Leandro Prados de la Escosura
(Universidad Carlos III, LSE, CEPR)
Economic freedom can be depicted as absence of interference and coercion in individuals’ economic decisions. Secure privately owned property, contracts enforced, stable prices, small barriers to trade s, and resources mainly allocated through the market are the main features of an economically free country.
Views on the evolution of economic freedom differ widely and assessments tend to be highly qualitative and occasionally tinted by ideology.
In recent times, empirical evidence has been gathered and synthesised as economic freedom indices (Heritage Foundation, Fraser Institute). However, even if its spatial coverage is wide, these indices only refer to the recent past. As a consequence of the limited time coverage, the value of its lessons and policy implications is sharply reduced.
Providing a long-run view of economic freedom and its main dimensions is the main goal of the new historical database. In its current version, the new Historical Index of Economic Liberty (HIEL) covers 21 of today’s advanced nations, (practically those included in the OECD in 1994) over 1850-2007. In next stages, the index will be extended to the present and will cover other regions of the developing world.
Four dimensions of economic freedom are considered: the legal framework and property rights, the value of money, international trade, and regulation.
In the new website (https://espacioinvestiga.org/hiel-eng/?lang=en) a dynamic graphic presentation is available for the aggregate historical index of economic liberty (HIEL) and each of its four dimensions across countries. Each country’s economic freedom index and its dimensions, including their contribution to the aggregate index, can also be viewed and accessed separately.
The database can be downloaded from the website, together with a discussion paper that presents the concepts and discusses the sources and procedures employed in the construction of the indices. A detailed list of the sources used in the construction of the dataset is provided.
Some results for the OECD as a whole
Economic liberty in the OECD was higher in 2007, the eve of the current recession, than at any time over the last one and a half centuries, but its evolution has been far from linear. Over 1850-2007, its improvement represented nearly three-fourths of its maximum potential.
From the mid-nineteenth century to the eve of the First World War steady advancement of economic liberty took place across the board in the OECD. On average, over three-fourths of the overall progress in economic liberty in the OECD up to 2007 had been achieved by 1913.
During the first half of the twentieth century economic freedom suffered a severe setback. After a dramatic decline during the war and its aftermath, the recovery was fast up to 1929. The Great Depression pushed down economic freedom again. By the eve of World War II economic liberty had shrunk to the early 1850s level.
Economic freedom expanded in the second half of the twentieth century and peaked at the beginning of the twentieth-first century, with two expansionary phases, the 1950s and, especially, the post-1980 period, in which economic freedom expanded until the eve of the current recession, reaching the 1913 peak by 1989.
However, economic freedom came to a halt during the 1960s and experienced a contraction in the early 1970s, by the end of the Bretton Woods system and the oil shock.
Countries from the Western Offshoots and the European Core stayed at the top over the entire considered period, while Southern European countries lagged consistently behind. Nonetheless, convergence episodes coexisted with country ranking stability.
Drivers of economic freedom
Improvements in economic liberty derived, however, from different dimensions.
Over 1850-1914, the improvement in property rights made the main contribution.
During the first half of the twentieth century, it was the collapse of freedom to trade internationally and, to less extent, monetary distortions, what account for the contraction in economic liberty.
Since 1950, the liberalization of trade and factor flows was the leading force. During the 1960s and 1970s, increases in regulation and unsound monetary policies represented a deterrent for the advance in economic liberty, offsetting the gains in freedom to trade and improvements in property rights.
Over 1850-2007, improvements in the legal structure and property rights emerge as the main force behind long-term gains in economic liberty.