Economic Freedom and the Building Blocks of Prosperity and Stability

For almost 20 years, the Fraser Institute’s Economic Freedom of the World report has highlighted the many benefits of economic freedom: more prosperity, faster and more sustained economic growth, higher income levels, faster reduction in poverty rates, even better air quality. The correlations between high levels of economic freedom and societal wellbeing—and low levels of economic freedom and societal ills—are numerous. But what struck me as I glanced at this year’s color-coded cover of the report is the correlation between economic freedom and stability and peace—and the converse correlation between a lack of economic freedom and instability and conflict.

The zones of economic freedom largely correspond with the most stable, most peaceful, most secure parts of the world. Twenty-four of the 39 most economically free countries (the blue-shaded areas on the cover map) are found in North America, Central America and Europe. Four others are islands in the Pacific (Japan, Taiwan, Australia and New Zealand). Another is the southern half of the Korean Peninsula. Just six are found in the Middle East-North Africa region (MENA), two in Africa and but one in South America.

Importantly, countries that embrace economic freedom—even if they are in unstable and war-torn regions—are generally more stable and more secure than their neighbors. Consider Jordan, seventh on the Economic Freedom of the World rankings. Jordan’s neighbors include Syria and Iraq, which are being torn apart by the Islamic State and by Shiite-Sunni sectarian divisions, and Saudi Arabia, which is fighting a proxy war against Iran inside and outside its borders. Yet Jordan is handling the epidemic of extremism far better than its less-economically-free neighbors. Jordan may not be immune from the contagions buffeting its borders (though it has remained an island of relative stability and prosperity through 12 years of war in neighboring Iraq and Syria), but perhaps a commitment to economic freedom has helped inoculate Jordan from the disease.

The regions where economic freedom is lacking (the red-shaded areas on the cover map) overlap with the world's most unstable, war-torn regions. Thirty-nine of the 40 least-economically-free countries are found in Africa, MENA, South America and Asia. Just one (Ukraine) is found in Europe, none in North America/Central America. Moreover, we should keep in mind that some countries are so broken, isolated, unstable and/or disputed that they cannot be measured by the Economic Freedom of the World survey. These include Sudan, South Sudan, Somalia, Western Sahara, Iraq, Belarus, Turkmenistan, Uzbekistan, Laos, North Korea and Cuba. Importantly, most of these countries are located in an arc of crisis stretching from Central Asia through the Middle East/North Africa.

This comparison of the top and bottom of the Economic Freedom of the World rankings is not exhaustive or scientific, but it is a revealing exercise.

An obvious chicken-and-the-egg question follows from this comparison: Did stability and peace yield economic freedom, or did economic freedom yield stability and peace? In other words, are the peace, prosperity and stability enjoyed by virtually all of Europe, North America and Central America, plus Australia, New Zealand, Taiwan, South Korea and Japan simply the product of good fortune and lucky geographic placement? Are chronic instability, conflict and poverty in other parts of the world the product of bad luck and disadvantageous geography? Or do decisions, policies and institutions make a difference?

It’s a fair debate. But the evidence seems to suggest that economic freedom leads to stability, peace and security. At the very least, economic freedom is a key ingredient to the stability, peace and security that characterizes the top quartile of the Economic Freedom of the World rankings (the blue-shaded countries).

Consider the 13 British colonies that forged the United States of America. They were anything but stable or secure when they declared independence. In fact, they were under constant threat from European empires, Indian tribes on the frontier, piratical regimes and internal discord. Yet America’s founding charters—the Declaration of Independence and Constitution—sought to encourage individual liberty and economic freedom, limit government, promote the rule of law, and protect property rights. From that emerged a secure, stable system of governance, a vibrant civil society, and a zone of peace and prosperity.

Or consider postwar Europe. It, too, was anything but stable or secure. It was saddled with a long history of violence. Its industries were razed, its polities demoralized, its politics poisoned, its peoples under threat from internal collapse and external invasion. Yet Western Europe committed to the rule of law, to political and economic freedom, to free trade and free government. From that emerged a new Europe. A continent that had been a venue for constant internal conflict, a source of international instability and an incubator of world wars was transformed into a partnership of peace and prosperity. Today, Europe is a source of global stability.

Likewise, postwar Japan was a broken nation, without industry, natural resources or hope. In the first three decades of the 20th century, it launched wars of aggression against Russia, China, Britain and America—ultimately bringing ruin down upon itself. Yet after it abandoned militarism and statism, and embraced free enterprise, free trade and free government, Japan became one of the main engines of the global economy, the envy of Asia and the Pacific, and a net exporter of security.

There is no magic or mystery to these transformations. As Indra de Soysa and Krishna Chaitanya Vadlamannati have noted, “Economic repression and market distortions create conditions that make armed conflict feasible.” The expansion of free markets and free economic exchange, on the other hand, “marginalizes violence because it binds people meaningfully in a way suited to addressing the collective dilemmas stemming from violence.”

“With economic freedom, people gain when they produce goods and services others desire in mutually beneficial exchange,” they explain. “People from other groups become customers, employees, employers, suppliers.” Together, these groups of people lay the building blocks for social trust and become essential ingredients in economic growth—rather than enemies in a zero-sum struggle over scarce resources.

Isn’t that what happened within post-Revolutionary America, postwar Western Europe and postwar Japan—and for that matter, between America and Britain, Britain and Germany, America and Japan, France and Germany, America and Germany?

Some will argue that the pathway to a more stable, more peaceful, more prosperous world is democratic elections, not economic freedom. But there is ample evidence—Iraq, Afghanistan, Egypt, Haiti—that free elections do not necessarily or automatically lead to stability, let alone prosperity or genuine freedom. As Robert Kaplan observed in his book The Coming Anarchy, “Democracies do not always make societies more civil—but they do always mercilessly expose the health of the societies in which they operate… If a society is not in reasonable health, democracy can be not only risky but disastrous.”

He wrote those words two years before America began its nation-building project in Afghanistan, four years before Iraq’s postwar war and more than a decade before Egypt descended into its spiral of re-revolution. “Democracy,” Kaplan concluded, “emerges only as a capstone to other social and economic achievements.” Economic freedom is surely one of those building blocks to durable democracy, political freedom and international stability.