From the Fraser Institute

By Vincent Geloso

When people have more economic freedom, they are allowed to make more of their own economic decisions, free of constraints imposed by others. During the 1960s and 1970s, despite the relative economic success of most western democracies, most of the rest of the world rejected strong pro-market policies, with the notable exception of Hong Kong. Milton Friedman said Hong Kong offered “an almost laboratory experiment in what happens when government is limited to its proper functions and leaves people free to pursue their own objectives.” Hong Kong’s success served as the primary example of the uplifting potential of economic freedom.

However, without a quantifiable measure of economic freedom, it was difficult to generalize these claims. This led to the conception and production of the Economic Freedom of the World (EFW) index by the Fraser Institute. Armed with a measure of economic freedom, researchers could test the claim that economic freedom leads to prosperity.

Since its inception, the multiple editions of the dataset routinely confirmed that economically freer countries have higher income levels, enjoy faster economic growth, are more resilient to shocks, and produce great reductions in poverty and income gains all along the income ladder.

But in fact, in a recent article published by the European Journal of Political Economy and co-authored with Macy Scheck and Sean Patrick Alvarez, I offer evidence that the EFW report often underestimates the potency of economic freedom.

Why? Because the economic statistics produced in countries ruled by autocrats are not believable.

In autocratic regimes, rulers must bolster their legitimacy to prevent coups or uprisings, so they produce statistics that exaggerate their country’s performance. And since neither the opposition nor independent authorities are allowed to challenge these claims, autocrats can get away with lying about the size of their economies.

Autocrats also repress economic freedom (along with other freedoms), so any estimation of the effects of economic freedom on economic development will likely be exaggerated due to the lies of dictators.

How can we correct these lies? It’s not as if the autocrats would let us check their books. But fortunately, we don’t have to. We simply need a measure of economic activity that correlates with economic development and cannot be manipulated. Namely, nighttime light intensity, as measured by satellites orbiting the Earth.

Satellites provide accurate and unbiased information, which dictators cannot manipulate. Nighttime light is artificial (manmade) and its level should depict (all else being equal) levels of development. It’s why one can often see images of North and South Korea at night where the former is in utter darkness and the latter sparkles like a Christmas tree.

By examining the relationship between light intensity and economic development as measured by GDP in democracies—where data is generally reliable—one can estimate the extent of inaccuracies in the economic data reported by dictatorships and then create corrected data.

In our article, based on satellite data, we found that in more than 110 countries (including dictatorships), the association between economic freedom and income levels was between 10 per cent and 62 per cent greater than previously estimated. We also found that when using the corrected data, one extra point of economic freedom (on a 10-point scale) generated between 5 per cent and 24 per cent more economic growth from 1992 to 2012.

These results are a powerful answer to those who doubt the value of economic freedom. And they offer a way to see past the lies of dictators.