Wednesday, 25 May 2011

On the relevance of freedom and entitlement in development

Reviewing the economic performance—good and bad—of more than 100 countries over the past 30 years, this paper finds new empirical evidence supporting the idea that economic freedom and civil and political liberties are the root causes of why some countries achieve and sustain better economic outcomes. For instance, a one unit change in the initial level of economic freedom between two countries (on a scale of 1 to 10) is associated with an almost 1 percentage point differential in their average long-run economic growth rates. In the case of civil and political liberties, the long-term effect is also positive and significant with a differential of 0.3 percentage point. In addition to the initial conditions, the expansion of freedom conditions over time (economic, civil, and political) also positively influences long-run economic growth. In contrast, no evidence was found that the initial level of entitlement rights or their change over time had any significant effects on long-term per capita income, except for a negative effect in some specifications of the model. 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 and may even make them poorer.
Or so says the World Bank's Jean-Pierre Chauffour in a new working paper. The paper looks at economic performance of a group of countries over time: it considers the last 30 years of data for more than 100 countries. The paper sets out to (1) re-examine the long-term relationship between freedom and economic growth; and (2) disentangle the respective role of economic freedom, civil and political liberties, and the pursuit of economic, social and cultural rights on economic growth.
In line with the analytical framework of the rights-based approach to development, the paper conjectures that development is fundamentally rooted in the protection of some fundamental rights. It however further conjectures that all so-called “rights” are not necessarily equal and that the individual rights at the root of sound institutions and sustainable economic growth may not necessarily coincide with the rights embedded in the instruments of international human rights law. In particular, the pursuit of freedom rights (i.e., economic freedom, and civil and political liberties) and entitlement “rights” (i.e., right to food, housing, education, health, etc) may lead to different institutions and development outcomes over the long run.
When thinking about economic development freedom and entitlement are two different paradigms can be utilised. 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. The results of this paper demonstrate empirically the important point that fundamental freedoms are paramount in explaining long term economic growth. It argues that for a given set of exogenous conditions, countries that develop institutions that favour free choice — e.g. economic freedom and civil and political liberties — over entitlement rights tend to see greater growth and better achieve many of the proximate characteristics of success, e.g. leadership and governance; engagement with the global economy; high rates of investment and savings; mobile resources, especially labour; and inclusiveness to share the benefits of globalization, provide access to the underserved, and deal with issues of gender inclusiveness. In contrast, pursuing entitlement rights through greater state coercion may be deceptive and even self-defeating in the long run.
These findings, which tend to support earlier results from the empirical literature, provide potentially important policy lessons for all countries. For developed countries, they suggest that prioritizing economic freedom over social entitlements could be an effective way to reform the welfare state and make it more sustainable and equitable in the long run. For middle income countries, such as countries in the midst of the Arab Spring but also countries in Asia and Latin America, they indicate that the quest for civil and political rights but also economic freedom implies the reduction of existing privileges and entitlements to create new social contracts. For low-income countries (as well as the international community), they provide an opportunity to reflect upon the achievement under the MDGs and the potential role of economic freedom, along with other fundamental freedoms, in a post-2015 MDG development agenda.

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