Florida State University Libraries

Electronic Theses, Treatises and Dissertations The Graduate School

2010 Determinants of Economic Institutions Matthew Eldyn Brown

Follow this and additional works at the FSU Digital Library. For more information, please contact [email protected] THE FLORIDA STATE UNIVERSITY

COLLEGE OF SOCIAL SCIENCES AND PUBLIC POLICY

DETERMINANTS OF ECONOMIC INSTITUTIONS

By

MATTHEW ELDYN BROWN

A Dissertation submitted to the Department of Economics in partial fulfillment of the requirements for the degree of Doctor of Philosophy

Degree Awarded: Summer Semester, 2010

The members of the committee approve the dissertation of Matthew Eldyn Brown defended on May 20, 2010.

______Bruce L. Benson Professor Co-Directing Dissertation

______James D. Gwartney Professor Co-Directing Dissertation

______Douglas Stevens University Representative

______Randall G. Holcombe Committee Member

______R. Mark Isaac Committee Member

The Graduate School has verified and approved the above-named committee members.

ii ACKNOWLEDGEMENTS

The research presented here is the culmination of a long process of intellectual development and discussions with numerous gifted friends and advisors. In particular, I thank Jon Wisman of American University with whom I first discussed the work of Jared Diamond and Jane Shaw for organizing a Liberty Fund conference on the book Guns, Germs and Steel, both of which sparked my interest in geography and economic institutions many years ago. Since then my professional development as an economist has been significantly advanced by my friends Dan Klein and Rick Stroup. Jim Gwartney and Bruce Benson provided significant guidance and insight over the course of a long summer developing the questions explored here and have generously—and patiently— provided valuable feedback along the way as co-directors of my research project. Early input from Dave MacPherson and Jon Klick was also helpful. I thank Randy Holcombe, Doug Stevens and Mark Isaac for their support and feedback on the project and their service on my committee. The support of the Charles G. Koch Charitable Foundation and its staff is also greatly appreciated. Finally, I thank Lora Holcombe for first teaching me to fall in love with economics and helping to start me on this extraordinary journey.

iii TABLE OF CONTENTS

List of Tables vi List of Figures viii Abstract ix

INTRODUCTION 1

1. INSTITUTIONS AND ECONOMIC PERFORMANCE: A REVIEW OF THE LITERATURE 5

Geography, Endowments and Institutions 8 Policy, Growth and Institutions 10 Institutional Hypotheses 11

2. DESCRIPTION OF MAJOR DATA SOURCES 17

Economic Freedom of the World 17 Index of Economic Freedom 21 World Development Indicators 21 21 Freedom in the World 22 Polity IV 24 Fractionalization 25

3. CHANGES IN INSTITUTIONAL QUALITY SINCE 1980 29

Introduction 29 Case Study Selection 30 Case Studies 34 Summary of Case Studies 99 Chapter 3 Conclusion 106

4. DETERMINANTS OF INSTITUTIONAL CHANGE 109

Introduction 109 Economic Freedom and Economic Performance 110 Economic Freedom, Geography and Size 113 Why Might Small Countries Have Better Institutions? 116 Other Geographic Characteristics 117 Geography and Subcomponents of Economic Freedom 125 Non-Geographic Factors Influencing Economic Freedom 126 Conclusion 137

iv CONCLUSION 139

REFERENCES 145

BIOGRAPHICAL SKETCH 169

v LIST OF TABLES

Table 2.1. EFW Ratings for 2004 20

Table 2.2. Freedom House Scoring 23

Table 2.3. Freedom House Ratings 23

Table 3.1. Improvements in Economic Freedom 31

Table 3.2. Improvements in Economic Freedom Relative to Possible Improvement 32

Table 3.3. Case Studies 33

Table 3.4. 39

Table 3.5. 39

Table 3.6. 40

Table 3.7. Chile 43

Table 3.8. Republic of Congo 45

Table 3.9. El Salvador 48

Table 3.10. Ghana 50

Table 3.11. 54

Table 3.12. 57

Table 3.13. Ireland 59

Table 3.14. Israel 61

Table. 3.15. Jamaica 64

Table 3.16. Kuwait 66

Table 3.17. Myanmar 70

Table 3.18. New Zealand 72

vi Table 3.19. 75

Table 3.20. Peru 78

Table 3.21. 80

Table 3.22. Tanzania 84

Table 3.23. 87

Table 3.24. United Kingdom 89

Table 3.25. Venezuela 91

Table 3.26. Zambia 95

Table 3.27. Zimbabwe 99

Table 3.28. Case Summaries 100

Table 4.1. Economic Freedom and Growth of Per Capital GDP 113

Table 4.2. Geography and Economic Freedom 122

Table 4.3. Economic Freedom and Geography with Natural Hazards and Endowments 124

Table 4.4. Geography and Subcomponents of Economic Freedom 126

Table 4.5. Economic Freedom and Openness to International Trade 129

Table 4.6. Economic Freedom and Civil and Political Freedom 132

Table 4.7. Economic Freedom and Civil and Political Freedom Reexamined 133

Table 4.8. Fractionalization and Economic Freedom 135

Table 4.9. Economic Freedom and Economic Performance 136

vii LIST OF FIGURES

Figure 3.1. Global Economic Freedom Average: 1980 to 2004 106

Figure 3.2. EFW Area Scores: 1980, 1990 and 2000 107

Figure 4.1. Per Capita Income and Economic Freedom by Quartile 110

Figure 4.2. Average Growth Rates and Economic Freedom by Quartile 111

Figure 4.3. Economic Freedom in 1980 and Income in 1980 and 2004 112

Figure 4.4. Economic Freedom and Area by Quartile 115

Figure 4.5. Economic Freedom and Population by Quartile 116

Figure 4.6. Map of Europe and : Does Shape Matter? 118

viii ABSTRACT

This dissertation explores the factors that determine the variation in institutional quality among nations. Previously, a growing body of literature has demonstrated the importance of economic institutions in determining prosperity, but significantly less work has been dedicated to understanding how those institutions are determined. A brief review of the literature on economic performance and institutions is provided as is a discussion of the various datasets used to measure institutional quality. Twenty-four case studies are presented of countries that have experienced significant changes in their economic institutions since 1980 with common experiences and themes developed that may account for changes in institutional quality. Empirical analysis demonstrates that geographic factors, particularly the ease of exit from a country, play a significant role in determining institutional quality. Openness to international trade is also shown to be a significant factor. Political factors and fractionalization are less important when these other characteristics are taken into account.

ix INTRODUCTION

The role and importance of institutions in economic growth is a topic that has been around as long as economics itself. But much of the work in post-World War II macroeconomics deemphasized institutions and focused instead on inputs into the production function, such as labor and capital, as the fundamental sources of aggregate economic performance. However, the institutional approach received renewed interest and legitimacy within the economics profession in the early 1990s. The collapse of the Soviet Union led to a serious reevaluation of the failures of central planning and the importance of markets in economic activity along with widespread disenchantment with socialism more generally. Then the awarding of the Nobel Prize to Ronald Coase in 1991 and Douglas North in 1993 helped refocus attention among the mainstream of the economics profession on the importance of institutions. Largely left out of the mathematical models of macroeconomics and development because of their difficulty to define and measure, institutions have since begun to receive increasing attention as a primary determinant of economic growth. Drawing on the work of North and others on why institutions matter, economists have more recently been asking how to measure institutions and test their importance empirically. The Economic Freedom of the World project of the Fraser Institute and the Doing Business report of the , which was inspired by the work of de Soto, are among a group of widely-used measures that have been developed to quantify institutional quality. A growing body of work has been produced using various indicators of this type to test the impact of institutions on economic performance with broadly consistent results. As Acemoglu and Johnson (2005) observe "there is a growing consensus among economists and political scientists that the broad outlines of North's story are correct: the social, economic, legal, and political organization of a society, that is, its 'institutions', is a primary determinant of economic performance" (2005, 949). But many questions remain to be answered. If "institutions rule" as one recent paper claimed (Rodrick et al. 2004), why don't countries with poor economic performance adopt "good" institutions? An emerging field of research is now beginning to address that question both theoretically and empirically. This dissertation will seek to advance that literature by asking: What factors determine why some countries adopt institutions that are more conducive to long-run economic growth while others fail to do so? This research project is the outcome of a long intellectual evolution that I began in the late 1990s studying institutional economics in the graduate school at American University. The AU approach to economics emphasizes heterodox thinking and included a good deal of study in institutional economics and economic history, as well as touching on feminist economics, Marxian theory and cultural studies and social history. The initial spark for the questions addressed here was discussions around the book Guns, Germs and Steel, which came out around the time I was finishing at AU. Those discussions eventually resulted in me helping to put together a Liberty Fund colloquium led by Jane Shaw at Big Sky Ranch in Montana. The other major contributor to my interest in this topic came from my work at the Florida State University with Jim Gwartney focusing on the economic freedom of the world project. That work, as well as a summer spent

1 surveying the institutional growth literature with Jim Gwartney and Bruce Benson, led to the outline of the questions that are ultimately presented here. Chapter 1 surveys the literature we reviewed that summer and how it has evolved from largely historical and anecdotal studies to more empirically robust studies. Recently economists have begun efforts to examine empirically the importance of institutions in macroeconomic performance. Perhaps the most important works to advance empirical evidence for the institutions-growth relationship have come from MIT economist Daron Acemoglu and his coauthors over the last ten years. Their various articles testing the impact of institutions on economic growth relied on the development of new variables to serve as instruments for institutions that allowed for novel ways to avoid questions about reverse causality in the relationship. These articles have created a significant interest in institutions and comparative political economy more broadly. The thrust of the Acemoglu et al. papers is that geographic factors impact the formation of institutions which then largely determine long-run economic performance. This contradicts the work associated with Jeffrey Sachs and his supporters who contend in their line of research that geographic characteristics impact economic performance directly through factors such as disease environment, rather than indirectly through institutions. While the mechanisms by which geography or institutions impact growth is still something of a black box, the overwhelming evidence from this growing body of work on empirical tests of institutions has been that institutions are important foundations for long-run economic performance. Chapter 1 will provide a more complete overview of the theoretical and empirical research on institutions and growth and demonstrate that the current state of the literature is at a point where further advances depend largely on determining the factors that lead to the adoption of institutional reforms, topics that will be dealt with in Chapters 3 and 4. The advances in empirical testing of the institutions/growth relationship mentioned above have relied on advances in the concept of measuring institutional quality, particularly economic institutions. These types of institutional measures are relatively new products. Popular measures for political and civil institutions began to emerge prominently in the political science literature in the 1970s; foremost among these were the Freedom House measures of political and civil freedoms and the Polity measures developed at the University of Maryland. But major advances in the empirical growth literature, beyond the dominant input-led analysis of the post-War period, was limited by a paucity of similar data on economic institutions. The major alternative measures of economic institutions began to emerge in the 1990s. Following these innovations there has been an explosion of empirical literature exploring the relationship between economic institutions and a variety of outcomes, most prominently economic growth and income. As mentioned above, this work has been crucial in increasing the prominence of institutions as an explanation of economic outcomes. Chapter 2 will address the methodology behind the major data sources used in this dissertation. Most importantly, the measures of political institutions developed by Freedom House and the Polity project, and the measures of economic institutions in the Economic Freedom of the World project will be covered at some length. And the various measures that have been developed to capture the homogeneity among national populations (or fractionalization) will be discussed as well as shorter mentions of the economic performance data that is commonly used in the literature.

