Saturday 23 April 2016

Economic freedom in the long run

An interesting paper on Economic freedom in the long run: evidence from OECD countries (1850–2007), by Leandro Prados De La Escosura, is available in The Economic History Review: Volume 69, Issue 2, pages 435–468, May 2016.

The abstract reads,
This article presents historical indices for the main dimensions of economic freedom and an aggregate index for the developed countries of today, specifically pre-1994 OECD members. Economic liberty expanded over the last century-and-a-half, reaching more than two-thirds of its possible maximum. However, its evolution has been far from linear. After a substantial improvement from the mid-nineteenth century, the First World War brought a major setback. The postwar recovery up to 1929 was followed by a dramatic decline in the 1930s. Significant progress took place during the 1950s but fell short of the pre-First World War peak. After a period of stagnation, steady expansion since the early 1980s has resulted in the highest levels of economic liberty of the last two centuries. Each of the main dimensions of economic freedom exhibited a distinctive trend and its contribution to the aggregate index varied over time. Overall, improved property rights provided the main contribution to the long-run advancement of economic liberty.
Section XI of the paper sums things up by saying,
An expansion of economic liberty, nearly three-fourths of its possible maximum, has taken place in the OECD during the last one-and-a-half centuries. Its evolution, however, has been far from linear. After a substantial improvement from the mid-nineteenth century that peaked in 1913, the First World War brought with it a major setback. A postwar recovery up to 1929 was followed by a dramatic decline in the 1930s and, by the eve of the Second World War, economic freedom had shrunk to its 1850 levels. Significant progress in economic freedom during the Golden Age (1950–73) fell short of the pre-First World War peak. A steady advance since the early 1980s has resulted in the highest levels of economic liberty in the last two centuries.

Dimensions of economic freedom exhibited different trends, which confirm their complementarity in composing a complex image of economic liberty. During the period 1850–1914, improvements in property rights enforcement represented the main contribution to its progress. In the interwar years, the collapse of freedom of trade and regulation accounts for practically all the contraction in economic liberty, but from 1950 onwards liberalization of trade and factor flows has been the main force behind its advance. Over the whole period 1850–2007, the main contribution to the increase in economic liberty has come from legal structure and property rights.

A new historical index of economic freedom raises pressing questions. Are there any trade-offs between economic freedom and other kinds of freedom? Have increases in economic freedom had a cost in terms of growth, inequality, well-being, and democracy, or, conversely, have these increases contributed to their enhancement? The next challenge for researchers is to provide answers to these questions. (Emphasis added.)
With regard to the importance of property rights the paper notes,
Over the one-and-a-half centuries examined, improvements in the definition and enforcement of property rights emerge as the driver of long-term achievements in economic liberty.The only exceptions were the US and the UK, in which trade liberalization made the most distinctive contribution, and Australia and New Zealand, in which it came from deregulation.
So New Zealand's economic liberty was helped by deregulation. Who knew?

2 comments:

Michael Reddell said...

Without having read the paper yet, surely one has to be a bit skeptical of deregulation being the big factor for NZ over the whole period since the 1860s? I'd be surprised if we had much of a stock of regulation in 1860 (and certainly not one materially different from that of the UK).

Michael Reddell said...

My skepticism is reinforced. The "regulation" variables in the 19th C are the government deficit as a share of GDP, and the real interest rate. Whether or not one looks positively on the huge role of government in borrowing, and developing infrastructure etc, in the 19th C, it is hardly what most have in mind when they think of "regulation". Labour market regulatory variables only enter his mix from 1950.

Given that the Australian colonies adopted much the same approach to govt borrowing as NZ in the 19th C, it is not surprising that the Australian results are similar.