances are concerned, ing Help You Grow? An Empirical Analysis for Developing Countries.” Policy Research Working Paper 5367, World Bank, Washington, DC. consistent with the economic theory and previous studies, Berggren, Niclas. 2003. “The Benefits of Economic Freedom: A Survey.” In- poorer countries tend to grow faster; countries located in the dependent Review VIII (2): 193–211. tropical climate and far away from the world’s biggest mar- Chauffour, Jean-Pierre. 2009. The Power of Freedom: Uniting Human Rights kets tend to growth slower than otherwise-similar countries and Development. Washington, DC: Cato Institute. in different locations; countries with higher proportions of ———. 2011. “On the Relevance of Freedom and Entitlement in Develop- coastal population grow faster; and, controlling for all other ment: New Empirical Evidence (1975–2007).” Policy Research Working Paper 5660, World Bank, Washington, DC. variables, countries that possess subsoil assets tend to grow Commission on Growth and Development. 2008. The Growth Report: faster. In other words, when natural resource abundance Strategies for Sustained Growth and Inclusive Development. Washington, does not lead to greater corruption and various forms of DC: World Bank. http://www.growthcommission.org/index.php. rights violations and inefficiencies, the economy that, in ad- Easterly, William. 2001. The Elusive Quest for Growth: Economists’ Adven- dition, is abundant in natural resources will tend to grow tures and Misadventures in the Tropics. Cambridge, MA: MIT Press. Friedman, Benjamin M. 2005. The Moral Consequences of Economic Growth. faster. New York: Alfred A. Knopf. Friedman, Milton. 1962. Capitalism and Freedom. Chicago: University of Conclusion Chicago Press. North, Douglass C., and Robert P. Thomas. 1973. The Rise of the Western New empirical evidence suggests that fundamental free- World: A New Economic History. London: Cambridge University Press. doms are paramount to explain long-term economic growth. Rodrik, Dani. 2000. “Institutions for High-Quality Growth: What They Are and How to Acquire Them.” Working Paper 7540, National Bureau of For a given set of exogenous conditions, countries that favor Economic Research, Cambridge, MA. free choice—economic freedom and civil and political liber- Sen, Amartya. 1999. Development as Freedom. New York: Alfred A. Knopf. ties—over entitlement rights are likely to achieve higher sus- tainable economic growth and to achieve many of the dis- About the Author tinctive proximate characteristics of success identified by the Commission on Growth and Development (2008). In con- Jean-Pierre Chauffour is lead economist in the Middle East trast, pursuing entitlement rights through greater state coer- and North Africa Region, Poverty Reduction and Economic cion is likely to be deceptive or self-defeating in the long run. Management (PREM) Network, of the World Bank, Washing- These findings provide potentially important policy les- ton, DC. This note draws on his book, The Power of Freedom: sons for all countries. For developed countries, they suggest Uniting Human Rights and Development. The author bears that prioritizing economic freedom over social entitlements sole responsibility for the views expressed in this note. could be an effective way to reform the welfare state and The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. It is produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at www.worldbank.org/economicpremise.