2 Views about the role of economic institutions and government led planning fluctuated throughout the twentieth century. Much of the post-World War II period of characterized by greater reliance on government led planning, which was particularly popular after what was viewed as the successful “planning” of the war-time economy. Intervention, to various degrees, was common worldwide. The gradual disenchantment with Keynesian-style intervention grew in the 1970s as grand ambitions gave way to stagnation and popular unrest. Beginning in the late 1970s there was movement back toward greater reliance on markets. At the end of the 1980s the collapse of communist systems in Eastern Europe and the Soviet Union led to a wide spread period of economic and institutional reform, some successful, others temporary. This era in many ways provides the possibility for natural experiments on the factors that lead to institutional change. The goal of chapter 3 will be to identify the major national reformers since 1980 and construct case studies for each country to determine which factors were prominent in instigating the institutional reform process. In order to provide a contrast to the countries that experienced increases in economic freedom it was deemed desirable to study several countries that experienced significant declines in economic freedom. As most countries around the world have experienced increases in economic freedom over this period of time there are not many countries that have experienced consistent meaningful declines. But four countries have experienced consistent and large negative changes in their economic freedom score; they are Zimbabwe, Venezuela, Myanmar, and Republic of Congo; all four were added to the list. The list thus includes 24 countries. Given their political and circumstantial similarities Latvia, Estonia, and Lithuania will be treated as a single case study on the Baltics, thus creating a list of 22 case studies included in Chapter 3. They are, in alphabetical order: Baltics, Chile, Congo, El Salvador, Ghana, Hungary, Iceland, Ireland, Isreal, Jamaica, Kuwait, Myanmar, New Zealand, Nicaragua, Peru, Poland, Tanzania, Uganda, United Kingdom, Venezuela, Zambia, and Zimbabwe. This group is diverse geographically, culturally, religiously, and in terms of income. At least five broad areas can be identified that may impact the evolution or adoption of economic institutions. Chapter 4 will empirically investigate the relationship between institutional reform and the following five areas: 1. Geography; 2. Openness to international trade; 3. Population Fractionalization; 4. Governance Factors (Political and Civil Freedoms); and 5. Recent Economic Performance. First, geography. Acemoglu et al. use natural factors (mortality from disease) as an instrument for institutions in their 2001 paper (discussed above) for countries that were former European colonies. But geographic or other natural factors may have an impact on institutions beyond those that were imposed by colonial powers. Diamond (1998) argued that natural features made China more easily centralized than Europe, which has many internal geographic boundaries that have prevented centralization. Looking at geographic factors such as ratios of coastlines to total area and overall geographic size may provide information about how restrictive institutions are in countries. Countries where exit is expensive and where centralization of a large area under one political power is easy are more likely to have less-free economic institutions. Second: openness. Increased exposure to foreign institutions and increased pressure from foreign investors may create the critical mass needed to implement domestic institutional reforms. Looking at the ratio of total imports and exports to overall

3 GDP over a period of years and comparing that to economic freedom scores may provide some evidence on how trade openness impacts institutional reform. Third: population characteristics. Ethnic fragmentation may lead to increased distrust in society and the incentive to try to use government power to redistribute wealth away from less powerful minorities, thus lowering economic freedom. Several researchers have also identified religion as a possible characteristic of the population for determining institutional quality. Four: Governance. Casual observation suggests restrictions on political freedom are highly correlated with restrictions on economic freedom, with well known exceptions. How changes in political institutions impact economic freedom is an open question. Measurements from Freedom House, Polity IV, as well as the democratic capital variable developed in Persson and Tabellini's (2006) working paper could be used to test the relationship between economic institutions and political stability. While often related to political institutions, civil liberties provide a distinct aspect of individual freedom that may impact economic institutions. The ability to disseminate information critical of official policies and to assemble groups to promote reform may be important aspects of institutional change. Fifth, how does economic performance impact institutional reform? Some countries, such as Ireland, seem to have adopted positive economic reform as the result of economic crisis. Many other countries continue to experience dismal economic growth rates and still fail to adopt positive economic reforms. Recent economic performance will be considered as a possible explanation for the adoption of widespread institutional reform. The fifth chapter presents the conclusions of the dissertation. This chapter will focus on lessons learned from the historical case studies and the broad themes that recur across different countries. It will also mention the challenges to this analysis brought about by the worldwide economic downturn which began in 2008, widely referred to in the as the Great Recession. While occurring after the time period covered in this study, possible implications of this recent experience as well as potential changes in global economic freedom trends will be briefly discussed. The empirical results from Chapter 4 will be summarized with a discussion for their implications of the common economic literature on institutions and growth. Finally, areas for future research based on these analyses will be identified.

4 CHAPTER 1

INSTITUTIONS AND ECONOMIC PERFORMANCE: A REVIEW OF THE LITERATURE

Contemporary research on the importance of economic institutions as determinants of long-run economic performance is largely associated with the work of Douglass North and several other economists in the post-War period. Although the importance of institutions has been recognized by many authors since at least Adam Smith (1776) much of post-war economics research ignored the importance of institutions for economic growth and development. The seminal textbook of the era, Samuelson’s Economics: An Introductory Analysis (1946), does not even include the word “institutions” in its index. Much of economics was following Samuelson’s path in the post-war decades and thus also ignoring institutions. Alternatively, North's less mainstream research over several decades provides the primary arguments for why institutions matter. "The evolution of institutions that create an hospitable environment for cooperative solutions to complex exchange provides for economic growth" (North 1990, vii). According to North, institutions are the "rules of the game" in an economy or "the humanly devised constraints that shape human interaction" (North 1990, 3). The broad, yet vague, nature of this definition simultaneously reveals the importance of institutions and the difficulty of developing reliable and meaningful measures of them. The term ‘institutions’ can, thus, carry many meanings. This dissertation will focus on the determinants of economic institutions and in that process will also discuss political institutions and informal institutions. North’s broad definition of institutions is modified to create a more precise taxonomy, although the spirit of his definition should be obvious. Economic institutions are considered here to be those laws, policies and regulations that govern the interaction of agents in market transactions, including the buying, selling and use of property and other goods and services, the level of government involvement in the economic sphere, including taxes and spending, and the level of restriction on adults to engage in mutually agreed upon economic transactions. Political institutions will primarily be discussed in relationship to how they may contribute to these economic institutions. Political institutions are those laws and regulations that govern the political process and political decision making as well as the citizen’s ability to engage with and criticize or comment on that process. Informal institutions will also be discussed briefly as they relate to the determinants of economic institutions. There is disagreement on how to define informal institutions. Informal institutions, which have been discussed in economics at least since Smith (1776), in the context of this dissertation can be thought of as the norms of behavior in society, culture, religion, and other social constructions that may constrain or influence societal interactions without carrying the force of law; included among these would also be the “extra-legal” economic arrangements discussed, for example, by DeSoto (1989 and 2000) (see also Helmke and Livitsky (2004) for alternative interpretations and classifications). More detailed descriptions of databases used to measure economic institutions and political institutions are discussed in Chapter 2.

5 North and Thomas (1973) argued that institutions, by shaping the incentives faced by individuals, were the driving force in long-run economic growth, and that changes in relative prices, such as their much cited example of feudalism and population change, were the reason that institutions evolved. Institutions responded efficiently in this explanation. North (1981) moved away from this efficiency explanation for institutional change and instead argued that institutions were adopted by self-interested rulers to satisfy their own interests and that there was no reason to believe that such institutions would be efficient or lead to maximum economic growth, but only to the increased well- being of the ruler and his supporters. North (1990) builds on this theory and argues that inefficient institutions that were adopted in the interest of the ruler or ruling elite may result in a path dependence in economic and institutional development that long outlasts the rulers who put the institutions in place. Other research in the 1980s and 1990s complemented North's emphasis on the importance of studying institutions. De Soto (1989) argued that economic development in poor countries was hindered by excessive regulation and bureaucracy that raised transactions costs so high that it prevented simple entrepreneurial activities from occurring. De Soto (2000) argued that poor countries lack the foundations of market economies, like a clear system of property rights, that rich countries developed in the nineteenth century and that the absence of such clear institutional underpinnings prevents individuals in poor countries from leveraging their informal, or extra-legal, property holdings into more productive economic activity. Rosenberg and Birdzell (1986) support this view with the argument that economic development in the West was a slow and gradual process that succeeded through experimentation. "The key elements of the system were the wide diffusion of the authority and resources necessary to experiment; an absence of more than rudimentary political and religious restrictions on experiment; and incentives which combined ample rewards for success" (33). Research on the importance of firms and contracting (Coase 1937, 1969 and Williamson 1985) and the price system (Hayek 1945) among many others have led to a large body of work explaining why institutions are an important, perhaps the most important, explanation for economic growth. More recently economists have begun efforts to examine empirically the importance of institutions in macroeconomic performance. Two important articles in this line of research were produced by Acemoglu, Johnson, and Robinson in 2001 and 2002. Their articles are among the most highly cited in the field of empirical macroeconomics and have made large contributions to the emergence, in its own right, of the field of comparative political economy as a mainstream area of research. In these companion pieces Acemoglu et al. investigate how pre-existing conditions impacted the establishment of institutions in European colonies and how institutions have impacted long-run growth in those former colonies. Both papers take exception with the argument of Jeffrey Sachs and others who claim that geographic factors like disease environment and climate directly impact economic performance today (see for example Sachs 2003). Instead Acemoglu et al. argue that economic institutions, such as property rights, which may have originally been influenced by natural conditions, are in fact the primary determinants of economic performance today. Most studies of how institutions effect growth suffer from the potential for reverse causality. While many papers have been produced recently showing a strong correlation

6 between economic freedom and growth (see Berggren 2003 for an overview) it is difficult to distinguish whether growth causes good institutions or good institutions cause growth. Acemoglu et al. address this in their papers by developing new instruments for economic institutions—variables that are associated with institutions, but cannot themselves be thought to directly impact growth, thus avoiding the problems of reverse causality. In their 2001 AER Colonial Origins paper, Acemolgu et al. use the mortality of colonial settlers as an instrument for economic institutions. They argue that colonial powers were more likely to set up “extractive institutions” in colonies where it was difficult to survive, thus allowing them to extract as much wealth as possible from the colony with little regard for long-run performance. In colonies where it was easier to survive they developed “productive institutions,” institutions that respected property rights and rule of law and encouraged long-run growth. In their 2002 QJE paper, Reversal of Fortunes, they used population density as an instrument for institutions. Here they argued that colonies with dense existing populations where more likely to receive extractive institutions, and colonies with sparse population densities were more likely to receive productive institutions. In both papers they found that their colonial instruments, mortality and population density, were good predictors of current day institutions and they used this to show that there is a strong causal relationship between the strength of property rights and current economic performance. These papers both show that once institutional factors are taken properly into account current geographic factors, like disease environment, have no direct impact on economic performance. Further their papers show that economic institutions often have deep historical roots that may be difficult to easily alter. Other recent research using various instruments to get around the causality problem has bolstered the argument that institutions are a primary determinant of economic growth. Easterly and Levine (2003) reject natural conditions as a cause of long- run growth beyond the impact those conditions have on institutions and argue that institutions are the fundamental cause of long-run performance. Rodrick et al. (2004) argue in the title of their paper that "institutions rule" and conclude "the quality of institutions trumps everything else" (2004, 135). But while institutions may rule, exactly which institutions rule and why is still an open question. Acemoglu and Johnson (2005) identify two types of institutions that reasonably could be thought to be important for economic growth: property rights institutions and contracting institutions. They identify property rights institutions as those that determine how secure property is from expropriation by the state or governmental entities. Contracting institutions are identified as those that govern the security of contracts signed by individual economic agents and how well those contracts are enforced. So the first group of institutions govern how the individual and his property interact with the state, and the second group of institutions govern how individuals interact with each other given the existing state. The goal of Acemoglu and Johnson is to determine the importance of these two different groups for long-run economic growth. There is much economic theory to support the importance of both groups. To address problems with endogeneity they use instrumental variables to test for a causal relationship between these variables and economic growth. The instrument for property rights institutions is the colonial mortality

