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Wednesday, September 28, 2005

Economic Freedom, Equality, & Growth

From BBC News:

When the World Bank’s new president, Paul Wolfowitz, presides over his first annual meeting, he will be confronted with a radical new report from his own organisation that sees ending inequality as a key to reducing poverty. The World Bank’s annual development report often sets the tone for its discussion on development issues. And this year’s report squarely confronts one of the key issues in development – the role of inequality.

The “Equity and Development” report is the first time that the World Bank has explicitly acknowledged that redistribution – as well as economic growth – is needed to end world poverty. The authors are careful to emphasise that they are not anti-growth, but that equity enhances the effect of growth on poverty reduction. They also put their main emphasis on equality of opportunity, pointing out that groups (such as religious or ethnic minorities) excluded from better health and education reduce the overall capacity of the economy to grow.


Older models of economic growth have given credence to physical factors of production. Land, labor and capital (inputs) are utilized to create outputs – the increase in these inputs or the specialization of these inputs would then, theoretically, result in the increase of outputs, or, economic growth. As the world has become globalized, it has become evident that there are additional “inputs” beyond those of land, labor, and capital that are necessary for such growth to occur.

There is a proven linkage between economic liberty and economic growth. Economic freedom has been systematically measured since 1983, first produced by Raymond Gastil and Lindsay Wright and presented in Freedom House’s annual report on political and civil liberties from around the world. Beyond these variables and indices that were determined and measured by organizations like Freedom House, the Fraser Institute, and the Heritage Foundation, there was research done on the effects of economic liberty on the distribution of wealth, and correspondingly, economic growth. Gerald W. Scully, in 1992, “determined that liberty had favorable effects on the distribution of income as well as its level [of income]”(Hanke and Walters, 1997). These findings were important to understanding how economic growth was affected by not only the physical factors of production, but also the economic freedom and equality of those who produce and consume in that society.

It seems to follow that these same concepts and theories that apply to states, apply to the world community, as a whole. Perhaps now that there is a realization of this, we can look forward to a world that is not only full of economic freedom, but also full of equality and the benefits that are associated with this, like economic prosperity.

Comments:
"There is a proven linkage. . ."

I think caution is always in order when we think of "proof." The scientific method, and the method of econometrics, is not really set up to "prove" something is the case. Rather, the method is pretty good at "proving" what is not the case.

I agree that the linkage you refer to has been suggested by not just a few empirical studies. Still, the proper methodological point is that the hypothesized linkage has not been rejected. Hopefully, different researchers will continue to work on estimates and explorations of the linkage, so that over time, there might be a much greater body of empirical evidence that tends to confirm the linkage.
 
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