Can we identify the characteristics of national ideologies that promote economic freedom?

I have had to revise my views about the characteristics of national ideologies that promote economic freedom after undertaking some  research using World Values Surveys (WVS). I used data from surveys conducted around 2000 and during the first decade of this Century.

The set of questions I thought would be most relevant relate to such things as attitudes to competition, potential for hard work to lead to success, wealth accumulation, income inequality, government ownership and increased government responsibility. So, I spent a few hours standardizing data in order to average it and derive an index of economic policy attitudes. 

The next set of questions that I thought would be relevant relate to confidence in major companies and confidence in organisations that tend to interfere with markets (the government, political parties, parliament and civil service). I thought that economic freedom was more likely to increase in countries where there was greater confidence in big business than in government agencies.

Another question that I thought might be relevant asks people to choose from four options what they consider to be the most important aim for the country over the next ten years.  The options are: a high level of economic growth; strong defence forces; people have more say about how things are done; and trying to make our cities and countryside more beautiful. I thought that people who favoured a high level of economic growth might possibly tend to favour increased economic freedom. I wasn’t over-confident about that, however, because people who claim to be in favour of high economic growth often seem to me to be inclined to espouse hair-brained ideas for government interventions to advance that objective.

Finally, I thought a question relating to opinion about scientific advances might be relevant. I wasn’t sure whether people who are confident about scientific advances might be more prone to think rationally about economic policy, or whether they might be prone to scientism and have an irrational attachment to government planning. Anyhow, I also included a variable based on the percentage in each country who think that scientific advances are likely to help mankind.

The regression model sought to explain change in economic freedom over the period 2001 to 2011 in terms of initial economic freedom, as well as the four variables discussed above. My rationale for including the initial level of economic freedom is that the higher the initial level of economic freedom, the more favourable ideology must be in order to produce a further increase in economic freedom. The estimated coefficient on that variable was negative, as expected.

However, to my surprise, the estimated coefficients on the economic policy and confidence in business variables had the ‘wrong’ sign and were not significantly different from zero. Leaving those variables out of the analysis made very little difference to the estimated coefficients on other variables. Regression estimates for the revised model are as follows:

Intercept                                 1.250   (0.734)

Economic Freedom 2001        0.740  (0.081)

Economic growth priority       1.058   (0.377)

Science helps                          0.449   (0.373)

Adj. R²                                     0.60

Changes in economic freedom predicted by the model are compared with actual changes in economic freedom in Chart 1.

The outliers in the chart are of some interest because they show the importance of factors other than the prevailing growth ideology of the population – an obvious factor is political leadership – in causing changes in economic freedom. The results support the view that the anti-economic freedom policies followed in Venezuela and Argentina, for example, do not have much support from the populations of those countries.

The results of the regression analysis suggest that a country like the US or Australia with a relatively high level of economic freedom (i.e. a rating of about 8)  would need to have prevailing attitudes toward economic growth that are around average (relative to the countries included in the analysis) in order to avoid a decline in economic freedom. That may actually be less likely to happen than you might think because people in countries like the US and Australia tend to give lower priority to economic growth than do people in countries with lower average income levels. I will discuss the implications in my next post.

What is the relationship between emancipative values and economic freedom?

Followers of this blog will know that I have recently written several posts on topics related to this question. However, I will do my best to ensure you can understand what this post is about without having to read earlier posts in the series. I will try to pull the threads together in a subsequent post.

Emancipative values, as defined by Christian Welzel in his book Freedom Rising, are about such things as individual autonomy, choice in relationships, gender equality, freedom of speech and democracy. Economic freedom is about such things as the right to use your own resources for whatever purposes you choose including mutually beneficial activities with others.

There is no, in principle, reason why emancipative values should conflict with economic freedom. The niggling issue at the back of my mind is that emancipative values are being expressed increasingly in affirmative action to create ‘entitlements’ that restrict economic freedom.

An obvious place to start in considering the relationship between emancipative values and economic freedom is with an international comparison of the type presented for 58 countries in Chart 1. The chart is based on data on emancipative values from WVS surveys conducted mainly in the first decade of this century and Fraser Institute economic freedom data for 2011.

The most striking observation from the chart is that while emancipative values are weak in some countries with high economic freedom, no countries with low economic freedom have strong emancipative values. That is consistent with the view presented in earlier posts that economic freedom improves the odds in favour of economic development and economic development tends to lead toward the strengthening of emancipative values.