7 data from the Acemoglu et al. Colonial Origins paper (2001) and the instrument for contracting institutions is the data on origins of the legal system developed by La Porta et al. (1997, 1998) and Djankov et al. (2002, 2003), which identifies the legal tradition (English, French, German etc) that underlies the legal system of each country. Their analysis reveals that a strong relationship exists between property rights institutions and economic performance, but that once these are controlled for, contracting institutions have no statistically significant impact on growth. They speculate that in an environment of secure property rights economic agents will be able to develop mechanism, such as reputation monitoring, to overcome shortcomings from a country's contracting rules. Acemoglu and Johnson (2005) leave many other types of institutions unaddressed. And they note that the mechanism by which institutions impact growth is still something of a black box. But the overwhelming evidence from this growing body of work on empirical tests of institutions has been that institutions are important foundations for long-run economic performance. Acemoglu and Johnson's paper leaves many other types of institutions unaddressed, such as monetary policy, regulations, and corruption, but it is an important step in helping to determine just what types of institutions poor countries will need to focus on if they are to encourage long-run economic growth. Having collected a large amount of evidence on the importance of institutions for long-run economic performance, economists have started to ask why some countries continue to have inefficient institutions. Several papers have begun to address this issue empirically. Zhao et al. (2005) investigate the relationship between trade liberalization and institutional change. They find that increased trade openness is not consistently correlated with institutional improvements as some theories predict. Alesina et al. (2006) develop measurements of how “artificial” state boundaries are with regard to division of nationalities. They discuss how this artificialness may impact institutions and performance. Ayyagari et al. (2006) investigate four factors that are thought to impact the evolution of well protected property rights: legal origin, natural endowments, ethnic diversity, and religion.

Geography, Endowments and Institutions

The past decade has seen an increasing emphasis on geography in the field of economic development. What has not been discussed as frequently is the degree to which geography influences the quality of institutions. Few would debate the notion that geography plays some role in influencing growth. Many discussions devolve into a quarrel over relative importance. Dani Rodrik et al. (2004) delineated three main schools of thought in the literature – geography, trade and institutions. While all three are relevant determinants of growth, debate remains regarding interaction and relative impact. Geography factors, with the exception of national borders, are exogenous. For this reason, those of the “Geography School” have the more straightforward task of proving correlation. “Trade fundamentalists and institutionalists have a considerably more difficult job to do, since they have to demonstrate causality for their preferred determinant, as well as identify the effective channel(s) through which it works.” (Rodrik, Sabraman, Trebbi 2004, 134)

8 Previously, many had been hesitant to revive such a deterministic conception of growth as geography. It is reminiscent of racist development theories that go back at least as far as Montesquieu (1750) and Machiavelli (1519) (Easterly and Levine 2003, 5). Yet, empirics suggest equatorial nations are substantially poorer than their counterparts at higher latitudes (Sachs et al. 1995; 1997). The most prominent representatives of the Geography School, Jeffrey Sachs et al. (1998, 2001, 2003) and Jared Diamond, argue that geography has both direct, as well as indirect effects, the direct being the most significant contributing factor for long-term growth. Sachs and Diamond approach the topic from slightly different perspectives. While Sachs illustrates how geography currently impedes economic development, Diamond tries to explain how geography influenced development over the course of history. Gallup and Sachs (1998) note that there are two “unmistakable” correlations with economic development. The first is that the majority of tropical countries are poor. The only tropical countries in the top thirty countries in terms of income are and Singapore. Secondly, coastal economies are richer than landlocked countries. There are no rich, landlocked countries in the world outside of Europe. Gallup and Sachs argue that these geographic factors continue to exert a direct impact on growth today. They estimate the following costs to per capita income for various factors: $4700 for being in the sub-tropics; $3,500 for being in the southern hemisphere; $10,000 for being socialist; $5,000 for being landlocked. In their 2003 work “Institutions Don’t Rule: Direct Effects of Geography on Per Capita Income,” Sachs et al. flesh out the tropical thesis by focusing on the direct impact of the malarial environment on growth in equatorial nations. They cite three main ways that disease climate has a direct effect on income: (1) unhealthy people are less productive; (2) poor health conditions reduce life expectancy and shorter lives mean less human capital is accumulated over the lifetime; and (3) poor health may reduce the ability for human capital investment. In addition to the tropical climate, Sachs et al. (1995; 1998; 2003) also discuss the relevance of coastal proximity for the growth of developing nations. They are not the first. Given lower transportation costs by sea than via land, one would expect that coastal nations would benefit more from exchange than their landlocked counterparts. Bauer devotes a few pages of his 1991 collection of essays, The Development Frontier, to addressing the relative importance of geography. He notes that while geographic factors play a significant role in shaping development in the short term, “this elementary analysis reveals nothing about developments over a longer period” (Baurer 1991, 28). He goes on to argue that “The small size and low productivity of many farms in the Third World reflect primarily want of ambition, energy, and skill, not want of land and capital” (194). Jared Diamond’s 1997 book Guns, Germs, and Steel provides a different take on the role of geography in the history of development. Diamond suggests four main causal paths through which biological and geographical factors affected development. To illustrate his hypotheses, he describes the differences in the development of Europe, Africa and Asia. First, Diamond attributes divergence in development to biological differences across continents. Societies with wild plants and livestock capable of being domesticated (Europe) developed resistance to certain infectious diseases like measles and small pox,

9 while those who lacked farm animals failed to develop the same immunity. This proved disastrous for the original populations of the Americas after contact with European explorers. The other obvious benefit of livestock resides in the productivity gains from agricultural use. Diamond notes that Africa missed out on these gains due to a disease climate that limited the number of cattle. Diamond’s second contention is that diffusion within continents via migration allowed for greater rates of development in Europe and Asia than in Africa and the Americas. Climate is relatively uniform along latitudinal lines, and therefore many of the crops that developed in Europe or Asia were easily transplanted from one continent to another along similar latitudes. On the contrary, the number of climatic regions in continents that are oriented primarily along north to south axes did not allow for the same spread of innovation. “If a productive crop is already available, incipient farmers will surely proceed to grow it rather than start all over again by gathering its not yet so useful wild relative and redomesticating it” (179). These continental corridors also allowed for contact that would have inspired trade, and the “diffusion of technological innovations” (179). Diamond notes that diffusion occurred more slowly in Africa and the Americas, given the north-south axes and geographic barriers. In addition to diffusion within continents, some factors allowed for diffusion between different continents. Some continents (Australia, Americas) have traditionally been more isolated than others. This led to less “interhemispheric diffusion” than that which has been observed within the Eurasian region, given its “east-west major axis and its relatively modest ecological and geographical barriers” (407). Diamond’s fourth hypothesis is that continents benefit from large geographic or population size. “A larger area or population means more potential inventors, more competing societies, more innovations available to adopt – and more pressure to adopt and retain innovations, because societies failing to do so will tend to be eliminated by competing societies” (407). Essentially, the competition and diffusion created by large areas for people to interact fostered development over the course of history. While all of Diamond’s arguments seem plausible he includes one final important hypothesis as almost an afterthought in his book. He presents a map of the borders of Europe and China and speculates that differences in their shape could have significantly influenced their institutional developments. China, he speculates based on the map, was easier to centralize and bring under the control of one ruling group while Europe was geographically suited for more local, decentralized control and was harder to reign in by any one power. As Diamond explains it, Europe is “much more indented and includes more large peninsulas and two large islands” providing natural barriers to political centralization. (414).

Policy, Growth and Institutions

Those who point to policy as the fundamental driver of long-term growth have come at the discussion from a variety of directions. Much of this literature has been wrapped up in debates about what is often referred to as “The Washington Consensus”— the understanding within much of the development community during the later decades

10 of the twentieth century that foreign development assistance should be tied more closely with domestic policy reforms by the recipient country, such as decreased trade barriers or sound monetary policy. The hope being that by using aid as a carrot Western governments could force developing countries to adopt policy reforms that would ultimately harden into better institutional environments, skipping over the messy business of trying to understand how institutions evolve locally (Easterly 2006). Trade policy has been a leading topic of interest in these discussions. Frankel and Romer (1999) are the leading proponents of the notion that integration with world markets is the primary driver of sustained growth. Frankel and Romer’s 1999 paper entitled “Does Trade Cause Growth?” examined the relationship between geography, trade, and income. Using a trade/GDP share constructed from a gravity equation for bilateral trade flows, they found trade to be the principal determinant of income. The gravity model suggests that trade between countries increases with area and population of the partner country, and decreases with the size of the host country. This follows earlier work where Romer (1986) proposed that sheer market size spurs growth in the sense that it allows for greater specialization, which increases productivity. Intuitively, the model also predicts that trade decreases as the distance between the countries increases. Alcala and Ciccone (2002) take issue with Frankel and Romer’s trade instrument. This is largely because they find that the instrument does not hold significance when distance from the equator is added to the equation. They propose their own measure, “real openness,” which is defined as the ratio of trade to (PPP) adjusted GDP.

