Emphasising democracy or overseas aid without fostering economic freedom in poorer countries is not the way to move forward, writes Paul MacDonnell
The West and a growing part of Asia are wealthy and peaceful while many parts of Africa and the Middle East remain mired in conflict and poverty. There is now clear evidence that increased economic freedom could not only cure this poverty, it could bring peace, too. Emphasising the need for democracy ahead of open markets, as the United States appears to be doing, or for overseas aid, as Ireland and other countries are now doing, may indeed be counterproductive.
For the past nine years a group of think-tanks, the Economic Freedom Network (EFN), of which Ireland's Open Republic Institute is a member, has measured the "economic freedom" of 127 nations. The results are published in the Economic Freedom of the World 2005 Report, which includes a league table rating countries on a scale of most to least economically free.
Economic freedom has four ingredients. First, governments should not become too big a part of the economy; this reduces efficient allocation of resources and, ultimately, prosperity.
Second, there should be a good legal system with an independent judiciary, impartial courts and security of property rights. Third, the currency should be sound; the government should not devalue it by printing money to pay for its own activities. Fourth, there should be freedom to buy and sell goods and services overseas.
When we compare countries' economic freedom to human welfare indices, we find that the economies of the top one-fifth of the economically free are growing at an average of 2.5 per cent, compared to 0.6 per cent for the one-fifth which are least free. This has frightening implications for those countries at the bottom, including almost all of sub-Saharan Africa. In the top one-fifth, only 0.1 per cent of children are in the labour force, compared to 22.6 per cent in the countries with the least economic freedom. Children in more "globalised" countries are less likely to have to work.
The most economically free nations have an average life expectancy of 77.7 years as against 52.5 for the least free. And the most economically free nations score three times better (using "Freedom House" data) for political rights than the least free. Lest anyone believe that I am confusing cause and effect, there is clear evidence that poor countries which begin to embrace economic freedom grow more quickly afterwards, India and China being the best examples.
This year's EFW report contains something new: it addresses the question of whether there is any relationship between economic freedom and conflict. There is.
Research by Erik Gartzke, associate professor of political science at Columbia University, shows that economic freedom is more likely to stop countries going to war than is democracy. Nations with a low score for economic freedom (below two out of 10) are 14 times more prone to conflict than states with a high score (over eight).
Why should this be so? For at least 200 years common sense has suggested to economists and philosophers that people who earn their living through trade have little incentive to try to take by force. Countries which rely on free trade have much more to lose by settling differences through conflict than through competition or negotiation.
Gartzke's research is the most comprehensive attempt yet to measure this effect. The implications for foreign policy are profound. It seems that the approach of multinational organisations such as the European Union, the World Bank and the IMF and of key national players such as the US government is broadly correct insofar as they promote economic freedom and free trade.
However, so beneficial is economic freedom that governments, organisations and groups interested in the developing world should place it at the top of their agenda. Conversely, the findings suggest that emphasising either democracy or overseas aid without looking for more economic freedom in developing countries is likely to fail.
The Middle East and Africa present the most serious challenges. Countries affiliated to the Arab League average between 14 and 20 per cent unemployment; that is 15 million people out of work. In the absence of economic growth - something which can only occur with greater economic freedom - this figure could grow to 50 million within 10 years. Unemployed, uneducated young men in this region have fewer reasons to refrain from joining or supporting extrem-
ist groups than their employed and educated counterparts elsewhere. According to the United Nations Development Programme, the Arab world's population is set to swell from 280 million now to between 410 and 460 million in 2020.
Today as much as 40 per cent of the Arab population is made up of children under 14 years. These young people will need jobs, jobs require economic development, and economic development requires economic freedom.
Africa is just as worrying. Ireland's recent commitment to donate 0.7 per cent of GNP to overseas aid by 2012 will likely see us transfer more than €1 billion per annum to Africa from that year. This is on top of the €500 billion spent by donors on the continent since the 1960s.
This aid has not done much good. To what extent are our Government and other donors asking or helping African countries to improve their levels of economic freedom? This question is especially important now that we know that economic freedom, and not aid per se, may ultimately reduce the main cause of suffering in Africa - conflict.
The evidence in favour of economic freedom as the prime instigator of human welfare is now too great to ignore. We need to see the world's poor not as victims or potential terrorists, but as prospective employees and employers through global free trade. Our engagement with them should place the highest expectations on their governments to embrace economic freedom.
Paul MacDonnell is a director of the Open Republic Institute: www.openrepublic.org