Devangshu Datta: Democracy and economic freedom

Is there a quantifiable cost to economic freedom (EF)? Do democracy and EF go together? Does crime increase with EF? There are knee-jerk answers but they’re usually driven by political convictions rather than data.

The Cato Institute’s annual Economic Freedom of the World (EFW) Report provides some hard data. (Since the Cato Institute is right wing liberal, the report may be safely ignored by left wingers.) The EFW 2010 ranks 141 nations on the following: size of government (relative to economy); legal structure and security of property rights; access to sound money; freedom to trade internationally; and regulation of credit, labour and business. It is based on 2008 data.

As in the EFW 2009 (2007 data), this time also Hong Kong and Singapore are No. 1 and No. 2, respectively. The rest of the top 10 are New Zealand, Switzerland, Chile, the USA, Canada, Australia, Mauritius and the UK. The bottom 10 are Algeria, Democratic Republic of Congo, Burundi, Guinea-Bissau, Central African Republic, Republic of Congo, Venezuela, Angola, Myanmar and Zimbabwe (also last in 2009).

A random sampling of other rankings: Germany (24th), Japan (24th), France (35th), Republic of Korea (37th), Spain (39th), Italy (66th), Mexico (69th), China (82nd), Russia (84th), India (87th), and Brazil (102nd). India retains its relative position.

Correlation between wealth and EF is very clear. Nations in the top 25 per cent (quartile) — that is, ranked between 1 and 35 — had an average per-capita GDP of $32,744, while the bottom 25 per cent (106-141) had an average per capita of $3,858. In the top quartile, the per capita of the poorest 10 per cent of citizens was $8,474 compared to $910 for the same group in the bottom quartile.

Life expectancy is 79.3 years for the top quartile and 59.9 years for the bottom. The top quartile has an average score of 7.4 for corruption on an ascending scale where 10 is least corrupt, while the least-free quartile has an average score of 2.6.

Nations in the top quartile also have an average score of 1.6 for political rights and civil freedoms on a descending scale of 1 to 7, where 1 is most free, while those in the bottom quartile have an average score of 4.3.

There isn’t a single bottom-10 nation, which qualifies as a “full-service” democracy. But Hong Kong and Singapore themselves don’t make the cut as full-service democracies. Also, some nations that are relatively low EF (Spain and Italy, for example) have high ratings for political and civil rights. The best one can say is that democracy makes EF much more likely.

One trend was that the world became less economically free in 2008, for the first time in decades. It was obviously due to the economic crisis. Regulation went up, the size of government increased, the soundness of money got worse.

Perhaps the most interesting chapter in the EFW 2010 is on the linkage between crime and EF. One issue is that some regimes under-report incarcerations and crime in general. As the authors admit, crime data are highly unreliable and they could get them only for 1995-1999.

The EFW used homicide data (usually reported objectively) as a proxy for all crimes. They found that inequality (measured by GINI) and literacy rates had significant correlations with homicide and, by their hypothesis, crime rates in general. The higher the inequality, the more the homicides. The lower the literacy, the more the homicides. Also, the lower the literacy, the more the inequality.

This represents an interesting conundrum for nations like the BRICS. Inequality always increases during phases when GDP grows quickly, until literacy rates catch up. This implies (if you believe the EFW) that crime is also likely to rise. The EFW recipe for India would probably be to encourage PPP in schools, liberalise trade, and deregulate labour, capital and business.