Freedom and Development

William Easterly

New York University and Brookings Institution

Development is fragile and unpredictable

• Brazil and Cote d’Ivoire were success stories of 1960-80, China and India were definitely NOT

• China and India are success stories 1980-2007, Brazil and Cote d’Ivoire definitely NOT

• Different answers that have disappointed: investment, education, health, privatization, structural adjustment, population control, foreign aid.

• Recent consensus among development economists is that we simply don’t know how to achieve development

We don’t know how to achieve development

• The World Bank (2005) : “different policies can yield the same result, and the same policy can yield different results, depending on country institutional contexts and underlying growth strategies.”

• Similarly the Barcelona Development Agenda (2004) -- a Who’s Who of leading economists --concluded that: “there is no single set of policies that can be guaranteed to ignite sustained growth. Nations that have succeeded at this tremendously important task have faced different sets of obstacles and have adopted varying policies regarding regulation, export and industrial promotion, and technological innovation and knowledge acquisition.”

• Lindauer and Pritchett (2002) call it most honestly: “it seems harder than ever to identify the keys to growth. For every example, there is a counter-example. The current nostrum of one size doesn’t fit all is not itself a big idea, but a way of expressing the absence of any big ideas.”

What to do when you don’t know what to do

• Lack of consensus on how to achieve economic development

• Freedom is what you do when you don’t know what to do – let individuals be free to figure it out for themselves.

F.A. Hayek on freedom and development

• “The interaction of individuals, possessing different knowledge and different views, is what constitutes the life of thought. The growth of reason is a social process based on the existence of such differences.”

• “It is of essence that its results cannot be predicted, that we cannot know which views will assist this growth and which will not – in short, that this growth cannot be governed by any views which we now possess without at the same time limiting it. To “plan” or “organize” the growth of mind, or for that matter, progress in general, is a contradiction in terms.”

• “Individualism is thus an attitude of humility before this social process and of tolerance to other opinions and is the exact opposite of that intellectual hubris which is at the root of the demand for comprehensive direction of the social process.”

Individual freedom, one and indivisible

• Classic definition: individual can do what they want, as long as they don’t hurt anyone else.

• Freedom to choose rulers, to dissent in politics and knowledge (“democracy”)

• Freedom to trade, invest, and innovate (“free markets”)• Freedoms of speech, press, assembly, religion• Freedom from foreign control! (Imperialism, Invasion, Colonialism,

Structural Adjustment are NOT Freedom)• All freedoms reinforce each other, lack of one freedom is a threat to

other freedoms (correlation of political and economic freedom=.74).• Freedom depends on many social norms and values, it is not

something that can be mechanically implemented overnight (“just hold elections”, “just remove price controls”)

Don’t lose the big picture for the little picture

• Big stylized facts about freedom and development have stood the test of time

• Results on democracy/economic freedom and economic growth/recovery from war&state failure are extremely fragile (depends on what else you control for, and there are hundreds of other possible controls).

• Yet movements towards greater freedom associated with virtually all the “success stories”

Overconfident precision from non-robust regressions (Collier)

• “Whether democracy contributes to stability depends on the level of per capita income in a country: in rich societies democracy makes things much safer, in poor societies it has the opposite effect. … at levels far below $ 2500, - per capita, democracy appears to increase the risk of civil war.”

• “Democracy will make matters worse {in the} the resource-rich poor countries.”

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Democracy and Per Capita Income (correlation=.68)

Democracy and Government Service Delivery

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Freedom from foreign control

• Growth under colonialism was poor, growth has been much higher since independence in most countries

• Growth under foreign aid/structural adjustment is poor

• Most successful examples of growth are homegrown : China, India, Vietnam, Turkey, Chile, Singapore, Taiwan, South Korea, Mauritius. Each society figured out its own unique path to accommodate dynamic individuals. Not told what to do by international organizations or invading armies.

Freedom includes Freedom from Foreign Control, NOT “we tell the

poor what to do”:• In Ghana Joint Assistance Strategy:• Official donors said to Ghana: “Partners emphasized the need for

the investment plan to be fully consistent with macro-economic stability, debt sustainability and principles for public financial management. …Partners committed to a full review of the Investment Plan…There is need to scale up investment in infrastructure support services and the promotion of public-private partnerships, especially in transportation, energy and ICT. There is also the need improve the business environment: ensuring an effective regulatory environment for all key sectors, particularly ICT; reducing the administrative burden on the private sector; and promoting flexible factor markets to address rigidities in the reallocation of factors of production (land, labor, capital). ….”

• Violates freedom from foreign dictates, this is not democracy.

Time for FAR more caution about military intervention

• It is by now obvious that Operation Iraqi Freedom did not create “freedom”

• Cold war “regime change” interventions worsened democracy in the long run, regardless of whether they were Soviet or American interventions (new research with Shanker Satyanath).

• Over-optimistic to think that there is now some neutral, humanitarian military force that can “fix failed states”

Freedom• Nobody is too poor to be free.• Indivisible bundle of freedoms – democracy, free

markets – is robustly associated with prosperity in the long run.

• In the short run, our knowledge is not great enough to make precise recommendations about transition paths.

• The lack of knowledge is itself another argument for freedom – when the experts are in doubt, let ordinary people (free market entrepreneurs, democratic activists, intellectual dissenters) figure it out for themselves.