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The rule of law, democracy and economic freedom

Is New Zealand the freest nation in the world? Two international freedom rankings have been published recently, with New Zealand scoring at or near the top of both.

On the Canadian Fraser Institute’s new “Worldwide Index of Human Freedom,” New Zealand had the most freedom, while on the American Heritage Foundation’s “2013 Index of Economic Freedom,” New Zealand was ranked fourth. Both indexes are concerned with “negative freedom”—that is, freedom from coercion or control by an external force or authority. The Fraser Institute’s new index is different to the Heritage Foundation’s, however, because it is an attempt to bring together a broader range of freedoms, including “freedom of speech, religion, individual economic choice, association and assembly, … crime and violence, freedom of movement and women’s freedoms.” It takes into account a richer range of factors than the Heritage Foundation’s, which concentrates on the extent to which the rule of law, regulatory efficiency, free trade and limited government are present in each country that it surveys.

Rankings aside, which institutions contribute to a country’s freedom and prosperity? The information that the different indexes present provides an opportunity to explore whether and to what extent different institutions contribute to our freedom. One that we perhaps do not automatically think about is whether or not democracy or the rule of law has a bigger impact on our economic freedom. One might think that they would have about the same impact, but that is not necessarily the case.

At the end of chapter three of the book that introduces the Fraser Institute’s index, its authors present a chart (reproduced below) that shows a strong relationship between their freedom index and four indicators of the Economist Intelligence Unit’s democracy index (electoral process and pluralism; functioning of government; political participation; and political culture).

While this is to be expected, it opens up—as the authors suggest—a raft of other questions about relationship between freedom and democratic institutions, and their impact on countries’ economic freedom.

Distinguished Harvard University economist, Robert Barro, writing for the Heritage Foundation’s index, examined the link between democracy and economic freedom, and the rule of law and economic freedom. Different to what we might intuitively expect, he finds that the rule of law is more important than democracy (as measured by the Freedom House “Political Rights” index) to future economic performance—as illustrated by the two charts below.

The chart on the left, examining the impact of the rule of law on economic performance, shows a stronger relationship (because of the positive straight line that is drawn through the data points), while the one on the right, examining the impact of democracy on economic performance, shows a weaker positive to negative relationship (because of the curved line that is drawn through the data points).
An implication of these findings for us is that they suggest a bedrock institution of a free, ordered society is the rule of law—along with property rights, and well-regulated free markets. It is likely to be more important for protecting our personal freedom and our material prosperity than democracy, which may not always protect political and economic freedoms.

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