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New strategy needed in developing world
Open Republic: April/ May/ June 2006

	In this issue
			Shadow Economy – causes, size and dynamic effects Robert Klinglmair and Friedrich Schneider, Department of Economics, Johannes Kepler University Linz, Austria Rethinking the gains from immigration: theory and evidence from the US Gianmarco Ottaviano, Università di Bologna and CEPR, Giovanni Peri, University of California, Davis Demographic alternatives for aging: increased fertility rate, labour force participation, or immigration Robert Holzmann, World Bank and IZA Bonn. The trouble with Chomsky George Jochnowitz Chomsky and the West's new Fifth Column Kevin Myers New strategy needed in developing world Paul MacDonnell, director of the Open Republic Institute (ORI)

This article originally appeared in The Irish Times on 12th October, 2005

The West and a growing part of Asia are wealthy and peaceful while many parts of Africa and the Middle East remain mired in conflict and poverty. There is now clear evidence that increased economic freedom could not only cure this poverty – it could bring peace too. Emphasising the need – ahead of open markets – for democracy, as the U.S. appears to be doing, or for overseas aid, as Ireland and other countries are now doing, may be counter-productive.

For the past 9 years a group of think-tanks, the Economic Freedom Network (EFN) – of which Ireland’s Open Republic Institute is a member – has measured the ‘economic freedom’ of 127 nations. The results have been published in the Economic Freedom of the World (EFW) Report – which includes a league table – from most to least economically free.

Economic freedom has four ingredients. First, the government should not, itself, become too big a part of the economy; this reduces efficient allocation of resources and, ultimately, prosperity. Second, there should be a good legal system with an independent judiciary, impartial courts and security of property rights. Third, the currency should be sound; the government should not devalue it by printing money to pay for its own activities. Fourth, there should be freedom to buy and sell goods and services overseas.

Things start to get interesting when we compare countries’ economic freedom to human welfare indices. The economies of the fifth most-free are growing at an average of 2.5%, compared to 0.6% for the fifth least-free. This has frightening implications for those at the bottom – including nearly all of sub-Saharan Africa. In the top fifth, only 0.1% of children are in the labour force, compared to 22.6% in the least economically free nations. In other words, children in more ‘globalised’ countries are less likely to have to work.

The most economically free nations have an average life expectancy of 77.7 years as against 52.5 for the least free. The most economically free nations score three times better (using Freedom House data) for political rights than the least free. Lest anyone believe that I’m confusing cause and effect there is clear evidence that poor countries that first embrace economic freedom grow more quickly afterwards – India and China being the best examples.

This year’s EFW Report has, however, something new. As well as addressing the current debate about how to free the world of poverty – it also addresses the question of whether there is any relationship between economic freedom and conflict. There is.

Research by Erik Gartzke, Associate Professor of Political Science at Columbia University, shows that economic freedom is more likely to stop countries going to war than democracy. Nations with a low score for economic freedom (below 2 out of 10) are 14 times more prone to conflict than states with a high score (over 8).

Why should this be so? For at least two hundred years common sense has suggested to economists and philosophers that people who earn their living through trade have little incentive to take by force. Countries that rely on free trade have much more to lose by settling differences through conflict than competition or negotiation.

Gartzke’s research is the most comprehensive attempt yet to measure this effect. The implications for foreign policy are profound. It seems that the approach of multinational organisations like the European Union, the World Bank, the IMF and key national players such as the U.S. government – is broadly correct in so far as these organisations promote economic freedom and free trade. However, so beneficial is economic freedom that governments, organisations and groups interested in the developing world should place it at the top of their agenda. Conversely, the findings suggest that emphasising either democracy or overseas aid without looking for more economic freedom in developing countries is likely to fail.

The Middle East and Africa present the most serious challenges. Members of the Arab league average between 14 and 20 per cent unemployment – that’s 15 million people out of work. In the absence of economic growth – something that can only happen with greater economic freedom – this number could grow to 50 million within 10 years. Unemployed, uneducated young men have fewer reasons to refrain from joining or supporting extremist groups than their employed and educated counterparts. According to the United Nations Development Programme the Arab world's population is set to swell from 280 million now to between 410-460 million in 2020. Today as much as 40 percent of the population is under 14 years old. These people will need jobs. Jobs require economic development and economic development requires economic freedom.

Africa is just as worrying. Ireland’s recent commitment to donate 0.7% of GNP to overseas aid by 2012 will likely see us transfer over €1 billion per annum to Africa from this date. This is on top of the €500 billion spent by donors on the continent since the 1960s. Aid has not done much good. To what extent are our government and other donors asking or helping African countries to improve their levels of economic freedom? This question is especially important now that we know that economic freedom and not aid per se may ultimately reduce the main cause of suffering in Africa – conflict.

Without attention to economic freedom in the Arab world and in sub-Saharan Africa, America’s and the EU’s policies in these regions may wind up not as the successes or failures their supporters and opponents describe – but as footnotes to a much wider disaster. The evidence in favour of economic freedom as the prime driver of human welfare is too great to ignore. We need to see the world’s poor not as victims or potential terrorists but as prospective employees and employers through global free trade. Our engagement with them should place the highest expectations on their governments to embrace economic freedom.