Economic Freedom and the Advantages of Backwardness

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According to econometric studies, economic freedomand its improvement increase growth rates.1 But their effectsare dominated by the effects of the level of economic developmentand human capital. Do these findings imply thatdefenders of capitalism and economic freedom exaggeratetheir case? Not at all.

Consider the level of economic development that determinesthe potential advantages of backwardness. Economistsusually discuss the reasons for the existence of these potentialadvantages: less developed economies can borrow technologies,business models, and marketing procedures from moreadvanced economies;2 and imitation may be easier and fasterthan innovation on which the leading economies have to rely.

Plausibly, these advantages are greater at moderate levelsof backwardness where the level of human capital formationpermits the exploitation of the opportunities of backwardness.Or, less developed economies have more scope forreallocating labor from less productive work in agriculture tomore productive work in industry or services. Or, it is probablyeasier to find profitable investments in developing countries.say, in transport infrastructure.than in highly developedeconomies where many of the obvious investmentshave already been made. I do not want to join the debateabout the relative merit of these arguments. Nor do I want toadd arguments from other social sciences according to whichthe process of economic development implies value changesthat feed back to undermine prospects for later economicgrowth.3

The Role of Advanced Countries

Instead, I want to underline the obvious, which neverthelesstends to be forgotten: the advantages of backwardnessfor some developing countries presuppose the existence ofadvanced countries. If advanced countries.say, the UnitedStates, European nations, and Japan.had not existed, theearly East Asian tigers (South Korea, Taiwan, Hong Kong,and Singapore) could never have grown as fast as they did,nor could China and India do so today. Before the mid-20thcentury and its previously unknown income differentialsbetween Western industrial societies and less developedcountries, no major country ever grew as rapidly as SouthKorea and Taiwan did during the 1960s and 1970s, or Chinahas since the 1980s, and India and Vietnam are doing now.4Thus, international inequality is an essential part of theadvantages of backwardness. This inequality benefits thosebackward countries that grasp the available opportunities.

The advanced and relatively free countries are essentialto generating the opportunities of backwardness. They providea model, a source of technology, and a market for lowwageproducts. If the advanced countries became rich aheadof other countries because they established safe propertyrights for merchants and producers earlier than others,because they benefited from limited government earlier thanothers, because they invented capitalism and benefited fromeconomic freedom first, then the advantages of backwardnessare the effect of economic freedom or capitalism.5

Unfortunately, a lack of quantitative data prevents usfrom analyzing the impact of economic freedom on growthrates in the long run. But it is plausible to base a claim onqualitative data or narratives according to which the impact ofeconomic freedom is strong. The advantages of backwardness must have been small before the establishment of capitalismbecause most major civilizations (comprising tens of millionsof people) then still had rather similar per capita incomes.6

Thus, the advantages of backwardness merit a Hayekianinterpretation:

The benefits of freedom are therefore not confined tothe free. . . . There can be no doubt that in historyunfree majorities have benefited from the existence offree minorities and that today unfree societies benefitfrom what they obtain and learn from free societies.7

This statement fits the current relationship between thePeople's Republic of China and the West, as if it had beenwritten yesterday and with exactly this example in mind.That the benefits of economic freedom in the United Statesand the West extend to statist societies was also pointed outby Henry Nau concerning Japan and other Asian states thatdeveloped earlier, such as Taiwan or South Korea:

The Asian model of development celebrated by strategictrade theorists works only in the context of theAnglo-American model of freer trade. No one hasshown that Japan or any other Asian country wouldhave succeeded in its trade and economic strategies,whatever the degrees of government intervention, if ithad not had access to world markets, particularly theAmerican market. To attribute such success to a superiordevelopment model, to domestic industrial, technology,and trade policy intervention, therefore, is atbest a half-truth.8

A Different View of Global Inequality

So it looks as if economic freedom in the global economy,that is, the existence of dominant and pioneering freeeconomies, is of paramount importance in improving growthrates and overcoming mass poverty everywhere. Moreover,economic freedom within nations, or the improvement of it,helps those who practice it.