Institutional Hypotheses

As discussed earlier, a large literature supports the notion that institutions play an important role in determining economic performance. The question of how those institutions evolve has been less well developed in these papers. As the following discussion illustrates, geography has been used as a major source of possible explanation for institutional variation. Other options include informal institutions, culture, history and even luck. Institutionalists, led by North (1990), P.T. Bauer (1991), and more recently Daron Acemoglu et al. (2001) and Rodrik (2004), follow the tradition of Adam Smith in pointing to the power of private property rights and a strong rule of law in creating societies that consistently generate wealth. North (1990) defines institutions as “the humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights)” (97). In essence, the theory is that these “rules of the game” have large and significant impacts on individual decision making. The decisions shaped by institutions determine the success and failure of economies. Hall and Jones (1999) were among the first to empirically explore the effects of geography on institutions. They found latitude to be a very significant determinant of institutional quality. Countries that are farther north have significantly more productive

11 institutions than those closer to the equator. They explored institutions as part of what they deemed “social infrastructure,” and found them to be productivity enhancing. About the same time Kaufmann et al. (1999) used percentages of English and European speaking populations to instrument for institutions. The reasoning, similar to that of Hall and Jones, is that Europeans have traditionally had better institutions, and generally settled in climates that were similar to those they were used to in Europe. Engerman and Sokoloff (1997, 2000) focus on the type of natural endowments present in different geographical locations, and how this translates to institutions. Their 2000 study, “Institutions, Factor Endowments, and Paths of Development in the New World,” centers on the disparity between development in North and South America. The argument is that given South America’s abundance of resources that lend themselves to commoditization (, silver, sugar cane), economies of scale led to slave labor under a few ruling elites. This stands in stark contrast to the history of North America, where the climate allowed for grains like and wheat which “permitted relatively small farms given the technology of the times and may help explain why such a policy of smallholding was implemented and was effective” (224). Ultimately, extreme inequality in the majority of the countries in the Americas allowed a few ruling elites to consolidate political power that still endures. In contrast, due to large amounts of available land and open immigration, the United States and Canada developed large middle classes that checked the power of those at the top of the wealth distribution. Because industrialization required the consent of the majority, these middle classes proved indispensable. This distinction was also apparent in the United States prior to the as southern states developed more extractive, less entrepreneurially focused institutions built around the slave-driven industry, while the northern states developed more productive institutions. Following Engerman and Sokoloff, Acemoglu et al’s 2001 and 2002 pieces on how pre-existing geographically-determined conditions impacted the establishment of institutions in European colonies, and how those institutions have impacted long-run growth in those former colonies, are two of the most influential pieces in the literature. The 2001 work, “The Colonial Origins of Comparative Development: An Empirical Investigation,” found settler mortality rates to be a powerful instrument for institutions. Their theory is that colonizers setup extractive institutions in areas with higher mortality rates that focused merely on taking whatever resources they could, as quickly as possible. Those places with lower mortality rates received more sound institutions that protected property and the rule of law. The former regions have lower levels of growth centuries later, while the latter have generally prospered. The Acemoglu et al. papers have been criticized, but primarily for the validity of their instruments as proxies for institutions not so much for their claims that the geographic conditions would have influenced institutions (see for example Sachs and McArther 2001). That being said, Rodrik (2004) argued that a better instrument for institutions had yet to be discovered. Easterly and Levine’s 2003 work “Tropics, Germs, and Crops: How Endowments Influence Development” examines Engerman and Sokoloff’s (1997) endowments- influence-institutions hypothesis. They develop dummy variables to test whether or not a country produces any wheat or mining commodities to test the theory. Contrary to the endowment and policy theorists, Easterly and Levine “find no evidence that endowments affect country incomes directly other than through institutions, nor … any effect of

12 policies on development once we control for institutions.” (39). But interestingly, as with much of this literature, the emphasis of the findings is placed on explaining the role of institutions in determining growth, and scant discussion is given to the reappearing assertion that geography is a major factor determining those institutions. Economists, for the most part, seem content to skip that step in the logic. Rodrik et al.’s 2004 piece “Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development” serves as a summary of prior works in that debate. Rodrik et al. compile the various instruments to show that Acemoglu et al’s proxy for institutions is a more significant determinant than any of Sachs’ geographic instruments, Frankel’s trade variables, or a number of other potential institutional measures. Alberto Alesina and Enrico Spolaore’s 2003 book The Size of Nations is the most comprehensive piece on the economics of political size to date. Unlike many of their predecessors, they treat national borders as endogenous factors that are the result of hundreds of years of cost/benefit analysis by regional competitors. Their thesis is that the main benefit of size is economies of scale in the provision of public goods. The main cost is the increasing heterogeneity in preferences that results from the expansion of borders. Using these assumptions, Alesina and Spolaore calculate the ideal state size, but acknowledge that democratic societies generally choose to be smaller than the efficiency maximizing size. While they approach the concept of size from a variety of angles, they spend the majority of their time explaining the determinants of size, with occasional discussion of the relationship between size and economic growth. It seems likely that the causal relationship between size and growth is mediated by institutional quality. While it is generally accepted that informal institutions are potentially as important as formal institutions, suitable measures for the former are wanting. This leads most scholars to focus their study on formal institutions. A recent exception to that rule is work by Williamson (2009). She distinguishes between formal institutions, which represent government enforced constraints, and informal institutions, which represent privately enforced practices. The contention based on empirical analysis is that informal institutions have an important role in determining economic outcomes and that formal institutions matter primarily if they are imbedded within or related to informal institutions. Her work points to an important role for informal institutions, culture, etc. in determining formal institutions and thus growth. These conclusions are supportive of the work of Easterly (2006), which focuses on the likelihood of failure if outside influences (as development lenders) impose formal institutions rather than building on organic, bottom-up informal means. He refers to what he calls the “twin tragedies” of development. First, that the world is largely characterized by widespread poverty that leads to overwhelming human suffering, disease and shortened life expectancies for a large portion of humanity. Second, while over $2.3 trillion dollars has been provided to developing countries by wealthy countries in the form of foreign aid over the last 50 years there is little or no progress to show for such massive wealth transfers. His frustration with the situation is obvious from his discussion: “This is a tragedy in which the West spent $2.3 trillion on foreign aid over the last five decades and still had not managed to get twelve-cent medicines to children to prevent half of all malaria deaths. The West spent $2.3 trillion and still had not managed to get four-dollar bed nets to poor families. The West spent $2.3 trillion and still had not

13 managed to get three dollars to each new mother to prevent five million child deaths. . . . It’s a tragedy that so much well-meaning compassion did not bring these results for needy people” (4). Easterly’s contention is that institutions are important, maybe the most important thing in determining long-run economic growth, but that so little attention has been paid to understanding how developing countries work that almost all attempts to improve institutions have done very little good. As he expresses it “the free market is a universally useful system. Economic freedom is one of mankind’s most underrated inventions” (72). However, while free-markets work well, he points out that free-market reforms are quite often failures because the designers of reform fail to understand the local underpinnings of how institutions evolve. While the first of the twin tragedies gains almost all of the public attention, including that of celebrities and politicians, Easterly argues that the first tragedy cannot be effectively addressed without first understanding the second tragedy. The emphasis, he argues, must be placed on understanding how institutions evolve locally and how assistance can be contributed within that process rather than aid being used to try to force imported practices to replace local practices. He clearly contends that productive institutions are not likely to be successfully imposed though outside pressure such as advocated by the Washington Consensus. Easterly’s arguments about the difficulty of transplanting institutions have gotten some traction in the development community, but a solution, as he concedes, is not readily apparent. Related to this challenge is the timing or sequencing of institutional reforms. Considerable attention has been paid to the process of economic reform in the former Soviet bloc, and much of that has focused on whether rapid or gradual transition is more desirable. Early in the reform process rapid reform, or shock therapy, was advocated by Jeffrey Sachs and others as the best alternative. Later, more gradual approaches gained favor after shock therapy faltered. Barlow and Radulescu (2005) examine how the order of reform impacts the progress or likelihood of future reform. That is, they ask: are there certain reforms that should be undertaken first that are more likely to increase the prospect of future reforms—institutions or policies that will help determine future institutions and policies? The order of reforms is important because changing economic institutions is unavoidably going to create winners and losers. Those who gain from the current system will be unwilling to support changes while those who gain from a particular type of reform, or from only partial reform, will advocate less than full reform. Changes that undermine public confidence in the reform process by creating unbalanced results and inequality will be likely to stall the reform process and lead to long-run economic problems. The authors use data from the European Bank for Reconstruction and Development to identify which of the transition countries have advanced reforms along 7 different areas: small scale privatization, large scale privatization, restructuring, trade liberalization, banking and interest rate liberalization, securities markets and competition policy. They use a logit model where a zero or one is assigned to the dependent variable to indicate if the country advanced with reform in that area or not. Movements in the all the 7 variables as well as country and time fixed effects are included on the right hand side. The results indicate that small scale privatization is most important in advancing other reforms. It is found to positively impact large scale privatization, trade

14 liberalization, and banking reform. The argument being that small scale privatization will create a large class of owners with a vested interest in promoting further reform. Large scale privatization does not have a significant impact on any of the variables, the argument given is that owners, often former government bureaucrats, have an interest in limiting competition once they own large firms and thus become opposed to further reforms. Lower budget deficits are found to positively impact reform in the areas of large scale privatization, restructuring, and trade. The authors conclude that reform is more likely to succeed and progress if a large class of individuals benefit early on so that sustained support for future privatization can be built. Therefore, they recommend small scale privatization as the way to advance the transition process in the long-run. To support this argument they cite public survey data from Russia early in the reform process that showed that most people supported small scale privatization, while a majority opposed large scale privatization. Small steps seem to build trust for reform, which is another key concept in determining institutions. The argument that informal institutions matter a lot in determining formal institutions and performance is supported by the small line of research on “trust”. Fukuyama (1996) was one of the first major efforts to discuss the role of trust in determining economic performance. Trust, he argues, can lower transactions costs by making it easier for parties to a transaction to agree to terms and feel comfortable about business dealings. Also trust may contribute to the adoption of more consistently fair formal institutions by creating a lower sense of unease about how the rest of society might take advantage of those institutions. Knack and Keefer (1997) have investigated Fukuyama’s hypothesis empirically using survey data and found that economic performance is positively correlated with reported levels of trust in a society. Fractionalization within the population whether on religious, ethnic or linguistic grounds is thought to be a potential hindrance to greater social cohesion and trust. Recent empirical work has attempted to develop measures of this type of fractionalization and test its impact on institutions and growth. Alesina et al (2003) developed the current standard measures of these three forms of fractionalization for 190 countries. Their study suggests some importance for fractionalization in determining institutional quality and economic performance, but is not conclusive. It’s greatest contribution has been spurring greater interest in the measurement and application of the concept of fractionalization to empirical growth literature. A theoretical foundation for the importance of fractionalization in determining institutional quality was provided by Olson (1982). In The Rise and Decline of Nations Olson applies the lessons from his 1965 work, The Logic of Collective Action, to the question of economic growth and performance and economic institutions. He argues that most development research in economics misses the primary drivers of institutions and growth. “They trace the water in the river to the streams and lakes from which it comes but they do not explain the rain” (1982, 4). Olson (1965) argues that group coordination is hindered by the free-rider problems; that is, if benefits of group action are dispersed each individual does not have an incentive to work very hard to achieve that action and instead has an incentive to free ride on the efforts of others. The larger a group is, and the more diverse are its members, the less likely it is to pursue actions in its members’ interests. Olson 1982 applies this logic to social evolution and institutions. Societies with more heterogeneity—fractionalization in the current literature—are likely to have less

15 social interactions and organization and are less likely to make decisions in the interest of the whole society—for example, adopting sound economic institutions. Political entrepreneurs, he argues, are more successful if they deal with homogeneous groups whose interests can be clearly identified and rewarded. Given the free-rider problem smaller groups have an advantage in organizing their members to capture the interests of these political entrepreneurs. As heterogeneity increases so too does the likelihood that policies will be adopted to support the interest of only one or a small number of groups and not society as a whole. The number of distinct interest groups increases the likelihood of bad outcomes in this reasoning. Thus fractionalization is expected to play a critical role in determining if a country will experience positive or negative economic institutions and performance. The question of how institutions impact economic growth has undergone something of a renaissance in the last 15 years. While institutions were largely ignored by the economics profession for most of the twentieth century, recent advances in the availability of quality data on institutional characteristics has allowed economists to conduct rigorous tests of the various theories of how institutions impact growth. These theories have traditionally relied on historical and anecdotal evidence for their support, but recent work has provided significant empirical support to this debate. Prior to the awarding of the Nobel prize to Douglass North in 1993, most economists paid little attention to the role of institutions in economic performance or the role of history in shaping those institutions. The empirical work of Acemoglu et al., in particular, has cited the ideas of North and addressed both the importance of institutions as drivers of economic growth and the role of historical experience in helping to shape those institutions. There, of course, remain many unanswered questions in the literature surveyed in this chapter. And while there is a growing consensus on the role of institutions there are many other factors, such as geography and fractionalization that are pointed to in the literature that may also play an important role in economic performance. Chapter 2 provides a discussion of the major data sources that have been used in the recent empirical growth literature and which will also be used in Chapters 3 and 4 to study the determinants of institutions.

