Political regime stability and economic freedom.

AuthorSaravia, Antonio
PositionEssay

This article assesses the impact of political regime stability, as measured by political regime experience or the number of years a particular political regime has been in place, on the adoption of institutions of economic freedom. Following Gwartney, Lawson, and Hall (2014), this article broadly defines institutions of economic freedom as the formal and informal conventions determining the protection of private property, free competition, and freedom of exchange.

In a very influential article, Acemoglu and Robinson (2006) proposed that incumbent rulers have more incentives to adopt institutions of economic freedom when facing either very low or very high political competition (i.e., when they belong to highly entrenched autocratic regimes or when they face highly competitive democracies) but not when facing mild political competitive levels in between. In my interpretation of Acemoglu and Robinson's (2006) model, the implicit key variable in both of the cases conducive to the adoption of institutions of economic freedom is the expectation of political regime stability. Highly entrenched autocratic regimes have incentives to adopt such institutions because they expect themselves (or their dynasty broadly understood) to remain in power in the future. At the other extreme, incumbent rulers facing highly competitive democracies have incentives to adopt such institutions because highly competitive democracies generate expectations of intertemporal political competition.

I propose that history (particularly the extent of political regime experience embedded in the polity) plays a relevant role in forming expectations of political regime stability. In the case of autocracy, long-standing regimes are typically expected to remain stable in the future to a larger extent than new regimes. In the case of democracy, rulers and citizens develop expectations of democratic stability as they develop common democratic values. Such values develop through the slow and lengthy accumulation of a stock of civil liberties and political rights gained with democratic experience.

I test political regime experience as a determinant of the adoption of institutions of economic freedom as measured by the change in the Economic Freedom of the World Index (EFWI) (Gwartney, Lawson, and Hall 2014) over the five-year periods ending in 1985, 1990, 1995, 2000, 2005, and 2010. I find strong support for the argument that both democratic and autocratic experience are positively associated with larger changes in EFWI.

Background and Context

While political and economic freedom have been increasingly adopted in the world in recent decades, neither one of these trends has been a necessary nor a sufficient condition for the other. Indeed, within the last three decades, some countries adopted institutions of economic freedom while adopting or strengthening their democracies, others adopted such institutions without modifying their autocratic regimes, and others were unable to do so despite having opened their political systems. (1)

The aforementioned evidence is not surprising. Although largely studied, the relationship between political and economic freedom still poses a challenging puzzle. Conventional wisdom has long suggested that political freedom is a condition for economic freedom (e.g., see Hayek 1944 and Friedman 1962). First, many of the institutions needed for political freedom--such as an independent judiciary, civil liberties, and private property rights--carry the seeds of economic freedom. Second, through the generation of political competition, political freedom induces incumbent rulers to adopt Pareto-improving institutions (Barro 1973). Third, political freedom, and the resulting system of checks and balances, reduces rent-seeking behavior (see Aslund, Boone, and Johnson 1996; North 1990; and Rodrik 1999).

An important study providing evidence on the Hayek-Friedman hypothesis is that of Lawson and Clark (2010), which finds "relatively few instances of societies combining relatively high political freedom without relatively high levels of economic freedom." It has also been shown that the causality may go in the other direction--that is, economic freedom may detennine political freedom. Two important studies making this argument are Farr, Lord, and Wolfenbarger (1998) and Wu and Davis (1999). Using different econometric methodologies, both studies find that economic freedom may indirectly detennine political freedom by first determining economic well being or development (as measured by GDP per capita).

While appealing at both positive and nonnative levels, several authors have contested the aforementioned view and posed that autocratic regimes may be more conducive to economic freedom, particularly at the beginning of the liberalization process when layoffs and cuts in entitlements are common (see Edwards 1991, Sen 1999, and Fidrmuc 2000). The cases of Pinochet's Chile, Chiang Kai-shek's Taiwan, and some of the Persian Gulf countries, among others, have been commonly used as evidence of this proposition. Additionally, as argued in the public choice literature, given that politicians tend to favor key interest groups that can guarantee reelection, political freedom may not provide the incentives for incumbent rulers to adopt institutions of economic freedom (see Rowley, Tollison, and Tullock 1989; Alesina and Perotti 1994; and Block 2002).

Reconciling both views, Acemoglu and Robinson (2006) have suggested that the relationship between political and economic freedom may not be linear because the adoption of institutions of economic freedom not only increases economic output (and, consequently, the incumbent ruler's share of economic output), but also creates political turbulence that increases the probability that the incumbent ruler is replaced. If the incumbent ruler belongs to a highly entrenched autocratic regime, however, this effect is not binding and the ruler feels secure enough to adopt institutions of economic freedom. At the other extreme, if the incumbent ruler faces a highly competitive democracy, the ruler may be forced to adopt institutions of economic freedom while fiercely competing for office--a result consistent with Barro's (1973) political principal-agent paradigm. It is only when the incumbent ruler faces mild levels of political competition, therefore, that the optimal choice may be to not adopt institutions of economic freedom in order to reduce the probability of being replaced.

An important insight of Acemoglu and Robinson's (2006) model is that, in both of the extreme cases conducive to the adoption of institutions of economic freedom, the implicit key variable is the expectation of political regime stability. Highly entrenched autocratic regimes have incentives to adopt such institutions because they expect themselves (or their dynasty broadly understood) to remain in power in the future. At the other extreme, incumbent rulers facing highly competitive democracies have incentives to adopt such institutions because highly competitive democracies generate intertemporal political competition--that is, the adoption of efficient institutions increases the probability of staying or regaining power in the future through new elections. Indeed, the longer the political regime is expected to remain stable, the higher the incentives for incumbent rulers to adopt institutions of economic freedom as the discounted value of their future share of economic output increases.

Importantly, the expectation of political regime stability also makes citizens less prone to threaten the regime even if the adoption of institutions of economic freedom negatively affects them in the short run. Workers who lose their job as the result of privatization, for example, would be less willing to instigate a coup or a revolution if they expect the regime to remain stable. This effect further strengthens the incentives for incumbent rulers to adopt institutions of economic freedom, generating a virtuous cycle. (2)

While several variables may affect the expectation of political regime stability, I propose that history plays a relevant role in this regard. In the case of autocracy, long-standing regimes are typically expected to remain more stable in the future than new regimes. The longer the duration of an autocratic regime, the stronger the signal it sends regarding its reach and dominance, and the more citizens expect the regime to remain stable in the future. (3) In the case of democracy, rulers and citizens develop expectations of democratic stability as they develop common democratic values (Clague et al. 1996, Gerring et al. 2005, Persson and Tabellini 2009). Such values, however, do not form overnight or in a vacuum but through the slow and lengthy accumulation of a stock of civil liberties and political rights gained with democratic experience. (4)

Several authors have studied political regime experience as a determinant of economic performance. Some of the most relevant studies include Clague et al. (1997), Grier and Munger (2006), Gerring et al. (2005), Gerring et al. (2011), and, as noted, Persson and Tabellini (2009). Although most of these studies argue that political regime experience affects economic performance through the adoption of institutions of economic freedom, none test this connection...

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