Even World Bank Research Shows Economic Liberty Is Better than Government Dependency

Regular readers know that I’m not a big fan of the international bureaucracies. I don’t like the International Monetary Fund because it encourages bad policy by bailing out nations such as Greece. I don’t like the Organization for Economic Cooperation and Development because it promotes bigger government with its anti-tax competition campaign. And I don’t like the United Nations because it is a wasteful and corrupt bureaucracy, though at least it is ineffective so we don’t have to worry too much about the bad ideas it generates (such as global taxes – see here, here, and here).

If I had to pick my “least despised” international bureaucracy, it would be the World Bank. Yes, it engages in lots of counterproductive income transfers, and yes, it has a long track record of wasting money with foreign aid boondoggles. But unlike other international bureaucracies, at least the World Bank doesn’t try to act like some sort of global economic policymaker.

Moreover, it occasionally is a force for good. The World Bank for years has been actively involved in helping nations develop and implement private Social Security systems. And the bureaucracy’s “Doing Business Index” and “Governance Indicators” help promote market-friendly reforms by publicizing which nations have bloated and inefficient public sectors.

And since I’m feeling temporarily warm and fuzzy about the World Bank, I should acknowledge that their researchers sometimes produce good research. I’m particularly impressed by a new study showing that economic freedom is the key to prosperity. The abstract of the paper summarizes the results.

Reviewing the economic performance—good and bad—of more than 100 countries over the past 30 years, this paper finds new empirical evidence supporting the idea that economic freedom and civil and political liberties are the root causes of why some countries achieve and sustain better economic outcomes. For instance, a one unit change in the initial level of economic freedom between two countries (on a scale of 1 to 10) is associated with an almost 1 percentage point differential in their average long-run economic growth rates. In the case of civil and political liberties, the long-term effect is also positive and significant with a differential of 0.3 percentage point. In addition to the initial conditions, the expansion of freedom conditions over time (economic, civil, and political) also positively influences long-run economic growth. In contrast, no evidence was found that the initial level of entitlement rights or their change over time had any significant effects on long-term per capita income, except for a negative effect in some specifications of the model. These results tend to support earlier findings that beyond core functions of government responsibility—including the protection of liberty itself—the expansion of the state to provide for various entitlements, including so-called economic, social, and cultural rights, may not make people richer in the long run and may even make them poorer.

Let’s apply these finding to the United States. Under Bush and Obama, the United States has suffered an expansion in the burden of government and a loss of economic freedom. This means our economy will grow at a slower rate, our incomes will not climb as fast, and our future will be less prosperous. There are real consequences to bad policy.

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