Tuesday, 27 November 2007

Does the granting of economic freedom result in greater political freedom and increased protection of human rights?

an old presentation revived and turned into an essay in my spare time


The issue of economic freedom is one that is far more controversial than political freedom. To many, the facets of economic freedom do not constitute ‘rights’ in the same way that civil and political rights do (for the purpose of this proposal, I will use the term ‘political freedoms’ to encompass civil and political rights). That is, for example, the right to free speech is fundamentally different from the right to choose your occupation. Proponents of the central allocation of resources often say that economic freedoms are inherently harmful, and that the government should control individual actions in the market. Oppositely, those who believe in laissez-faire believe that the individual should be allowed to conduct his or herself in the market in whichever way he/she perceives best. In the world today, there are no examples of absolute laissez-faire or complete central allocation. Rather, governments vary in their degrees of market intervention. This essay presents a proposal to investigate a quantitative relationship between the economic and political aspects of ‘freedom’. To accomplish this, statistical analysis using measures of economic and political freedom will be employed. Economic freedom will be judged using the "economic freedom index" in Gwartney et. al (2000), while the civil and political rights aspects constituting political freedom will be measured using Freedomhouse’s "freedom in the world" survey rating scores.

Literature on the puzzle:

20th Century economists, Friedrich Hayek, Milton Friedman and Ludvig von Mises have written at length about the idea that “liberties in the political and economic spectrum are complementary and mutually dependent.” In Capitalism and Freedom, Friedman addressed the dual role of free economic arrangements in the promotion of a free society in promoting both political freedom and ‘total freedom’ (as he calls it). Using the example of post Second World War “control of arrangements order” in Britain, he shows how free economic pursuit makes up an integral part of our notion of essential personal liberties. The order indoctrinated by the Labour party made centralized allocation of individuals to occupations the law. Even though, this does not constitute a violation of any international human rights covenants, I am sure most, if not all, of us would feel this that is a grave violation of personal liberties. Therefore, the notion of our right to economic freedom is so natural and so ingrained in our beliefs of liberty that we can hardly separate it from what we call ‘freedom’. Friedrich Hayek stated, “liberty of the individual can only be obtained when the latter is free to exploit his productive capacities…without the interference of state.”
His work also addresses how economic freedom can be viewed as a means to the end of political freedom: “competitive capitalism promotes political freedom because it separates from economic power from political power and in this way enables one to offset the other.” Peitsinis Charilaos of the Institut Hayek articulates this in a slightly clearer manner: economic freedom allows the individual to earn independently of the state, and thus allows him to question, express dissent, and even combat this institution. History provides ample evidence for this argument, as there has never truly been a society that has sustained a high degree of political freedom, without also having a great degree of economic freedom as well. Examples ranging from the golden ages of Greece and Rome to the United States’ tremendous prosperity in the 1990s solidify this argument.
However, it would be foolish not to observe the rather recent instances where a high degree of economic freedom was not associated with political freedom, total freedom or the provision of human rights. Notorious examples include the repressive regimes of Russia under the Tzars, Nazi Germany, fascist Italy and Spain, and possibly today’s Sudan. Similarly, the astounding economic prosperity of China after it pursued economic freedom has not be associated with proportional increases in political freedom and in the provision of human rights.

Thus, History provides us with the following three outcomes for an association between political and economic freedom: 1) for political freedom to be sustained at length, economic freedom must also exist, political freedom cannot exist without economic freedom (totalitarian socialism), 2) economic freedom can exist without political freedom, 3) both exist.

Possible outcomes from historical evidence:

1) Neither political nor economic freedoms exist. > totalitarian socialism
2) Economic freedom exists only. > fascism
3) Both exist. > capitalist liberalism

Operationalization of Economic and Political Freedom:

For quantifying economic freedom we will use the ‘economic freedom index’ developed in 2000 and 2001 by James Gwartney and Robert Lawson in The Concept and Measurement of Economic Freedom, while the former author was the chief economist of the joint economic committee of the U.S. congress. I believe that this is the best existing measure for economic freedom because it is multifaceted unlike most others, which are limited to indicators such as the black market premium on foreign exchange. Nevertheless, this measure is not free from criticism. It is deeply rooted in modern libertarian ideology and assumes that the principal role of government should be limited to the enforcement of property rights and contract obligations, provision of a stable monetary system, freedom of floating exchange, and the limited provision of essential public goods like law enforcement and national defense. Therefore, the scope of this measure is limited and can be subject to dispute as suggested by Carlsson et. al in Economic Freedom and Growth: Decomposing the Effects.

Quantitatively, Gwartney et. al’s index consists of seven categories measured on a scale of 0 to 10, where 10 is the highest degree of freedom.

These seven categories, whose detail is beyond the scope of this presentation include:

1) The size of government
2) Economic structure and the use of market
3) Monetary policy and price stability
4) Freedom to use alternative currencies
5) Legal structure and security of private ownership
6) International exchange – freedom to trade with foreigners
7) Freedom to exchange in capital markets

Measuring Political Freedom:

For measuring political freedom we will use the freedomhouse freedom in the world survey ratings. This measure has been covered rather extensively so I won’t go into as much detail on its intricacies. The methodology of the survey is grounded in basic standards of political and civil liberties derived from the Universal Declaration of Human Rights. The authors of the survey claim that it “does not maintain an culture-bound view of freedom”, however the U.N.’s definitions of political freedom are essentially rooted in Western Liberalism. So, even this measure is not free from bias.

Quantitatively, 192 nations and 14 territories are given a rating from 1 to 7, with 1 indicating the highest degree of freedom, and 7 the least. Countries are also classified as Free, Partly Free, or Not Free by the survey.

Ho: Economic freedom has no association with political freedom
Ha: Economic freedom has a significant association with political freedom

For actually using these measures to conduct statistical tests for association, there are several approaches. But for our purposes, I will detail the simplest and most straightforward one: linear regression. Variables in political science rarely follow a non-linear relationship; therefore, a regression will be suitable. I will run a regression with political freedom as the dependent variable (Y), as measured by Freedom House, and economic freedom as the independent variable (X). Once the test is conducted, we will derive a coefficient for the correlation between the two variables. We will then conduct significance tests to test the probability of finding an association with the magnitude, as large or as small, as we did.

Subsequently, we can disaggregate the effects of economic freedom on political freedom for more policy relevant results. We can run multiple regression analysis using each of the seven categories of economic freedom to find their individual correlations with political freedom. Another possible test would be to disaggregate both the effects of economic freedom and political freedom, ala Cherif, and find the correlations between each individual measure that we use for economic and political freedoms.


I have presented a proposal that I believe will be very significant for studying associations between economic freedom and political freedom, by which I generally mean civil and political rights. From historical evidence and theory I have reason to believe that the two occur simultaneously in a large number of instances, with a minority of cases of economic freedom without political freedom. However, I do not want to overemphasize or overestimate the consequences of the study. Finding a strong positive association between the two does not mean that the granting of economic freedom results political freedom. We have seen that the IMF and World Bank’s structural adjustment agreements advocating liberalization have not necessarily helped poor countries. But, what I hope this study will establish is that the two freedoms are complementary and complexly interrelated. For a truly free society to exist, both forms must simultaneously occur.