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Fall 2005

ISSN 0890-913X

Volume 21, Number 1

Categories: Economics | Fall 2005

Political Freedom, Economic Freedom, and Prosperity: International Trade Policy as a Measure of Economic Freedom

Lawton Lanier Nalley,

Andrew Barkley,

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JournalofPrivateEntoprise,VolumeXXI,Fall2005PoliticalFreedom,EconomicFreedom,andProsperity:InternationalTradePolicyasaMeasureofEconomicFreedomLawtonLanierNalleyandAndrewBarkley"Ibelievethatfreesocietieshavearisenandpersistedonlybecauseeconomicfreedomissomuchmoreproductiveeconomicallythananyothermethodofcontrollingeconomicactivity."(MiltonFriedman,ForewordinGwartney,etal.,1995)SincethetimeofAdamSmith,ifnotbefore,economistsandeconomichistorianshavearguedthatthecentralingredientsforeconomicprogressincludefreedomtochooseandsupplyresources,competitioninbusiness,tradewithothers,andsecurepropertyrights(NorthandThomas,1973).In1962,MiltonFriedmanboldlyassertedinCapitalismandFreedomthateconomicfreedoms,intheformoffreemarkets,andpoliticalfreedoms,intheformofcivillibertiesanddemocracy,werenecessaryconditionsfortheattainmentofhighlevelsofpercapitaincome.Theobjectiveofthisresearchistomeasuretheimpactofpoliticalandeconomicfreedomoneconomicgrowthforacross-sectionofnationsduringthe1970-2000timeperiod.InCapitakIrmandFreedom,Friedman(1962)contendedthatpricesupportprogramsinagricultureandtradebarrierswerenotonlyunjustifiable,buthamperedeconomicgrowth.Today,itiswidelyacceptedamongeconomiststhat,ceterisparibus,countrieswithfewerrestrictionsontradewillgrowfasterthanthosenationsthatplacerestrictionsorbarriersontrade.DuncanandQuang(2004)foundthattradeliberalizationcanLawtonLatherNalleyandAndrewBarkley123
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JournalofPrivateEnteVire,VolumeXXI,Fall2005leadtofastereconomicgrowthbyreducingdistortionsinrelativepricesandallowingactivitiescharacterizedbycomparativeadvantagetoflourish.BhagwatiandPanagariya(2003)claimedthatsustainedeconomicgrowthcannotbeachievedwithoutrapidgrowthintrade,whichrequiresareductionintradebarriers.Thisclaimisbasedonthealternativeresultoftradediversion'whichcancausethemisallocationofresourcesandhaveadverseeffectsontheeconomy.BhagwatiandPanagariya(2003)alsostatedthatinthelastfourdecadesthereisvirtuallynoexampleofacountrywithsustainedrapideconomicgrowthpossessinghighandnon-decliningbarrierstotrade.Therefore,opennesstointernationaltradeisincludedinaregressionmodeltoquantifytheimpactofgovernmentinterventionininternationaltradeoneconomicgrowth.TheresultsprovidesomeempiricalevidencethatFriedman'shypothesesarecorrect,contributingtoourunderstandingoftherelationshipsbetweenpoliticalfreedom,economicfreedom,andeconomicgrowth.Theresultsalsoshowthatnationswithhigherdegreesofopennesstointernationaltradehavebeencharacterizedbyhigherlevelsofeconomicgrowth.TheRoleofPolitical,Civil,andEconomicFreedominGDPGrowthSeveralstudies,includingVega-GordilloandAlvarez-Acre(2003),havequantifiedadirectcorrelationbetweenthelevelsofcivil,economic,andpoliticalfreedomandtherateofnationaleconomicgrowth.GwartneyandLawson(1997)definedpoliticalfreedomasasituationwherecitizensarecompletelyfreetoparticipateinthepoliticalprocess;andwhereelectionsarefair,competitive,andfreefromcorruption.Theyalsodefinedcivillibertiestoincludefreedomofthe'Tradediversionreferstotheshiftingoftradeawayfromalow-costproducertowardsahigher-costproducer,asaresultofareductionintradebarrierswiththecountryoftherelativelyhigh-costproduction.LawtonLanierNalleyandAndrewBarkley124
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JournalofPrivateEnterprise,VolumeXXI,Fall2005press,freedomofassociation,freedomofreligion,andfreedomofspeech.EconomicfreedomisdefinedbyFreedomHouse(2004)asthepresenceofthesecharacteristics:(1)propertyacquiredwithouttheuseofforce,fraud,ortheftisprotectedfromphysicalinvasionbyothers;and(2)citizensarefreetouse,exchange,orgivepropertytoanotheraslongastheiractionsdonotviolatetheidenticalrightsofothers.Vega-GorclilloandAlvarez-Acre(2003)proclaimedthatdemocracyshouldfacilitateeconomicgrowththroughthedevelopmentofaninstitutionalframeworkthatismorecompatiblewithincentivestoengageinproductivetransactions.Wittman(1989,1995)andBaba(1997)arguedthatdemocracyenablesthedevelopmentofinstitutionsthatguaranteethetransparencyofthepolicy-makingprocessandthatinstitutionssuchaspropertyrightsarecrucialtoeconomicgrowth.Rodtick(2000)demonstratedempiricallythatparticipatorydemocraciesareassociatedwithhigher-qualitygrowth,definedasmorepredictablelong-termgrowthrates,greatershort-termstability,betterresiliencetoadverseshocks,andabroaderdistributionofwealth.Numerousstudieshavedemonstratedapositivecorrelationbetweeneconomicgrowthandpoliticalrightsandeconomicfreedom,includingGastil(1978),Scully(1988,1992),Goldsmith(1995),andLeblang(1996).However,PrzeworskiandLimongi(1993,1997)andBarr°(1996)foundlittletonocorrelationbetweenpoliticalrights,democracyandeconomicgrowth.Barro(1996)foundanonlinearrelationshipbetweendemocracyandgrowth:democracyenhancedgrowthatlowlevelsofpoliticaltightsorfreedom,butdepressedgrowthasmorepoliticalfreedomwasobtained.Althoughthereareexceptionsthroughouttheliterature,economictheorysuggeststhattheadoptionofeconomicfreedombyasocietyismorelikelytopromotehighereconomicgrowththanasocietythatischaracterizedbylowerlevelsofeconomicfreedom.Gwartneyetal.(1995)pointedtoseveralfundamentalreasonswhythistheoryislikelytohold.First,securepropertyrightsandlowtaxeswillencourageindividualstoengagemoreintenselyinproductiveactivities.Second,greaterfreedomofexchangeLawtonLatherNalleyandAndrewBarkley125
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JournalofPrivateEnterprise,VolumeXXT,Fall2005willexpandtherealizationofgainsderivedfromspecializationandeconomiesofscale.Gwartneyetal.(1995)assertedthatfreedomtoenterandcompeteinmarketscanenhancebothefficiencyofproductionanddirectresourcestotheirmosthighly-valuedsources.Further,theyprovidedevidencethateconomic,political,andcivilfreedomsarerelatedtoeconomicgrowth.Evenifdemocracyexists,protectionismcandiminisheconomicgrowth,evenwiththeexistenceofeconomic,political,andcivilfreedoms.Thispossibilityisthefoundationuponwhichthepresentresearchisbuilt.AccordingtoBhagwatiandPanagariya(2003),wenowhaveconsiderableevidencesupportingthehypothesisthatopennessisanecessaryconditionforrapideconomicgrowth.Thisisbackedbyfindingsthatconcludethatimpedimentsordistortionstotrade(tariffs,quotas,subsidies)lowereconomicgrowth(Dollar,1992;Ben-David,1993;SachsandWarner,1995;andFrankelandRomer,1999).Studiesthatfoundanegativerelationshipbetweentradeliberalizationandgrowtharetypicallyassociatedwithheavily-regulatedeconomies(DjankovandMurrell,2003;WacziargandWallack,2004).BolakyandFreund(2004)statedthatforeconomicgrowthtoreachitspeak,thegovernmentmustnotonlyliberalizetrade,butalsoneedstoderegulateindustry.ThisresultreinforcesDuncanandQuang(2004),whofoundthateveniftradeliberalizationanddemocratizationareimplemented,economicgrowthcanbemitigatedthroughgovernmentintervention.Manystudieshaveshownthattheremovaloftradebarriers,orincreasingthedegreeofopenness,hasledtohigherlevelsofeconomicgrowth.SachsandWarner(1995)concludedthatanindexusedasadegreeofopennessispositivelycorrelatedwithdomesticgrowth.DollarandKraay(2001a,2001b)foundthatmoretrade,oropenness,promotesgrowth.Tradebetweennationsisoftenreducedbyataxoninternationaltrade,ortariffsonimportedproductsfromothercountries.GrossmanandHelpman(1995)assertedthatregionaltradingblocsarenotamovementtowardfreetrade.Instead,theycausemoretradediversionthantradecreation:areductionoftradebarriers,evenLawtonLanierNalleyandAndrewBarkley126
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Metadata [hide]
Title Political Freedom, Economic Freedom, and Prosperity: International Trade Policy as a Measure of Economic Freedom
Authors/Creators: Lawton Lanier Nalley,
Andrew Barkley,
Year: 2005
Volume: 21
Number: 1
Pages: 123 - 141
Publisher: The Association of Private Enterprise Education
ISSN: 0890-913X
Document Type: Articles
Keywords: Economic freedom, Standard of living, International market, Trade, Civil liberties, Subsidies
Citation:
Lanier Nalley, Lawton; Barkley, Andrew / 2005. "Political Freedom, Economic Freedom, and Prosperity: International Trade Policy as a Measure of Economic Freedom." The Journal of Private Enterprise, 21(1): 123-141.
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Title	Political Freedom, Economic Freedom, and Prosperity: International Trade Policy as a Measure of Economic Freedom
Authors/Creators:	Lawton Lanier Nalley, Andrew Barkley,
Year:	2005
Volume:	21
Number:	1
Pages:	123 - 141
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	Economic freedom, Standard of living, International market, Trade, Civil liberties, Subsidies