Original URL: http://www.theregister.co.uk/2011/06/13/world_bank_report/

So, how does your economy grow?

Stopping the swirl down the drain

By Tim Worstall

Posted in Small Biz, 13th June 2011 12:41 GMT

The economy is, as is being gleefully pointed out to us, gathering speed as it swirls its way towards the U-bend. No or little economic growth, unemployment still monstrously high.

The glee comes of course from those who say we should be doing more to polish it up: not always simply a euphemism for spending more on whatever it is that the speaker finds desirable. There really are those who think that more government, more government spending, is good for the economy in and of itself.

One problem we've got it that like Frenchmen, economists are those who when seeing something working in practice wonder whether it really works in theory. Even while seeing something, like all too many Britons, not working wondering why it doesn't work in theory. A little more empiricism, references to the real world would be useful, don't you think?

Which brings us to this lovely little paper (pdf) from the World Bank. It is just that, empirical work: if we look at 100 countries over the past 30 years what can we see in common in those places that have had decent economic growth?

What can we see similarly in common in those that don't? We'll then construct our theory after we've looked at those commonalities, rather than before and trying to make reality accord with our ruminations.

Given the level of economic debate currently in the UK the results might surprise. For they support an economic and civil liberalism entirely unlike anything that any political party currently puts forward. This first result is that:

For instance, a one unit change in the initial level of economic freedom between two countries (on a scale of one to 10) is associated with an almost one percentage point differential in their average long-run economic growth rates.

This is unlikely to please those we think of as being on the political left: what, you mean people should just be allowed to get on with things without the direction of a beneficent state? But there's not that much support for the sort of One Nation Tory paternalism of the other lot either:

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.

Leave 'em alone!

Yes, people really should be left alone, to shag and to smoke and to live their lives as they please. And finally, it's going to absolutely appal all of those who insist that it's the positive freedoms that really produce 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.

Income redistribution, high (or low) unemployment pay, child care subsidies, they just don't make any positive difference to growth but might have negative ones. The conclusion of the study:

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.

Which, if we stopped just there, would rather mean the end of social democracy (let alone anything further left) as a socio-economic system and the glorious victory of laissez faire types like myself. However, we shouldn't stop there because economic growth isn't in fact the be all and end all of life: there is a tension between our desires.

Friedman's complete lack of surprise

Making our children richer, or ourselves in a decade so, is important, yes. But not so important that it over rides our sense of what is fair and just now. What we individually think is fair and just varies of course: but as humans we do, most of us at least, psychopaths and politicians aside, have opinions on what such fairness is.

The findings from this paper would not have surprised Milton Friedman: he always used to insist that there were indeed things that had to be done and which could only be done by government. Laissez faire, for example the idea that anyone can just get on and make, produce, whatever they like, takes quite a lot of government to keep it going.

For it's necessary to defend, through the law, peoples' right to do just that. An absence of government, an absence of action to maintain that freedom leads to the protection rackets and thuggery that bedevil those trades which don't currently have such governmental protection: drugs and prostitution being obvious examples.

Similarly, it takes quite a lot of action to protect civil and political rights. That whole set-up of the criminal law, that habeas corpus stuff, trial by jury, no double jeopardy - these are not there to protect the criminals from their righteous dues. They are to protect the non-criminals from having their civil rights traduced by those in political power.

So far, so very liberal and even neo-liberal. But as above, this markets red in tooth and claw world conflicts with the desires of many for what they see as a more just world right now. Those economic and social rights which can be damaging to that future economic growth. And while I personally admire such as Sir John Cowperthwaite many don't share that view.

When appointed after WWII to go and sort out Hong Kong's economy it took him some good few months to actually get there, by which time he found it sorting itself out quite happily without him. He spent the next few decades making sure that no one tried to sort it out: he even forbade the collection of GDP statistics (let alone their publication) on the grounds that some damn fool would only try and do something with them.

Growing pains

It might shock some to find out that there is in fact a solution to this seeming incompatibility, between “fair” and “growing”. It lies in the statements of one Polly Toynbee.

No, no, don't worry, not in what she thinks nor even in what she thinks she's thinking. Rather in what she says, that we should all be more like Sweden, be more Nordic. For that is indeed the solution, to be more like the Nordics even if not in the way that Polly suggests.

Note that both Denmark and Sweden have very high levels of both economic and civil freedom. Oh, sure, there are near insane tax rates and so on, but underlying those socially democratic things there are what are really classically liberal economies humming away.

If you leave the tax part aside both are generally thought of as having more economic freedom than either the US or the UK. An example might be Sweden's reaction to Ford trying to sell Saab. Shrug, well, if no one wants to buy it, better close it down then: compare and contrast that to the reactions to GM or Rover.

What our World Bank paper allows us to do is work out why these places work: it isn't because those economic and social rights improve the performance of the economy. Rather, it's that with that free economy underneath those economic and social rights can be afforded: it's possible to have both the growth and the current “fairness”.

Which leads to what I consider a very interesting conclusion indeed: that those economic, social and cultural rights are not what ameliorates capitalism sufficiently that it then works. Rather, it's that if you desire those rights, think they are desirable in and of themselves, then you have to have a more capitalist, free market, structure to the economy to be able to afford those desirable rights.

So Polly is right, we should be more like Sweden - more economic and social freedom so that we can buy all the economic and social rights she wants. ®