Political Freedom, Economic Liberty, and Prosperity

Across the countries of the world, annual GNI/capita varies by a factor of almost 100, from $440 in Sierra Leone to $41,230 in Luxembourg (in 1999.) Past literature has often associated country wealth with culture, geography, history and religion, but nothing can be done about such influences over a short horizon, and probably little can be done over generations. We seek instead to uncover the "deep" determinants of wealth; i.e., those macroeconomic, structural, political and in stitutional conditions realistically amenable to change. We find surprisingly good news; more than 80 percent of the international variation in GNI/capita can be explained by mutable determinants. Fourteen candidate determinants are examined over five recent years (1995-99 inclusive) utilizing a principal components approach to minimize the effects of interdependence. Property rights (+) and black market activity (-) have the highest levels of significance. Also contributing to the explanation are regulation (-), inflation (-), civil liberties (+), political rights (+), press freedom (+), government expenditures (+) and trade barriers (-) (but not trade levels). To check that these variables represent causes and are not the effects of high income, we also trace the trajectories of GNI/capita before and after political liberalizations or dictatorial retrenchments over the past half-century. Liberalizations are, on average, followed by dramatic improvement in country income, while substantial reductions in growth typically follow anti-democratic events. We conclude that countries can develop faster by enforcing strong property rights, fostering an independent judiciary, attacking corruption, dismantling burdensome regulation, allowing press freedom, and protecting political rights and civil liberties. These features define a healthy environment for economic activity.