According to that view, we might expect a strengthening of emancipative values in Singapore in the years ahead. The chart also suggests that there is something odd about the combination of economic freedom and emancipative values in Venezuela – hopefully adjustment will occur by restoring economic freedom rather than through a weakening of emancipative values.

It is also evident from the chart that the US is no longer exceptional in terms of either emancipative values or economic freedom. Not only does the US have emancipative values that are weaker than in Sweden and Norway, it now also has levels of economic freedom lower than in Switzerland and New Zealand. Australia is not much better than the US in either respect.

Chart 2 shows how economic freedom has changed with changes in emancipative values over the last few decades in 36 countries for which data is available.

Click on the chart for a better view.

If a trend line was drawn it would appear to show a negative relationship between changes in emancipative values and economic freedom. That apparent relationship disappears if we just focus on countries with relatively high incomes (above $25,000 in US 2005 dollars) shown in red. There is no obvious relationship between change in emancipative values and change in economic freedom in the high income countries. While the US and Japan experienced a modest strengthening in emancipative values accompanied by a decline in economic freedom, Sweden and Norway experienced both a strengthening in emancipative values and an improvement in economic freedom.

The experience of Sweden and Norway goes some way toward persuading me that if the expression of emancipative values conflicts with economic freedom in high income countries, then the economic consequences will unleash social forces to rectify the problem. However, it would be nice to have a better understanding of how the attitudes and ideologies that lead to change in economic freedom are related to emancipative values.

Are culture and economic freedom substitutes or complements in facilitating economic development?

A couple of articles by Claudia Williamson and Rachel Mathers provide a good place to start to think about this question.

The authors construct an economic culture index by identifying four categories of culture likely to encourage economic interaction and hence promote economic development. The categories are: trust (percentage who say most people can be trusted); respect (percentage who choose tolerance and respect for other people as one of the most desirable qualities for children to learn at home); individual self-determination (average rating on a scale of 1 to 10 where the highest rating is given where respondents claims a great deal of control over the way their lives turn out and the lowest rating where they claim no control); and individualism (percentage who choose obedience as one of the most desirable qualities for children to learn is viewed as a negative factor). The data comes from World Values Surveys and culture index scores for each country are obtained using principal component analysis.

The economic freedom data used in the studies comes from the Fraser Institute. This economic freedom index combines economic and institutional variables relating to size of government, monetary policy and price stability, legal structure and security of private ownership, freedom to trade with foreigners, and regulation of credit, labour and business.

The studies use regression analysis in an attempt to disentangle the impact of economic culture and economic freedom on growth in per capita incomes. There are some differences in the conclusions of the two articles.

The first article, ‘Economic Freedom, Culture and Growth’, for which Claudia Williamson is lead author, was published in Public Choice (2011). The authors found that economic freedom is “relatively more important for growth than culture” and suggested that “culture and economic freedom may best be described as substitutes”. They suggested that trust and respect may become less important from an economic growth perspective as economic institutions are established to enforce property rights and contracts. The authors also acknowledged that culture may have important indirect effects on economic growth by promoting establishment of economic freedom.

The second article, ‘Cultural Context: Explaining the Productivity of Capitalism’ for which Rachel Mathers is lead author, was published in Kyklos (2011). This article extends the line of analysis by including an interaction term (the product of the culture and freedom indexes). The authors find that “such interaction does demonstrate a significant and positive effect on economic growth”. They conclude that if economic culture is deficient, “economic freedom alone may not possess the necessary binding constraints to be as effective as theory predicts”.

After reading these articles again I wanted to get a better feel for the data which the authors use. The first chart has been constructed using the summary data provided in Appendix 2 of the Public Choice article. (The culture index has been rebased from a 0-10 scale to 1-10 scale to assist subsequent analysis) The size of the balls in the chart (it would not be appropriate to refer to them as bubbles) represents the per capita income level for each country in 2000 (That year is chosen for consistency with other data used in the studies. The relevant variable is rgdpl Penn World Tables version 6.2).

What the chart shows is, of course, consistent with some substitution between culture and economic freedom – for example, both Singapore and Sweden manage to have relatively high per capita income levels. It suggests, however, that substitution possibilities are limited. The countries that rate highly in terms of culture also tend to rate highly in economic freedom, and vice versa.

