Tuesday, September 04, 2007

Is economic freedom contagious? 

The new Economic Freedom in the World 2007 is out from the Fraser Institute. In it is an essay by Russell Sobel and Peter Leeson on whether states that neighbor or trade with other states that become more free economically pass on that freedom. They test the hypothesis advanced by George Bush, among others:
�[a] new regime in Iraq would serve as a dramatic and inspiring example of freedom for other nations in the region � A liberated Iraq can show the power of freedom to transform that vital region, by bringing hope and progress into the lives of millions.
Geography and trade are two channels through which freedom might spread. If your neighbors are more free geographically, it's not too hard for your own citizens -- particularly the productive ones -- to move to the freer state. Such moves might cause the less free state to move towards the more free one in terms of policy. Imports are like advertising for freedom; freedom attaches in a cultural way to the goods traded, and sticks to the receiving country.

The results suggest that having the average score on the Economic Freedom in the World Scale of all your country's neighbors increase by 1 (on a 10-point scale) increases your country's freedom by 0.2 on the same scale. Likewise, if your import partners have an average increase of 1, your economic freedom goes up 0.2 or 0.3, depending on the specification. (There's an issue of whether you trade with countries who are like you in economic freedom, so it's possible that causality goes the other way on that; this isn't true for the geographic results.)

For those who might argue that Iraq is a beachhead to connect the Non-Integrated Gap, such results would be good, though the size of the effect isn't as large as one might hope.

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