2008 Economic Freedom of the World Report

Philip Booth comments at the IEA Blog on the UK release of the 2008 Economic Freedom of the World Report. Booth writes

African nations occupy most of the bottom spots in the index. With the exception of Venezuela, the ten nations with the lowest levels of economic freedom are extremely poor countries: Zimbabwe, Angola, Myanmar, the Republic of Congo, Niger, Guinea-Bissau, Central Africa Republic, Chad, Rwanda, and Burundi. As James Gwartney, the lead author and professor of economics at Florida State University said “Weakness in the rule of law and property rights is particularly pronounced in sub-Saharan Africa, among Islamic nations, and for many nations that were part of the former Soviet bloc.”

There is an important lesson here for the Make Poverty History Campaign and the so-called Trade Justice Campaign. The former has campaigned for more government aid for poor countries. Both groups have campaigned to try to stop the forces that lead to the liberalisation of trade in poor countries. There are many unfortunate direct economic effects of aid (it can raise real exchange rates and damage export sectors for example). But an important indirect effect is that it can give greater financial power to governments and enable government officials to benefit from financial preferment. In other words, aid has effects that lead to bad governance and can undermine the rule of law and property rights. Similarly, trade regulation, quite apart from the damaging direct economic impact it has, is well known to be a major source of corruption in under-developed countries.

These observations do not prove that either aid or trade regulation are a bad thing as such - I would however argue that the latter almost always is - but it should give aid campaigners pause for thought. Those who want greater government aid for poor countries and who campaign against trade liberalisation in poor countries should realise that, if they are wrong, the consequences could be very serious. Increased economic freedom can be one factor in increasing the wealth of poor countries.