The finding in the Kyklos article concerning the importance of interaction between culture and freedom suggested to me that it might make sense to use a Cobb Douglas production function in further regression analysis. The isoquants in Chart 2 have been constructed using the coefficients of such an analysis. The isoquants show the differing combinations of culture and freedom that are estimated to produce a given level of average income. The per capita income level of the US in 2000 was about 4.25 times that of Mexico, which in turn was a bit more than 4.25 times that of Ghana.

 (For those with an interest in such esoteric matters, the estimated coefficients of the regression are as follows:

Intercept         2.44 (0.64)

Ln Culture       0.66 (0.21)

Ln Freedom     3.20 (0.47)

Adj R²= 0.68

N=81)

If the isoquants are interpreted as reflecting a production function, the Chart suggests that in the absence of a supportive culture, high levels of economic freedom cannot produce high average income levels. However, it might be more appropriate for the isoquants to be interpreted as being determined simultaneously by interaction between culture, economic freedom and development levels. Under that interpretation, a high level of economic freedom is unlikely to be sustainable in the absence of some cultural support because law and order problems would constitute a major threat to lives and property.

It seems to me that in trying to put together a plausible story of economic development, it makes sense to speculate that interactions between culture and economic freedom facilitate market exchanges, which in turn provide incentives for participants to gain reputations as being worthy of trust. As people become more trustworthy and trusting, and more respectful of the rights other people, they could be expected to support greater economic freedom. We may thus observe a virtuous cycle where economic freedom promotes economic development and economic development promotes a culture supporting greater economic freedom.

However, I have yet to provide a satisfactory answer the question raised in my last past of whether emancipative values (as defined by Christian Welzel) support economic freedom.

Do emancipative values support economic freedom?

What do I mean and why should you care?

Emancipative values, defined by Christian Welzel in his book Freedom Rising (discussed here) cover values relating to autonomy, choice, equality and voice (democracy). There are two reasons why you should care whether emancipative values support economic freedom:

• First, people tend to have happier lives in societies with strong emancipative values. As more countries have experienced economic development and accompanying improvements in material living standards, a rise in emancipative values has resulted in more widespread opportunities for individuals to flourish.
•  Second, societies have a better chance of being able to sustain improvements in material living standards if their values support economic freedom. As discussed in my last post, there is evidence that the industrial revolution, which began the process of economic development, was influenced by a change in values toward support of economic freedom.

The question of whether emancipative values support economic freedom is too big to answer in this post, but I can make a start. My search for literature relating to links between values and economic freedom led me to Gizem Arikan’s article: ‘Economic Individualism and Government Spending’ (WVR: 4(3),2011). Using data from the World Values Survey, the author tested whether countries in which values of citizens are more individualistic have smaller government (as measured by government spending as a percentage of GDP). She found that individualistic societies do indeed tend to have smaller government. She also found that the effect of individualism on size of government is more pronounced in societies with majoritarian elections and presidential systems (which I find very interesting, even though it is not particularly relevant to the present discussion).

The study uses central government spending as its measure of government spending, but allows for the possibility of lower central government spending in federal systems by including federalism as a control variable. Other control variables include per capita GDP, the percentage of the population over 65, democracy, and institutional variables to account for majoritarian and presidential systems. The results are inconclusive on the question of whether high income countries tend to have big governments. The results are consistent with the view that an aging population tends to result in larger government, but suggest that democracy, majoritarianism and presidentialism all tend to reduce the size of government.  

The individualism variable used in the study incorporates values relating to: whether respect for parents should be conditional on their behaviour; ideal qualities for children to learn at home e.g. independence, imagination and feelings of responsibility; and qualities important in a job e.g. responsibility and opportunity to use initiative.

 

There is not much direct overlap between Arikan’s individualism index and Welzel’s emancipative values index. The only components they have in common relate to desirable child qualities. While Arikan’s index focuses on values that relate fairly directly to individual autonomy, Welzel’s index has a broader focus, incorporating values relating to sexual morality (divorce, abortion and homosexuality), gender equality and voice (freedom of speech and democracy).

However, the chart below suggests that there is high correlation between Arikan’s individualism index and Welzel’s emancipative values index.

The surprising observation in the chart is that the Nordic countries – normally thought of as prime examples of countries with big government - rank much more highly than the United States on both the individualism and emancipative values indexes. Does this mean I should reconsider my view of the US as the land of the free? Perhaps we can shed some light on the matter by considering the relationship between emancipative values and attitudes toward big government and competition.