Recognition of the fact of international inequality alsohas led to quite different evaluations. Recently, the WorldBank bemoaned that "there are huge inequities in the world.Even better-off citizens in most of the developing world faceworse opportunities than the poor in rich countries. The factthat the country of birth is a key determinant of people'sopportunities runs counter to our view of equity."9

Whatever the World Bank's concept of equity, this is atbest an incomplete evaluation of the impact of the inequalitybetween nations.which arose because of the establishmentof property rights, economic freedom, and capitalism in theWest before those achievements slowly spread elsewhere. Ifthe early establishment of economic freedom had notenriched the West ahead of others, then there would be nopotential advantages of backwardness for poor countries to exploit. Thus, Western economic freedom not only generatedthe prerequisites of Western prosperity; it simultaneouslyestablished the precondition for overcoming mass povertyrapidly elsewhere.


Notes

This bulletin is based on Erich Weede, "Economic Freedom andDevelopment: New Calculations and Interpretations," CatoJournal 26, no. 3 (Fall 2006): 511.24.

1. James D. Gwartney and Robert A. Lawson, "EconomicFreedom, Investment, and Growth," in Economic Freedom of theWorld: 2004 Annual Report, ed. James D. Gwartney and Robert A.Lawson (Vancouver, BC: Fraser Institute, 2004), pp. 28.44; JamesD. Gwartney, Randall G. Holcombe, and Robert A. Lawson,"Institutions and the Impact of Investment on Growth," Kyklos 59(2006): 255.73; and Weede, "Economic Freedom andDevelopment."

2. Robert J. Barro and Xavier Sala-i-Martin, Economic Growth(New York: McGraw Hill, 1995); William J. Baumol,"Multivariate Growth Patterns: Contagion and Common Forcesas Possible Sources of Convergence," in Convergence ofProductivity, ed. William J. Baumol, Richard R. Nelson, andEdward N. Wolf (Oxford: Oxford University Press, 1994), pp.62.85; and Mancur Olson, "Big Bills Left on the Sidewalk:Why Some Nations Are Rich, and Others Poor." Journal ofEconomic Perspectives 10 (1996): 3.24.

3. Ronald Inglehart, Modernization and Postmodernization(Princeton, N.J.: Princeton University Press, 1997).

4. Angus Maddison, The World Economy: A MillennialPerspective (Paris: OECD, 2002).

5. Eric L. Jones, The European Miracle (Cambridge:Cambridge University Press, 1981); David S. Landes, TheWealth and Poverty of Nations (New York: Norton, 1998);Douglass C. North, Institutions, Institutional Change andEconomic Performance (Cambridge: Cambridge UniversityPress, 1990); Richard Pipes, Property and Freedom (New York:A. A. Knopf, 1999); Nathan Rosenberg and L. E. Birdzell, Howthe West Grew Rich (New York: Basic Books, 1986); and ErichWeede, Asien und der Westen (Baden-Baden: Nomos, 2000).

6. Maddison. Although Acemoglu, Johnson, and Robinson didnot explicitly focus on limited government and economic freedom,they do argue that institutions dominate geography as adeterminant of economic growth over centuries, and they providesome quantitative evidence from the last five centuries tosupport their view. Daron Acemoglu, Simon Johnson, and JamesRobinson, "Reversal of Fortune: Geography and Institutions inthe Making of the Modern World Income Distribution,"Quarterly Journal of Economics 117 (2002): 1231.94.

7. Friedrich Hayek, The Constitution of Liberty (Chicago:University of Chicago Press, 1960), p. 32.

8. Henry R. Nau, Trade and Security (Washington, DC: AEIPress, 1995), p. 47.

9. World Bank, World Development Report 2006: Equity andDevelopment (New York: Oxford University Press, 2005), p. 206.

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Erich Weede

Erich Weede was full professor of sociology at the University of Bonn, Germany, until his retirement in fall 2004. He is a member of the Mont Pèlerin Society.