16 CHAPTER 2

DESCRIPTION OF MAJOR DATA SOURCES

Prior to the 1990s most of the major work on the relationship between institutions and economic performance was historical and descriptive. This was largely out of necessity due to a paucity of quality data on various institutional variables. As discussed in Chapter 1, recent improvements in the measurement of institutions has resulted in a significant increase in empirical research focusing on institutions—both political as well as economic institutions. There are now several alternative measures available of both political and economic institutions. Also recent work has yielded a variety of measures of demographic characteristics focused on topics like ethnic fractionalization. Combining data sources from these three broad areas—political institutions, economic institutions, and demographic characteristics—with the extensive data on economic outcomes allows for significant expansion in the type of questions that can be addressed empirically that were largely only discussed historically or anecdotally before. As economic, political and demographic factors have often been thought to be important, both individually and in how they interact, each will be used extensively in this dissertation. The major source of data on economic institutions used here is the Economic Freedom of the World index published by the Fraser Institute (Gwartney and Lawson, 2006). Additionally, data were collected from the Heritage Foundation's Index of Economic Freedom (2007), which provides an alternative methodology to measure economic institutions. Data on ethnic fractionalization is more sparsely available, yet there are several possible sources. Political institutions were measured using the Polity IV data set and Freedom House's Freedom in the World. Economic outcome variables were taken from the World Bank's World Development Indicators (World Bank 2007) and the United Nations' Human Development Index (United Nations 2006). As these various datasets will be used extensively in Chapters 3 and 4, explanations of the data sets are provided below.

Economic Freedom of the World

Produced annually by the Fraser Institute, the Economic Freedom of the World (EFW) collects both survey and objective data for 130 countries and territories. The project was begun in the 1980s when Michael Walker of the Fraser Institute and economist Milton Friedman hosted a series of meetings to discuss the concept of measuring economic institutions and determining if they were consistent with the idea of free markets and economic freedom. A series of conferences was held between 1986 and 1994 and involved numerous scholars including Nobel laureates such as Friedman, Gary Becker and Douglas North. The conferences resulted in a series of publications on the concept and challenges of measuring economic freedom and eventually to the publication of the first economic freedom index in 1996, The Economic Freedom of the World: 1975-

17 1995. Since then, the 1996 volume and its successors have become a common source of data on institutional quality and have been cited in over 200 scholarly articles. The EFW measures the “degree to which policies and institutions in countries are supportive of economic freedom” (2006, 3). But economic freedom is not necessarily an easily defined concept. The EFW lists the four primary ingredients of economic freedom as: 1) personal choice, 2) voluntary exchange coordinated by markets, 3) freedom to enter and compete in markets, and 4) protection of persons and their property from aggression by external parties. One way of conceptualizing the primary ideas captured in the economic freedom index is to distinguish between ‘negative’ rights and ‘positive’ rights. The EFW measure is primarily concerned with protection of ‘negative’ rights. These are often thought of as rights to engage in activities voluntarily, i.e. individuals are free to choose their own actions as long as they do not violate the person or property rights of others. Alternatively, positive rights are construed as rights to something provided by others, for example, a ‘right’ to health care or the ‘right’ to periodic holidays with pay, as described in the United Nation’s Universal Declaration of Human Rights. This view of rights implies that one has a right to force someone else to provide the goods. The EFW measure rejects this view because forcing others to provide you with housing, health care, a high paying job, or other things you would like violates the freedom and property rights of others. Economic freedom, as defined in the EFW, does not mean ‘no government’, but it does mean limited government. Essentially, the role of government is limited to the protection of the person and property of individuals from aggressors and provision of a limited set of public goods. “In order to achieve a high EFW rating, governments must do some things, but refrain from others” (2006, 5). Among the things governments must do to achieve high economic freedom are provision of a legal system that protects property rights and enforces contracts in an unbiased manner, and monetary arrangements that provide access to money of sound value (stable purchasing power across time periods.) The things governments must refrain from doing for there to be high economic freedom are much broader, including refraining from the imposition of high taxes, entry constraints that limit competition, and restrictions that limit the ability of the citizenry to trade with foreigners. “In essence, the EFW rating is a measure of the extent to which countries rely on private ownership and markets rather than the political process to allocate goods, services, and resources” (2006, 5). As the authors indicate, economic freedom, political freedom and civil freedom are similar but different. “Economic, political and civil liberties reflect the same fundamental value,” but they cover different arenas of human action. It is possible for countries to have high levels of one type of freedom but not another. For example, is by most measures a stable democracy with relatively high levels of political freedom, but it has a relatively unfree economy. Alternatively, Singapore has one of the highest economic freedom scores in the world, but has relatively restricted political and civil freedoms. The EFW score is calculated as a composite of scores in five areas: 1) size of government, 2) legal structure and security of property rights, 3) access to sound money, 4) freedom to trade internationally, and 5) regulation of credit, labor and business. In terms of the dataset that accompanies this dissertation chain-linked data was used in order to maintain continuity between data over time by applying similar evaluation criteria to

18 previous years. The construction of the five main areas of the index and the chain-linked index are discussed below. The five major areas of the EFW are composed of 21 components; several of these components are constructed from sub-components, bringing the total number of data points compiled in the index to 38. Each of the various components and sub- components is fitted into a 10-point scale and simple averages are used among the subcomponents to determine the score of the component and then among the components to determine the area score. Raw data is provided so researchers can reweight areas, components or subcomponents based on different theories; but the underlying logic of the index is to make the scores as value-free and objective as possible, so the authors do not apply any weights themselves. Area 1 is Size of Government, which can be broken down into two broad aspects, government spending and the extent to which government decision making replaces voluntary decision making. The first two components of Area 1 measure government consumption as a share of total consumption, the third component measures the degree to which private enterprise or government controlled enterprises produce the economy’s output, and the fourth component measures marginal tax rates. Area 1 is based entirely on objective data. Area 2 is Legal Structure and Property Rights. This area captures one of the most fundamental characteristics about institutions as discussed in most of the literature, namely, how well-defined and secure property rights are in a country. The first component in Area 2 measures opinions about judicial independence; the second component measures opinions about the impartiality of courts; the third measures protection of intellectual property; the fourth, military involvement in the legal or political process; and the fifth component measures the ‘integrity’ of the legal system. The data in this area are subjective and compiled from the International Country Risk Guide and the Global Competitiveness Report. Area 3 is Access to Sound Money. This Area is based on the work of Friedman and others who have pointed out the importance of low and stable rates of as sources of economic growth and the dangers of government’s ability to erode property rights and diminish the foundations of private business arrangements through inflationary policies. The first three components of Area 3 look at measures of inflation and money growth. The fourth component looks at the ability of individuals to hold alternative currencies. The data for this area are objective. Area 4 is Freedom to Trade Internationally; it contains a mixture of both objective and subjective (survey) data. Policies that limit international exchange limit the extent of the market and are clearly contrary to the notion of economic freedom. The first two components measure tariffs and non-tariff trade barriers. The third component is an estimated variable determined by regression analysis used to estimate the actual size of the trade sector compared to the expected size of the trade sector based on national characteristics such as size, access to coasts, and location. The fourth component compares the black market exchange rate to the official exchange rate, and the fifth component measures controls on capital markets. Area 5 is Regulation of Credit, Labor and Business; this is a mostly subjective category based on the lack of objective data concerning regulatory burdens, which are often hidden. This category is broken down into three components which measure

19 regulation in the credit market, the labor market and regulation of business practices generally. Although this area is difficult to measure it is a key component of economic freedom; given the hidden nature of many regulations, they are an increasingly popular object of rent seeking activity among politicians and special interest groups.

Table 2.1: EFW Ratings for 2004 10 Most Free Countries in 2004 Ten Least Free Countries in 2004 Hong Kong Central African Republic Singapore New Zealand Algeria United States of America Guinea-Bissau Ireland Venezuela United Kingdom Democratic Republic of Congo Canada Republic of Congo Iceland Myanmar Zimbabwe

The 2006 Economic Freedom of the World index contains data in the above mentioned areas for 130 countries for the year 2004. Much of the data included in the index is time-intensive to compile and the various sources such as the World Bank and IMF generally publish their data with a two year lag, making each year’s index a snap shot of economic institutions from two years prior. For the 2004 data the ten most- economically free countries and the ten least-economically free countries are included in Table 2.1. One challenge with time series data of any sort is ensuring comparability of the data between different time periods. The EFW index contains data back to 1970 in many cases. For example, for 1970 53 countries are included; for 1980 there are 102 countries; for 1990 there are 123 countries; and, as mentioned, there are 130 countries included for 2004. As the index has evolved, additional data sources have been included; therefore, the raw scores from previous years are not always comparable to scores from later years. To account for these changes and create data that is comparable over different time periods the EFW creates a chain-linkd index. This is similar to calculating purchasing power or prices over time when the goods measured might actually be changing. For the chain-linked index the year-2000 score serves as the base year. Scores from years before or after 2000 are adjusted based on the changes in the data sources they contain that overlap with the data in 2000. So, for example, if 1995 scores were composed of 80 percent of the same data used in the 2000 index then the score for a country in 1995 would be adjusted based on how much difference existed between the common 80 percent of data in 1995 and 2000. If it were the same for each year the overall score would remain unchanged. If that 80 percent in 1995 were higher or lower the total score for 1995 would be adjusted up or down accordingly. The chain-linked index data is utilized in this study when comparisons are made across time periods.

20 Index of Economic Freedom

The Heritage Foundation's Index of Economic Freedom is designed to capture similar attributes about national economic institutions as the EFW. The Index defines economic freedom as “the fundamental right of every human to control his or her own labor and property.” The 2007 index includes 157 countries measured in 10 dimensions: Business Freedom, Trade Freedom, Fiscal Freedom, Freedom from Government, Monetary Freedom, Investment Freedom, Financial Freedom, Property Rights, Freedom from Corruption, and Labor Freedom. Each component is assigned a score from 0 to 100 with 100 being most free; the total economic freedom score is calculated by averaging the 10 component scores. According to the 2007 index, "In order to compare country performances from past years accurately, scores and rankings for all previous years dating back to 1995 have been adjusted to reflect the new methodology" (Heritage 2007, Executive Summary).

