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

By Nalley, Lawton Lanier; Barkley, Andrew | Journal of Private Enterprise, Fall 2005 | Go to article overview

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


Nalley, Lawton Lanier, Barkley, Andrew, Journal of Private Enterprise


"I believe that free societies have arisen and persisted only because economic freedom is so much more productive economically than any other method of controlling economic activity."

(Milton Friedman, Foreword in Gwartney, et al., 1995)

Since the time of Adam Smith, if not before, economists and economic historians have argued that the central ingredients for economic progress include freedom to choose and supply resources, competition in business, trade with others, and secure property rights (North and Thomas, 1973). In 1962, Milton Friedman boldly asserted in Capitalism and freedom that economic freedoms, in the form of free markets, and political freedoms, in the form of civil liberties and democracy, were necessary conditions for the attainment of high levels of per capita income. The objective of this research is to measure the impact of political and economic freedom on economic growth for a cross-section of nations during the 1970-2000 time period. In Capitalism and Freedom, Friedman (1962) contended that price support programs in agriculture and trade barriers were not only unjustifiable, but hampered economic growth. Today, it is widely accepted among economists that, ceteris paribus, countries with fewer restrictions on trade will grow faster than those nations that place restrictions or barriers on trade.

Duncan and Quang (2004) found that trade liberalization can lead to faster economic growth by reducing distortions in relative prices and allowing activities characterized by comparative advantage to flourish. Bhagwati and Panagariya (2003) claimed that sustained economic growth can not be achieved without rapid growth in trade, which requires a reduction in trade barriers. This claim is based on the alternative result of trade diversion1 which can cause the misallocation of resources and have adverse effects on the economy. Bhagwati and Panagariya (2003) also stated that in the last four decades there is virtually no example of a country with sustained rapid economic growth possessing high and non-declining barriers to trade. Therefore, openness to international trade is included in a regression model to quantify the impact of government intervention in international trade on economic growth. The results provide some empirical evidence that Friedman's hypotheses are correct, contributing to our understanding of the relationships between political freedom, economic freedom, and economic growth. The results also show that nations with higher degrees of openness to international trade have been characterized by higher levels of economic growth.

The Role of Political, Civil, and Economic Freedom in GDP Growth

Several studies, including Vega-Gordillo and Alvarez-Acre (2003), have quantified a direct correlation between the levels of civil, economic, and political freedom and the rate of national economic growth. Gwartney and Lawson (1997) defined political freedom as a situation where citizens are completely free to participate in the political process; and where elections are fair, competitive, and free from corruption. They also defined civil liberties to include freedom of the press, freedom of association, freedom of religion, and freedom of speech. Economic freedom is defined by Freedom House (2004) as the presence of these characteristics: (1) property acquired without the use of force, fraud, or theft is protected from physical invasion by others; and (2) citizens are free to use, exchange, or give property to another as long as their actions do not violate the identical rights of others.

Vega-Gordillo and Alvarez-Acre (2003) proclaimed that democracy should facilitate economic growth through the development of an institutional framework that is more compatible with incentives to engage in productive transactions. Wittman (1989,1995) and Baba (1997) argued that democracy enables the development of institutions that guarantee the transparency of the policy-making process and that institutions such as property rights are crucial to economic growth. …

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