The Corner

Economic Freedom and Quality of Life

This is a well-conceived and well-executed video about the impact of economic freedom on the quality of life.

https://youtube.com/watch?v=v1U1Jzdghjk

It was produced by the Koch Foundation based on this economic freedom data. I recommend this paper on the issue of institutions and economic freedom by professors Christopher J. Coyne and Russell S. Sobel. As they explain:

There is widespread consensus among economists that institutions matter for economic development or stagnation. A large literature indicates that wealthy countries are those where property rights are clearly defined and protected, the rule of law is established and enforced, citizens have political and civil liberties, and policymakers adopt sound monetary and fiscal policies. Poor countries tend to lack most, if not all, of the ingredients required for development. Given the widespread agreement regarding the importance of good institutions for economic growth, an important question for poor countries is to how to engage in effective institutional reform.

Understanding how institutions relate to economic growth is key to understanding how poor countries may change the path they are on. That’s what Coyne and Sobel look into:

Our main findings can be summarized as follows. First, most formal economic and political institutions are non-stationary: changes to these institutions are permanent. The exceptions to this finding are the measures of civil liberties and political rights and of legal structure and property rights found in Area 2 of the EFW [Economic Freedom of the World] index,which we find to be stationary. This implies that changes to these institutions tend to revert to the mean, at least within the 35-year time period we examine. Our explanation for the stationarity of these measures is that they capture aspects of informal, embedded institutions that tend to take longer than formal institutions to change permanently. Second, we find that most of a country’s institutions are co-integrated, implying that sustainable institutional change requires reforms across multiple institutions. Taken together, these results provide insight into our understanding of how institutions are related. If economic and political institutions tend to move together, sustainable institutional reform requires simultaneous reforms and emphasis must be placed on seeking opportunities for changes to an array of institutions.

If you are interested in the academic literature about the connection between economic freedom and economic growth, I would recommend these posts by my colleague Matt Mitchell.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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