World Development Indicators

The World Bank's annual publication World Development Indicators is one of the most widely used sources of economic data in the world, and is produced by the Bank’s Development Data Group. According to the Bank the "World Development Indicators (WDI) publication is the World Bank's premier annual compilation of data about development”. The 2007 WDI includes more than 900 indicators in the categories: World View, People, Environment, Economy, States and Markets, and Global Links" (World Bank 2007, Introduction). This dataset is used for GDP figures among other economic indicators.

Human Development Index

The United Nations' Human Development Index is an outgrowth of its Human Development Reports of the United Nations Development Program, which were first published in 1990 as the reports state "with the single goal of putting people back at the center of the development process in terms of economic debate, policy and advocacy" (United Nations 2006). The HDI attempts to capture a broader view of human well-being than is available simply through per capita income figures. The HDI combines data on three dimensions: 1. life expectancy at birth; 2. knowledge, which is the weighted average of literacy rate (two-thirds) and school enrollment figures (one-third); and 3. standard of living measured by the PPP-adjusted per capita GDP figures for the country. HDI is widely used in studies as an alternative to simply using GDP.

21 Freedom in the World

Freedom House is an independent non-profit organization that measures political and civil rights in countries and major territories. Their studies of freedom were initially launched in the 1950s as annual reports on political trends and the implications those trends had for human freedom. In the 1970s they began producing annual studies using more comprehensive data. This research was spearheaded by University of Washington political scientist Raymond Gastil, and it began including both political and civil freedom ratings separately. The annual book form of Freedom in the World was first published in 1978. The annual Freedom in the World survey evaluates freedom as experienced by individuals in countries across the globe. Freedom House defines freedom as “the opportunity to act spontaneously in a variety of fields outside the control of the government and other centers of potential domination” (Freedom House 2006, Introduction). Using this definition, it organizes freedom into two distinct categories: political rights and civil liberties. The 2006 report is the one used in this dissertation. It was compiled by a team of 8 in-house scholars from Freedom House as well as a group of 16 outside consultants. Their findings are reviewed at a series of regional meetings with area specialists to try to ensure consistency across countries. The Freedom in the World survey assigns scores according to a series of general questions. The political rights survey consists of 10 questions, grouped into three subcategories: electoral process (3 questions), political pluralism and participation (4 questions), and functioning of government (3 questions). Each of the 10 questions is assigned a score of 0-4 (a total of 40 possible points), with 4 being the most free. Freedom House analysts answer the questions by drawing information from foreign and domestic news reports, academic research, non-governmental organizations, think tanks, professional contacts, and visits to the region. There are two additional questions on the political rights survey, which only apply under specific circumstances. These questions are scored negatively from 1-4, where a score of 4 would decrease the total, rather than add to it as with the other questions. The two extra questions (accompanied by multiple sub-questions) are: 1) For traditional monarchies that have no parties or electoral process, does the system provide for genuine, meaningful consultation with the people, encourage public discussion of policy choice, and allow the right to petition the ruler? 2) Is the government or occupying power deliberately changing the ethnic composition of a country or territory so as to destroy a culture or tip the political balance in favor of another group? (Freedom House 2006) The civil liberties score produced by the survey is compiled in a nearly identical manner. The score is the result of 15 questions on a 0-4 scale (a total of 60 possible points), grouped into four broad subcategories: freedom of expression and belief (4 questions), associational and organizational rights (3 questions), rule of law (4 questions), and personal autonomy and individual rights (4 questions).

22 Table 2.2: Freedom House Scoring Political Rights PR Rating Civil Liberties (CL) CL Rating (PR) Total Raw Points Total Raw Points 36-40 1 53-60 1 30-35 2 44-52 2 24-29 3 34-43 3 18-23 4 26-34 4 12-17 5 17-25 5 6-11 6 8-16 6 0-5 7 0-7 7

Total points in each category—political or civil—are summed and they are fitted into predetermined ranges (scaled), which assigns ratings between 1 (most free) and 7 (least free). The ranges are presented in Table 2.2. The average of the political rights and the civil liberties ratings is then taken to assess the level of freedom in each country. This average is used to assign a non- numerical category of free, partly free, or not free as shown in Table 2.3.

Table 2.3: Freedom House Ratings Combined Average of the Country Status PR and CL Ratings 1.0 - 2.5 Free 3.0 - 5.0 Partly Free 5.5 - 7.0 Not Free

While the Freedom in the World survey data is valuable and, in many ways, unique, it is, nevertheless, highly subjective. The questions the survey asks are not empirical and, consequently, are potentially subject to analysts’ biases as well as flawed interpretations and definitions. A potential problem also lies in using the data for time-series analysis. Unlike EFW, Freedom in the World does not produce chain-linked data, which would maintain consistency over time. This creates potential problems with time-series analysis.

23 Polity IV

Polity IV is an academic project that “codes” regimes and their characteristics, annually and historically. It does this through carefully constructed analytical scoring, similar to the Freedom in the World survey, although much more extensive and well- defined. It is one of the most widely used research tools in political science and history in terms of regimes. The Polity project was founded by political scientist Ted Robert Gurr of the University of Maryland, College Park in the mid-1970s and appeared as Polity I. As the dataset was updated and refined new versions were introduced resulting, ultimately, in the most recent version, Polity IV, with data through 2008 produced under the direction of Monty G. Marshall of George Mason University. In the Polity IV dataset the main variable is POLITY, which is a combination of two other constructed variables, “institutionalized democracy” (DEMOC) and “institutionalized autocracy” (AUTOC). DEMOC is conceptualized as three necessary, interdependent elements: first, the ability of citizens to express preferences about possible policies and leaders through the presence of effective institutions and procedures; second, extant institutionalized constraints on the exercise of power by the executive; and third, the availability of civil liberties to all citizens in daily and political life. Characteristics such as the rule of law, freedom of the press, plural democracy, and checks and balances are considered to be found implicitly in these three principles. DEMOC is measured on a scale of 0-10, with ten being the most democratic. The points for the scale are derived from codings for: 1) competitiveness of executive recruitment; 2) openness of executive recruitment; 3) constraints on the chief executive; and 4) competitiveness of political participation. These scores are then weighted according to specifications set out by Polity IV. It should be noted that there is no “necessary condition” for consideration as a democracy; instead, it is treated as a variable. The process of coding AUTOC is nearly identical. The categories are the same, although it differs in the way points are assigned and the scores are weighted. AUTOC is generally conceptualized as government restricting political competition and participation and having few institutional constraints. AUTOC runs in value from -10 to 0, with -10 the most authoritarian. POLITY scores then run from 10 (strongly democratic) to -10 (strongly authoritarian). Here POLITY2 scores are used rather than POLITY. The only coding differences between these two data series are found in years of strife. POLITY codes years during which there was civil war, external conflict, or transition as outside the 10 to -10 scale, making those years unavailable for time-series data analysis. POLITY2 attempts to ameliorate this situation by assigning scores for those years which had been marked with conflict designations. For instance, years in which there was a foreign “interruption” in a particular country were coded “-66” in POLITY, may now be assigned a number 10 through -10 in POLITY2. One of the most commonly cited measures used to calculate POLITY in the Polity IV data series, “constraints on authority” (XCONST), is also included in the dataset. This is coded on a scale of 1 to 7, with seven indicating “executive parity or subordination” and one indicating “unlimited executive authority”. These constraints are general, ranging

24 from constitutional restraints on an executive, as found in many western democracies, to restraints placed on an executive by groups of nobles, powerful advisors, tribal leaders or the military. Overall, these scores are compiled by analyzing a checklist of questions and attributes. Like the Freedom in the World survey, the data is also not chain-linked, which brings into question the accuracy of time-series analysis. While Polity IV does periodic coding reviews, it is not perfect. Polity IV conducted tests to determine the continuity of scores over time. The dataset held up well, although not perfectly. The experiment re- calculated a sample of scores from previous years, using the current rubric. This experiment found that authority patterns over the short- and medium-term fared well. Of the 148 cases examined across time, seventy four resulted in the exact same POLITY score; forty five cases had results within one point; and twelve cases were within two points. 80% of the cases looked at were within 2 points (Polity 2006, 7). A summary of the main variables commonly used from the Polity IV data project are listed below. 1. Indicators of Democracy and Autocracy (Composite Indicators): this groups has 5 subcomponents: a. Number of years (rounded) a particular polity case has persisted without a change in variable scores b. Democracy Score: general openness of political institutions. c. Autocracy Score: general closed-ness of political institutions d. Combined Polity Score: DEMOC minus AUTOC e. Indicator of polity durability based on the number of years since the last (3-point or greater) regime transition 2. Authority Characteristics: a Component Variable that has 6 subcomponents, the 4th of which has been widely used in scholarly research. a. Regulation of Executive Recruitment: institutionalized procedures regarding the transfer of executive power. b. Competitiveness of Executive Recruitment: extent to which executives are chosen through competitive elections. c. Openness of Executive Recruitment: opportunity for non-elites to attain executive office. d. Executive Constraints: operational (de facto) independence of chief executive. e. Regulation of Participation: development of institutional structures for political expression. f. Competitiveness of Participation: extent to which non-elites are able to access institutional structures for political expression. 3. There are also variables on wars and civil war.

Fractionalization

Over the past forty years, ethnicity has been linked to civil conflict, economic growth, and the quality of institutions. The traditional tool for making these linkages is

25 the Ethno-Linguistic Fractionalization (“ELF”) index. Originally constructed by Soviet ethnographers in the early 1960’s1, the index measures how ethnically diverse, or fractionalized, a country is. Generally speaking, it measures the likelihood that two people chosen at random will be from different ethnic groups, and the original study included 129 countries (Posner 2004). It is calculated using a simple Herfindahl concentration index common in the industrial organization literature While ELF has been widely utilized as a method of measuring fractionalization within a society, there are many problems with the index, as evidenced by the growing body of literature attempting to augment or supplant ELF. The primary criticisms are: 1) the ethno-linguistic data is outdated. The Soviet data is from the early 1960’s and does not reflect ethno-linguistic changes over the past 40 years. 2) The dataset is incomplete for the current landscape. It does not capture much of de-colonization and the break-up of the Soviet Union, and hence reflects a world that no longer exists. 3) The data is skewed toward language differences, while discounting differences in ethnicity like race, skin color, or social group (clan, tribe, etc.) (Alesina et al 2003). And, 4) encapsulating an entire country with a single statistic can gloss over important aspects of the country’s ethnic landscape (Posner 2004). Many researchers have their own modified version of ELF, or have created counter measures to be used in the place of ELF. The following is a review of the most significant models. Alberto Alesina, Arnaud Devleeschauwer, William Easterly, Sergio Kurlat, and Romain Wacziarg developed a dataset often simply referred to as “fractionalization”. The measures created by Alesina et al. are an attempt to “correct” the original ELF, as well as to draw further, more accurate correlations. In doing so, they derive three separate measures of fractionalization based on ethnicity, language, and religion. Their study improved upon the original ELF in two ways. First, the ethnic fragmentation measure used is more broadly defined, including race, rather than the original which was skewed toward language as a defining characteristic. Second, these new measures are derived from a dataset much larger (190+ countries) than the original. Another measure of fractionalization, Ethnic and Cultural Diversity by Country, was created by James Fearon. In order to be included in Fearon’s dataset an ethnic group needed to account for at least 1% of the respective country’s population; other authors have since adopted this methodology. Fearon’s hypothetical criteria for including an ethnic group was survey identification, meaning that if an individual was chosen at random, how would he or she answer the question “what are the main ethnic (or racial or ascriptive) groups in this country?” Lacking the means to effectively survey globally, he relies on secondary sources and available lists. In creating his ethnic fractionalization measure, he included any characteristic that would separate one individual from another, including race, language, descent, etc.2

1 Published in the Atlas Narodov Mira (1964) 2 Fearon’s complete list of protypical ethnic group features: 1. Membership in the group is reckoned primarily by descent by both members and non-members. 2. Members are conscious of group membership and view it as normatively and psychologically important to them. 3. Members share some distinguishing cultural features, such as common language, religion, and customs. 4. These cultural features are held to be valuable by a large majority of members of the group. 5. The group has a homeland, or at least “remembers” one. 6. The group has a shared and collectively represented history as a group. Further, this history is not wholly manufactured, but has some basis in fact.

