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Economic liberty in the long run: Evidence from OECD countries

From VoxEU by Leandro Prados de la Escosura:

How has freedom evolved over time? A distinction has been made between ‘negative’ freedom – a lack of interference or coercion by others (freedom from) – and ‘positive’ freedom, the guarantee of access to markets that allow people to control their own existence (freedom to) (Berlin 1958). An example of negative freedom is economic liberty. A country is economically free to the extent that privately owned property is protected, contracts enforced, prices stable, barriers to trade small, and resources mainly allocated through the market (Friedman 1962).

 

Empirical research on economic liberty has been restricted to recent decades (de Haan et al. 2006). The resulting indices of economic freedom exhibit wide spatial coverage, but their time dimension is limited; the most comprehensive measure of economic liberty, the Fraser Institute’s index, only goes back to 1970 (Gwartney et al. 2013). The lack of a long-run perspective reduces the value of its lessons and policy implications, with the risk of identifying what it is specific to the recent past, with empirical regularities that apply across space and time.

 

A new Historical Index of Economic Liberty (HIEL) provides a long-run view of economic freedom and its main dimensions for today’s advanced nations; more specifically, those included in the OECD prior to its enlargement since 1994 (Prados de la Escosura 2014).

 

Given the bounded nature of any index of economic freedom, the use of its percentage change or rate of growth would be misleading, as increases achieved at low levels cannot be matched at high levels. It is preferable then to look at the absolute shortfall of economic freedom from its upper bound at the initial point and, then, compute its relative decline over a given period. Thus, the improvement is measured as the proportion of the maximum possible (that is, the reduction in its shortfall).

 

Economic liberty is higher nowadays in the OECD than at any time over the last one and a half centuries and, probably, in history. Over 1850-2007, the shortfall declined by nearly three-fourths. However, its evolution has been far from linear (Figure 1). Different phases can be established.

 

Figure 1. Historical indices of economic liberty (HIEL) in OECD countries, 1850-2007
Unweighted and population-weighted averages

 

 

From the mid-nineteenth century to the eve of World War I steady advancement of economic liberty took place across the board, peaking in 1913 (although it is up to early 1880s when most of the action happened). Over three-quarters of the overall progress in economic liberty in the OECD up to 2007 had been achieved before World War I.

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