The Age of Milton Friedman

Journal of Economic Literature 2009, 47:1, 123–135 http:www.aeaweb.org/articles.php?doi=10.1257/jel.47.1.123 The Age of Milton Friedman Andrei Shleifer* Between 1980 and 2005, as the world embraced free market policies, living standards rose sharply, while life expectancy, educational attainment, and democracy improved and absolute poverty declined. Is this a coincidence? A collection of essays edited by Balcerowicz and Fischer argues that indeed reliance on free market forces is key to economic growth. A book by Stiglitz and others disagrees. I review and com- pare the two arguments. 1. Introduction also embraced free market policies. All three of these leaders professed inspiration from he last quarter century has witnessed the work of Milton Friedman. It is natural, Tremarkable progress of mankind. The then, to refer to the last quarter century as world’s per capita inflation-adjusted income the Age of Milton Friedman. rose from $5,400 in 1980 to $8,500 in 2005. The association between free mar- Schooling and life expectancy grew rapidly, ket policies and social progress notwith- while infant mortality and poverty fell just standing, economists remain divided in as fast. Compared to 1980, many more coun- their assessments of this Age. Two recent tries in the world are democratic today. books illustrate the divisions. A collection The last quarter century also saw wide of papers edited by Leszek Balcerowicz acceptance of free market policies in both and Stanley Fischer—Living Standards rich and poor countries: from private own- and the Wealth of Nations: Successes and ership, to free trade, to responsible budgets, Failures in Real Convergence (MIT Press, to lower taxes. Three important events mark 2006)—endorses free market policies. A the beginning of this period. In 1979, Deng volume by Joseph E. Stiglitz, José Antonio Xiao Ping started market reforms in China, Ocampo, Shari Spiegel, Richardo Ffrench- which over the quarter century lifted hun- Davis, and Deepak Nayyar—Stability with dreds of millions of people out of poverty. Growth: Macroeconomics, Liberalization, In the same year, Margaret Thatcher was and Development (Oxford University Press, elected Prime Minister in Britain, and initi- 2006)—rejects them. A joint review of these ated her radical reforms and a long period two books allows for a brief look at both the of growth. A year later, Ronald Reagan was facts and the disagreements. elected President of the United States and I begin this review by quickly summariz- ing the salient facts about the world economy and society over the last quarter century. I * Shleifer: Harvard University. then consider the two books in turn. 123 03Shleifer.indd 123 2/24/09 10:18:01 AM 124 Journal of Economic Literature, Vol. XLVII (March 2009) 9,000 8,000 7,000 World GDP per capita PPP 6,000 5,000 1980 1985 1990 1995 2000 2005 Year Figure 1. World GDP Per Capita PPP (Constant 2000 International Dollar) Source: World Bank 2006b. 2. Basic Facts the former Soviet Union and Eastern Europe grew slowly during the 1980s, declined Some of the central facts of economic and sharply after the beginning of economic social development during 1980–2005 can reforms, but then expanded rapidly over the be easily summarized in pictures. Figure 1 last decade. shows the evolution of world per capita GDP Figure 3 shows a remarkable decline in at purchasing power parity between 1980 infant mortality in all regions, with the world- and 2005. During this period, world per cap- wide population-weighted average dropping ita income grew at about 2 percent per year. from 64.5 to 37.5 per thousand births. The rest of the figures are organized by Figure 4 presents data on life expectancy, region. Figure 2 presents the growth of per revealing strong increases in all regions but capita income for the main developing regions transition economies and Africa. of the world. Figure 2 shows rapid growth in Figure 5 shows the gains in education East and South Asia (the economic history of around the world. Worldwide population- the last twenty-five years is indeed the story weighted years of schooling grew from 4.4 in of Asia), slow growth in Latin America, and 1980 to almost 6 in 1999. stagnation in Africa. Figure 2 also suggests Figure 6 presents the now-familiar picture that the so-called transition economies of of growth in democracy. With the conspicuous 03Shleifer.indd 124 2/24/09 10:18:01 AM Shleifer: The Age of Milton Friedman 125 8,000 6,000 4,000 2,000 0 GDP per capita PPP (Const. 2000 INTL) 1980 1985 1990 1995 2000 2005 Year East Asia Pacic Eastern Europe and Central Asia Latin America and Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Figure 2. GDP Per Capita PPP (Const. 