Academic journal article The Cato Journal

Political Regime Stability and Economic Freedom

Academic journal article The Cato Journal

Political Regime Stability and Economic Freedom

Article excerpt

This article assesses the impact of political regime stability, as measured by political regime experience or the number of years a particular political regime has been in place, on the adoption of institutions of economic freedom. Following Gwartney, Lawson, and Hall (2014), this article broadly defines institutions of economic freedom as the formal and informal conventions determining the protection of private property, free competition, and freedom of exchange.

In a very influential article, Acemoglu and Robinson (2006) proposed that incumbent rulers have more incentives to adopt institutions of economic freedom when facing either very low or very high political competition (i.e., when they belong to highly entrenched autocratic regimes or when they face highly competitive democracies) but not when facing mild political competitive levels in between. In my interpretation of Acemoglu and Robinson's (2006) model, the implicit key variable in both of the cases conducive to the adoption of institutions of economic freedom is the expectation of political regime stability. Highly entrenched autocratic regimes have incentives to adopt such institutions because they expect themselves (or their dynasty broadly understood) to remain in power in the future. At the other extreme, incumbent rulers facing highly competitive democracies have incentives to adopt such institutions because highly competitive democracies generate expectations of intertemporal political competition.

I propose that history (particularly the extent of political regime experience embedded in the polity) plays a relevant role in forming expectations of political regime stability. In the case of autocracy, long-standing regimes are typically expected to remain stable in the future to a larger extent than new regimes. In the case of democracy, rulers and citizens develop expectations of democratic stability as they develop common democratic values. Such values develop through the slow and lengthy accumulation of a stock of civil liberties and political rights gained with democratic experience.

I test political regime experience as a determinant of the adoption of institutions of economic freedom as measured by the change in the Economic Freedom of the World Index (EFWI) (Gwartney, Lawson, and Hall 2014) over the five-year periods ending in 1985, 1990, 1995, 2000, 2005, and 2010. I find strong support for the argument that both democratic and autocratic experience are positively associated with larger changes in EFWI.

Background and Context

While political and economic freedom have been increasingly adopted in the world in recent decades, neither one of these trends has been a necessary nor a sufficient condition for the other. Indeed, within the last three decades, some countries adopted institutions of economic freedom while adopting or strengthening their democracies, others adopted such institutions without modifying their autocratic regimes, and others were unable to do so despite having opened their political systems. (1)

The aforementioned evidence is not surprising. Although largely studied, the relationship between political and economic freedom still poses a challenging puzzle. Conventional wisdom has long suggested that political freedom is a condition for economic freedom (e.g., see Hayek 1944 and Friedman 1962). First, many of the institutions needed for political freedom--such as an independent judiciary, civil liberties, and private property rights--carry the seeds of economic freedom. Second, through the generation of political competition, political freedom induces incumbent rulers to adopt Pareto-improving institutions (Barro 1973). Third, political freedom, and the resulting system of checks and balances, reduces rent-seeking behavior (see Aslund, Boone, and Johnson 1996; North 1990; and Rodrik 1999).

An important study providing evidence on the Hayek-Friedman hypothesis is that of Lawson and Clark (2010), which finds "relatively few instances of societies combining relatively high political freedom without relatively high levels of economic freedom. …

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