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Political freedom translates into economic freedom

Economic freedom begets prosperity and political freedom. And vice versa.

Conservative economists have been exploring and promoting that thesis in recent years.

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It is "new groundbreaking research," says Bryan Johnson, a policy analyst at the Heritage Foundation in Washington.

After ranking 161 nations on their economic freedom, Mr. Johnson concludes: "Those countries that are most economically free generally are also the most politically free. Similarly, those countries that are most economically repressed also tend to be the most politically repressed."

James Gwartney, an economist at Florida State University, Tallahasee, figures political freedom and economic freedom advance each other.

"Political reform precedes economic reform and makes it more lasting," he says. "Or economic reform, with its higher income levels, leads to a demand for political reform."

That's just common sense, many would say.

After all, in the post World War II years, nations governed by communist regimes or right-wing dictatorships have mostly done poorly in economic terms.

In contrast, democratic, free-enterprise nations have thrived. The cold war ended with the fall of communism partly because it became widely evident in state-planned nations that the relatively free capitalist economies were more successful.

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Many liberals would agree.

"There is evidence that a greater degree of democracy and personal freedom correlates with economic growth and dynamism," says Robert Reich, secretary of Labor during President Clinton's first term. "When people feel they have more control over their future, they tend to be more inventive and expansive in all aspects of their lives."

Conservative economists, however, have wanted to make such observations more scientific. They have an agenda behind this effort. If they can prove the correlation of economic freedom with various goodies, such as political freedom, economic growth, stability in a financial crisis, and even greater income equality, they can urge developing countries, former communist countries, and, especially, the United States and other industrial nations to adopt the institutions and policies of free economies.

Starting more than a decade ago, with the encouragement of Nobel Prize-winning economist Milton Friedman, these conservative economists have worked to devise a numeric way for defining, measuring, and ranking economic freedom.

The Heritage Foundation and The Wall Street Journal last month published the fifth annual edition of their research results, the 490-page 1999 Index of Economic Freedom. A month earlier, another conservative think tank, The Fraser Institute in Vancouver, British Columbia, came out with its third version of a separate index on "Economic Freedom of the World." It was compiled with the help of 53 other similar institutions in as many nations around the world.

(A third index, published for many years by Freedom House in New York, deals more with political or civil liberty rather than economic freedom.)

Mr. Gwartney, one author of the Fraser index, sees it as the best measure of economic freedom. It relies on objective, quantifiable data, whereas the Heritage Foundation index uses some judgmental information, he maintains. This database allows an analysis of trends in economic freedom in a nation back to 1970. That, he says, enables analysts to see the impact of trends in economic freedom on growth and political liberty. But Heritage's Mr. Johnson says there are more similarities than differences in the two indexes, and that the results are highly comparable in ranking economic freedom.

Whatever their differences, one important factor in both measures of economic freedom is the size of government in relation to a nation's total output. As long as government is not so small that it permits anarchy, smaller is freer. That's a view that matches those of the sponsoring think tanks.

It also is agreeable to many Republicans in Congress.

The two authors of the Fraser index, Gwartney and Robert Lawson, an economist at Capital University in Columbus, Ohio, together with another Florida State University economist, Randall Holcombe, used their research in a study for the Republican majority of the Joint Economic Committee (JEC) last spring. It makes comparisons among 23 nations belonging to the Organization for Economic Cooperation and Development (OECD), the Paris-based club of industrial nations.

"Excessively large government," it finds, has reduced economic growth. It defines government's "core functions" as protection of persons and property, national defense, education, monetary stability, and physical infrastructure.

In OECD nations, these core activities cost on average about 15 percent of gross domestic product (GDP), that is a nation's total output of goods and services. When spending goes beyond core services, it retards economic growth, the study finds.

A 10 percentage point increase in government expenditures as a share of GDP is "associated with" a one percentage point decline in the growth rate of real output after inflation. "Rather than devising new programs to spend any surplus that may emerge from the current economic expansion," the study concludes, "Congress should develop a long-range strategy to reduce the size of government so we will be able to achieve a more rapid rate of economic growth in the future."

The study notes that the five fastest growing countries in the world from 1980 to 1995, South Korea, Thailand, Taiwan, Singapore, and Hong Kong, had total government spending as a percentage of GDP averaging 20.1 percent - "less than half the average of the OECD countries."

More recently, these nations have run into a rough patch with the Asian financial crisis.

A December JEC study by two Ohio University professors, Richard Vetter and Lowell Gallaway, concludes that the ideal size of government in the US is 17.45 percent of GDP. So, from the standpoint of optimizing economic growth, today's federal government is 12 to 20 percent too large, they argue.

That squares with the conservative Republican view that government should be shrunk.

But liberal economists attack the study from both a technical and a policy standpoint.

"A gross simplification," says Max Sawicky, an economist at the Economic Policy Institute in Washington. "The paper is done at the level you would expect from a junior at college."

From a government policy view, he adds, economic growth is not the end-all and be-all. Some government spending on social programs improves general welfare. And spending on infrastructure, education, training, and research and development can boost economic growth.

Mr. Reich, now with Brandeis University in Waltham, Mass., holds that some government spending is justified to make people happier, healthier, and better off. And the greatest aid to economic growth is spending on education and training.

"If we ensure that every child has at least an equal opportunity to get a good education and a healthy start in life, then more of society's potential talents can be utilized," he says.

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