2000 INTL) (Population Weighted Means by Continent) Source: World Bank 2006b. exceptions of China and the Middle East, growth; Sub-Saharan Africa, with little or no the world has made significant strides in economic growth, is where the really poor democratization. Latin America and Eastern are concentrated. Europe are the shining examples. What about economic policies? Figure 7 The World Bank presents figures on pov- shows that the world median (taken over coun- erty based on Yuri Dikhanov (2005). Between tries) inflation rate in 1980 was 14.3 percent; 1980 and 2000, the share of the world’s pop- by 2005 that median declined to 4.1 percent. ulation living on less than $1 a day fell from Figure 8 shows top marginal income tax 34.8 percent to 19 percent. The World Bank rates, which fell around the world from the forecasts that the number of people living on population-weighted average of 65 percent less than $1 a day will continue to fall sharply in 1980 all the way down to 36.7 percent in despite population growth, and account for 2005. 10 percent of the world’s population by 2015. Figure 9 presents official versus black Ironically, the Millennium foreign aid proj- market exchange rates, a common measure ect argues that massive increases in foreign of financial liberalization. In the 1980s, most aid are needed to reach this goal—the World governments restricted foreign exchange Bank forecast suggests that such increases transactions; by 2005 “black market” are unnecessary to reach the 10 percent exchange rates have nearly vanished. goal. Billions of people in Asia have been Figure 10 shows tariff rates, which fell from lifted out of poverty thanks to economic the population-weighted world average of 43 03Shleifer.indd 125 2/24/09 10:18:01 AM 126 Journal of Economic Literature, Vol. XLVII (March 2009) 150 100 50 0 1980 1985 1990 1995 2000 2005 Mortality rate of infants (per 1,000 births) Year East Asia Pacic Eastern Europe and Central Asia Industrialized Latin America and Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Figure 3. Mortality Rate of Infants (per 1,000 births) (Population Weighted Means by Continents) Source: World Bank 2006b. percent in 1980 to 13 percent in 2004, in par- 3. Balcerowicz–Fischer allel with vast expansion in world trade. Finally, figure 11 presents much more Balcerowicz and Fischer edited a recent data on trends in regulation, using the collection of articles presented at a con- number of procedures an entrepreneur must ference in Poland devoted to convergence follow before he can legally start a business among economies. Most of the contributions (Simeon Djankov et al. 2002). These data are country studies of economic reforms are only available since 1999. Over the last and their consequences. In addition to theo- six years, these data show downward trends, retical and historical papers, these include although East Asia and Latin America remain studies of China, Chile, Spain, Portugal, heavily overregulated. Greece, Ireland, as well as the Former The message of these figures is simple. Soviet Union. The conclusion of the book is In the Age of Milton Friedman, the world summarized by the editors more than once: economy expanded greatly, the quality of life “reliance on market forces within an open improved sharply for billions of people, and economy in a stable macroeconomic envi- dire poverty was substantially scaled back. ronment, with assured property rights, are All this while the world embraced free mar- the keys to rapid economic growth.” Milton ket reforms. Is this a coincidence? Two recent Friedman would have put it better, but with books disagree on the answer. the same idea. 03Shleifer.indd 126 2/24/09 10:18:01 AM Shleifer: The Age of Milton Friedman 127 80 70 60 50 40 Life expectancy at birth (total years) (total birth at expectancy Life 1980 1985 1990 1995 2000 2005 Year East Asia Pacic Eastern Europe and Central Asia Industrialized Latin America and Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Figure 4. Life Expectancy at Birth (Total Years) (Population Weighted Means by Continents) Source: World Bank 2006b. To convey the flavor of the book, I briefly market policies, and in particular of export- focus on a few studies I liked the most. Wing led growth. He presents a great deal of evi- Thye Woo asks whether the extraordinary dence, and his story is compelling. China, like success of China is due to its embrace of free much of the rest of Asia, succeeded because market policies, or the deviations from those. it embraced capitalism—including a largely Since the beginning of China’s reforms, China open economy, financial stability, and reason- specialists have argued that China succeeded ably secure property rights for entrepreneurs, in its transition because of its deviations from despite, not because of, the “Chinese charac- free market policies.

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