26 Using these criteria, he amasses a dataset of 822 ethnic groups in 160 countries. He finds that the “average country” has about five ethnic groups that make up at least one percent of the population. 70% of countries in the world have an ethnic group that forms an absolute majority of the population. Only 21% of countries are “homogeneous”, where 90% of the population is from the same group, including only one in Sub-Saharan Africa. Africa accounts for only 25% of countries but 43% of ethnic groups and averages more than eight per country. Fearon also notes that, while the West is the most homogeneous region ethnically, and Sub-Saharan Africa by far the least, Latin America/Caribbean, Eastern Europe/Former Soviet Union, Asia, and North Africa/Middle East are all similarly homogeneous. Fearon further attempts to distill his ethnic fractionalization measure by accounting for differences between ethnic groups. He does this through a proxy measure, namely measuring how far apart the languages spoken by each ethnic group are, using the linguistic classifications created by Grimes and Grimes (1996). The reasoning behind this measure is that having different ethnic groups matters little if they are relatively close culturally. He defines this as drawing two people at random from a country and then computing their expected resemblance. Fearon gives a multitude of anecdotal examples to support his claim of cultural resemblance as a superior measure. For instance, he points out that Belarus and Cyprus have nearly identical ethno-linguistic fractionalization scores. If one takes the view that ethnic diversity makes it harder to cooperate, one would expect Belarus to be just like Cyprus. However, this is not the case, with Belarus’ ethnic groups (Byelorussians, Ukrainians, Russians and Poles) being much less culturally divided than Cyprus’ (Greek and Turkish). When cultural resemblance is taken into account (as he calculates it), the two countries diverge greatly. Belarus, with all of its ethnic groups speaking a Slavic language (and all but the Poles speaking an eastern Slavic language), seems to be much more homogeneous nationally than Cyprus, with Greeks and Turks speaking languages from completely different families. In Measuring Ethnic Fractionalization in Africa, Daniel N. Posner has created a measure he terms Politically Relevant Ethnic Groups (PREG), in an attempt to augment ELF. His chief concern with ELF and subsequent measures based on ELF is that they count the total number of ethnic groups without taking into account whether they are politically, economically or socially relevant. While noting that there is no objective way of determining ethnic groups, Posner scours available research on African ethnic groups, conflicts, and tensions in order to surmise what groups are “relevant” in a particular country. Posner also allows for “coalitions” in his study, grouping together ethnic groups that work in tandem. However, Posner’s measure has problems. First, he calculates PREG only for 42 African countries, which reduces its general application. Second, Posner’s definitions of ethnic groups, as well as his categorizations as “relevant” are highly subjective. Finally, Jose G. Montalvo and Marta Reynal-Querol created Ethnic Diversity and Economic Development. This study analyzes both ethnic and religious fractionalization. They examine ELF by inputting their own current data into the original equation and then introduce a new measure of potential conflict.

7. The group is potentially “stand alone” in a conceptual sense-that is, it is not a caste or caste-like group (e.g., European nobility or commoners).

27 Considering that Alesina et al. did virtually the same data analysis with a much larger dataset, the data of Montalvo and Reynal-Querol has little additional value in terms of both ethnic and religious fractionalization. In fact, Montalvo and Reynal-Querol’s ELF is highly associated with both Alesina et al’s as well as the original ELF. They also find, as did Alesina et al, that ethno-linguistic fractionalization is correlated with a negative effect on economic growth. Their study is based on the assumption that social tensions emerge more easily when the population is distributed between two groups of equal size. Accepting this premise, they construct a model where the greatest probability of social conflict (polarization) is found when two groups of equal size are present. This differs from ELF, which increases as the number of groups increases. While the ethnic and religious fractionalization indices created by Montalvo and Reynal-Querol may be of little value due to their similarity with more extensive work already done, their polarization indices are at the very least an alternative formulation and way of looking at ethno-linguistic fractionalization. While the dataset is smaller than others, their polarization indices can offer a valuable check on ELF measures. However, the assumptions that undergird their polarization model may be flawed. This dissertation will rely primarily on the Alesina et al dataset as a measure of fractionalization. It is the most commonly used currently in the economics literature. The other measures will be considered as alternative measures to verify robustness of results as needed. Chapter 3 presents historical case studies from the last three decades of countries that have experienced significant changes in their economic institutions. The major data source used to determine which countries to study was the Economic Freedom of the World dataset described above. In addition to focusing on changes in the EFW scores, Chapter 3 will discuss changes in political freedom measured by Polity IV and Freedom House. Chapter 4 conducts empirical analysis on the determinants of economic freedom. In that chapter alternative formulations of the EFW index are used as the primary dependent variable representing economic institutions and independent variables on economic, political, and demographic characteristics are used from the other data sources discussed above.

28 CHAPTER 3

CHANGES IN INSTITUTIONAL QUALITY SINCE 1980

Introduction

The twentieth century witnessed several major waves or fads in terms of economic institutions. Following World War II and what was seen as the success of "planning" the War-time economies, there was broad movement toward economic centralization and planning around the world from the 1940s through the 1970s. Both democratic and non-democratic countries alike embraced government intervention as the way to drive economic prosperity. Those trends began to shift gradually in the 1970s first with economic reforms in Chile, and then as a result of the perceived failure of Keynesian policies to deal with the stagflation and other economic turmoil of the decade. From 1980 to 2001 there was a broad worldwide movement back toward freer markets and government deregulation. The reforms of the Reagan and Thatcher governments were seen as examples to be followed by some developing countries (Commanding Heights 2002), and at the end of the 1980s the collapse of communist systems in Eastern Europe and the Soviet Union led to a wide-spread period of economic and institutional reform, some successful others temporary. Reforms of the Chinese communist system begun in the early 1980s and the liberalization begun by India in the early 1990s provide examples of countries not directly in either the America or Soviet spheres also taking part in the trend away from planning and centralization during this time period. This era in many ways provides the possibility for natural experiments on the factors that lead to institutional change. Although the period under question coincides with a renaissance of economics research concerned with the question of growth (see for example the vast literature that has been spawned by the work of Lucas (1988) and Romer (1986)), much of it has been focused on theoretical models rather than case studies of actual reforms. There are signs now that the emphasis in the profession, while still strongly focused on theory and empirics, has begun to expand to include an appreciation of the importance of case studies and other more contextual approaches which have typically been less important—history matters (Dunn 2009). The goal of chapter 3 will be to identify the major institutional reforms that have occurred since 1980, explain briefly the economic and political events associated with the reforms, and try to determine if the reforms survived or if the system reverted to previous norms. Additionally, comparing changes in both economic and political institutions could provide evidence for the relationship between the two types of reform, provide data to be used in chapter 4, and identify future research questions, including which country’s reforms should be studied in more detail in future work to help clarify aspects of the reform process. The case study approach should prove a valuable addition to the economist’s traditional tool box of empirical analysis. The process of institutional reform and

29 economic growth is so complex and involves so many different actors that one methodological approach, while potentially very valuable, is bound to leave import questions unaddressed. Case studies should simultaneously make it possible to identify areas for more rigorous empirical analysis as well as possibly shedding light on areas that are not as easily addressed empirically, such as the role of culture, history or informal institutions. A large body of literature in the social sciences, mostly outside of economics, has demonstrated the importance of these approaches and questions (see, for example, in American history Appleby, Hunt and Jacob 1994; for a review in sociology and anthropology see Walker 2001 for an introduction; French theory has had a huge impact on the non-economically dominated social and human sciences in the United States— arguably more so than it has had in France—a good recent survey is Cusset 2008).

Case Study Selection

The last thirty years have seen large changes in the quality of economic institutions. In an effort to better understand the origins of these institutions, as well as the basis for their changes, specific countries need to be examined. The data on institutional change used to select the countries were from the Fraser Institute’s Economic Freedom of the World index (EFW). Before selecting countries, criteria needed to be established. To begin with, countries were examined in three different time periods: 1980-2004; 1990-2004; and 1995-2004. This allowed the inclusion of countries that were late reformers and for those that simply did not exist during the earlier periods, such as countries that became independent after the break-up of the Soviet bloc. The initial investigation was two-pronged. First, the absolute size of the institutional change, as measured by the index was taken into account. Countries that have large shifts may be easier to analyze because these shifts are most likely caused by large changes within the country, making them easier to research. The down side to this approach is that it could bias the countries selected to those that have very low scores to begin with since they would have the most room to improve. The second criterion is the size of change as a percentage of possible improvement. This is defined as the change during the period divided by the highest possible score minus the score from the beginning year of the period—essentially measuring how much value that was left on the table at the beginning of the period was captured by the countries subsequent reforms. This method will not be biased by the starting point of the country. The formula used is:

% Improve = (2004 Score – Base year score)/(Perfect Score – Base Year score) (1)

This formula was calculated for the time periods 1980 to 2004, 1990 to 2004, and 1995 to 2004.

30 For the Economic Freedom of the World the highest ranked countries for absolute improvement are given in Table 3.1 (only those countries that improved the overall EFW score by 2 or more points are listed. As noted the rankings of countries by absolute movement in the various index scores is informative, but also biased to countries that begin the period with low scores as casual analysis of the tables reveals. Therefore it is important to look at the percentage improvements based on room for improvement as discussed above. Table 3.2 gives the biggest increases in Economic Freedom of the World based on formula 1 for the three time periods 1980 to 2004, 1990 to 2004 and 1995 to 2004.

Table 3.1: Improvements in Economic Freedom Absolute Change in Economic Freedom of the World 1980 to 2004 1990 to 2004 1995 to 2004 Ghana 4 Zambia 4 Latvia 2.5 Israel 3.4 Nicaragua 3.8 Iran 2.5 Uganda 3.4 Uganda 3.7 Estonia 2.4 Hungary 3.1 Poland 3.4 2.3 Jamaica 3.1 Peru 3.2 2.3 El Salvador 3 El Salvador 2.8 Lithuania 2.3 Iceland 3 Israel 2.8 Zambia 2.3 Peru 2.9 Tanzania 2.7 Romania 2.1 Bangladesh 2.7 Albania 2.7 Albania 2 Tanzania 2.6 Bulgaria 2.6 Hungary 2.6

Table 3.2 is the table from which the countries for the case studies were chosen. All the countries from the top 10 improvers for the time period 1980 to 2004 were chosen—these are: Iceland, New Zealand, Israel, Hungary, Ghana, El Salvador, Jamaica, United Kingdom, Peru, and Uganda. Of the top ten improvers in the time period 1990 to 2004, five were on the list of top ten for the 1980 to 2004 period and thus were already included; they are: El Salvador, Uganda, Peru, Israel, and Hungary. Thus to include all the top ten countries for the time period 1990 to 2004 only five countries needed to be added to the list: Zambia, Poland, Nicaragua, Kuwait, and Tanzania. The top three countries for the 1995 to 2004 period, Estonia, Latvia, and Lithuania, were added to the list to capture the recent movers from the former Soviet bloc. And finally, Ireland and Chile, which were ranked numbers 11 and 12 in the 1980 to 2004 period were included. Ireland because it is probably the most frequently cited example of successful economic reform in recent years, and Chile because, along with the UK, it is one of the earliest of the recent wave of reformers, having begun reforms in the 1970s. Thus the list selected includes all the top 12 countries from the 1980 to 2004 period, all the top ten countries from the 1990 to 2004 period, and the top three countries from the 1995 to 2004 period.

31 Table 3.2: Improvements in Economic Freedom Relative to Possible Improvement % Improve in Economic Freedom of the World 1980 to 2004 1990 to 2004 1995 to 2004 1 Iceland 58.78% Zambia 54.89% Estonia 51.72 2 New Zealand 54.98% Poland 51.38% Latvia 46.26 El 3 Israel 54.60% Salvador 50.42% Lithuania 42.52 4 Hungary 54.18% Nicaragua 50.24% Zambia 41.83 5 Ghana 52.39% Uganda 50.19% Iran 37.61 6 El Salvador 52.04% Peru 50.05% Croatia 37.38 7 Jamaica 51.18% Israel 49.21% Slovak Rep 37.02 United 8 Kingdom 50.89% Hungary 49.21% Poland 36.43 9 Peru 48.05% Kuwait 46.42% Cyprus 34.49 10 Uganda 48.05% Tanzania 43.60% Albania 33.35 11 Ireland 47.37% 41.07% Romania 32.87 12 Chile 46.09% Albania 41.03% Bulgaria 31.98 13 Cyprus 45.72% Bulgaria 40.70% Tanzania 31.55 14 Costa Rica 45.03% Iceland 38.33% Madagascar 30.49 15 Mauritius 44.45% Cyprus 37.77% Brazil 30.48 16 Botswana 43.18% Botswana 37.23% Hungary 30.3 17 Malta 42.96% Iran 36.70% Russia 29.98 Unit. Arab 18 Em. 42.80% India 36.68% Nigeria 29.83 19 42.72% Portugal 36.36% Uruguay 28.97 20 Iran 42.62% Ghana 35.75% 28.68

In order to provide a contrast to the countries that experienced increases in economic freedom it was deemed desirable to study several countries that experienced significant declines in economic freedom. As most countries around the world have experienced increases in economic freedom over this period of time there are not many countries that have experienced consistent meaningful declines. But four countries have experienced consistent and large negative changes in their economic freedom score over all three time periods, they are Zimbabwe, Venezuela, Myanmar, and Republic of Congo; all four were added to the list. The list thus includes 24 countries. Given their political and circumstantial similarities Latvia, Estonia, and Lithuania will be treated as a single case study on the Baltics, thus creating a list of 22 case studies included in Table 3.3. They are in alphabetical order: Baltics, Chile, Congo, El Salvador, Ghana, Hungary, Iceland, Ireland, Israel, Jamaica, Kuwait, Myanmar, New Zealand, Nicaragua, Peru, Poland, Tanzania, Uganda, United Kingdom, Venezuela, Zambia, and Zimbabwe. This group is diverse geographically, culturally, religiously, and in terms of income.

32 Table 3.3: Case Studies Case Studies 1 Baltics 2 Chile 3 Congo, Republic of 4 El Salvador 5 Ghana 6 Hungary 7 Iceland 8 Ireland 9 Israel 10 Jamaica 11 Kuwait 12 Myanmar 13 New Zealand 14 Nicaragua 15 Peru 16 Poland 17 Tanzania 18 Uganda 19 United Kingdom 20 Venezuela 21 Zambia 22 Zimbabwe

After reviewing the countries chosen, there are a few surprises. Two of the hottest economies over the past twenty years are completely absent. While both China and India improved their EFW score, neither improved enough to make this list, and both are still stuck in the middle of the pack. Having started with low rankings and not having increased very much, they are nowhere near the top of the EFW index in terms of percentage improvement based on possible improvement. For the period 1980 to 2004 China was ranked 56, for the period 1990 to 2004 China were ranked 45, and for the period 1995 to 2004 it was ranked 51. India faired better, the rankings for the three time periods were 42, 18, and 27 respectively. The United States while typically considered a leader in the movement toward more economic freedom during this period did not rank high in any time period despite what, at least domestically, are considered major reforms beginning in 1981. For the 1980 to 2004 period the United States ranked 54, for the 1990 to 2004 period it ranked 100, and from 1995 to 2004 it did not make the list because its economic freedom score decreased slightly.

33 A recent study by the International Monetary Fund (IMF 2005) studied institutional transitions around the world since 1970 for both political and economic institutions. The study's criteria for a political institutional transition was the first year in which the forward looking eight year moving average of the Polity score was 4 points greater than the backward looking eight year moving average. An economic institutional transition was noted when the forward looking eight year average of the Economic Freedom of the World index score was one point higher than the backward looking eight year moving average and a minimum score of 4 had been obtained. Based on this methodology the IMF identified 68 countries with political transitions and 65 countries with economic institutional transitions. Of the sixty five institutional transitions the IMF identifies since 1970 fifteen are included on the list of twenty four countries studied in this chapter (twenty four reflects the number of countries counting the Baltics separately as the IMF does; the IMF includes all three Baltic countries). Nine countries in these case studies are not listed as having experienced institutional transitions by the IMF. There are several reasons for the differences: first, of course, the IMF list comprises all countries that transitioned according to their methodology, whereas in this chapter only the top movers over three time periods. Second, the IMF does not include countries that may have negatively transitioned, thus the four large decliners included in the case studies here are not included by the IMF. Third, the IMF threshold for a transition in economic institutions was lower than the countries in my sample, where the average increase in EFW was just less than two points. The fifteen countries in my sample listed by the IMF with the year the IMF lists as the beginning of the transition are: Chile (1976), El Salvador (1994), Estonia (1995), Ghana (1985), Hungary (1995), Jamaica (1993), Kuwait (1986), Latvia (1999), Lithuania (2000), Nicaragua (1994), Peru (1993), Poland (1990), Tanzania (1997), Uganda (1996), and Zambia (1997). It should be noted that the IMF's start year for transitions should not be interpreted literally as they are mathematical constructions rather than being associated with historical events. The countries not included by the IMF that are included in this chapter are: the four decliners: Zimbabwe, Venezuela, Myanmar, and Congo; and five of the leading improvers: Iceland, Ireland, Israel, New Zealand, and the United Kingdom. While there are doubtless many other interesting cases of reform in the previous thirty years this data was used in order to identify countries with the largest shifts in institutional quality over the past thirty years. These countries then may shed light on why institutions change, as well as on what spurs them to change. While often difficult to measure and understand, institutional changes are an extremely important field of study allowing scholars to better understand how and why societies evolve.

Case Studies

The Baltics: Estonia, Latvia, and Lithuania

Since the collapse of the Soviet Union the institutional improvement in the Baltic countries is far and away the best in Central and Eastern Europe. From 1995 to 2004,

34 Baltic economic institutions have shown the most improvement in world. In terms of improvement in relation to possible improvement for the period 1995-2004 the three countries improved an average of 47%. The best performer of the group was Estonia, which improved 1.98 points and leaped from 77th to 13th overall in the rankings, an increase of 64 spots (EFW Database). Though Estonia was the brightest star, it was not alone; Latvia and Lithuania moved up 54 and 51 spots, respectively (EFW Database). While these statistics give an indication of great changes in the Baltics, they beg the question of what happened in these countries to so dramatically change their institutional makeup. As with most countries, the past very much affects the present in the Baltics. The Baltic countries all have similar, though not always over-lapping, histories. The entire Baltic region was dominated by a succession of different, often simultaneous foreign powers. All three countries’ indigenous populations were enserfed by these external forces (Kasenkamp: Estonia; Kasenkamp: Latvia; State Department Lithuania). The aftermath of the First World War and the Bolshevik revolution in Russia saw all three Baltics gaining independence either from Russian or German control (State Department Background Notes for Estonia; Latvia; Lithuania). All three constructed constitutional democracies, and instituted radical land reforms that redistributed land to peasants (Kasenkamp: Estonia; Kasenkamp: Latvia; Girnius: History). During the inter-war period, all three Baltic countries shifted from democracy to authoritarian rule. Although the period started out with relatively strong democratic institutions, these were replaced with strong authoritarian ones (Polity IV Database). Each of these changes was in reaction to a perceived ideological threat. In Estonia, authoritarianism was used to “save” the country from the radical right; in Lithuania it was protection from the radical left; in Latvia, it was in reaction to both the radical left and the radical right (Kasenkamp: Estonia; Kasenkamp: Latvia; Girnius: History). This period of domestic authoritarian rule was ended in 1939 by the non- aggression pact signed by the Nazi regime and the Soviet Union, which gave control of the Baltics to the USSR. In 1940, the Soviet Union occupied the entire Baltic region, deporting and executing many of the political and cultural elites. Within a year the Nazis would remove the Soviets and rule over the Baltic region until 1944, at which time the Soviets once again controlled the region. The Baltics were formally admitted into the Soviet Union, agricultural land was collectivized, and massive deportations took place, along with massive influxes of ethnic Russians into Estonia and Latvia (Kasenkamp: Estonia; Kasenkamp: Latvia; Girnius: History). Lithuania escaped the massive increase in its ethnic Russian population because it was viewed as being less troublesome than its other Baltic neighbors (Economist 11/20/03). The Baltics emerged from Soviet Domination in the early 1990’s battered but free. Their economies immediately plummeted retracting an average of 8.77% between 1991 and 1995, and inflation was out of control with the Baltic annual average during the same period of 264%. (World Development Indicators). Baltic governments reacted by instituting their own national currencies in 1992- 93, pegging them to existing ones1 (Dunn and O’Mahony; Morrison and Dunn; Girnius: Economy). This extricated the countries from the sinking ruble, and established monetary

1 Estonia pegged to the Deutsche mark; Latvia to IMF’s Special Drawing Right, a basket of major world currencies; Lithuania pegged to the US dollar (Dunn and O’Mahony; Morrison and Dunn; Girnius: Economy)

35 stability. By 1994, inflation was down to more acceptable levels, and from 1996-2000 it fell to an average 8.6% (World Development Indicators). In addition to improving monetary policy, Estonia and Lithuania generally kept spending in check. Estonian law requires a balanced budget, and the law is generally respected, leading to little public-sector debt (Dunn and O’Mahony). Lithuania kept spending in check, with government deficits averaging 2% of GDP for most of the 1990’s (Girnius: Economy). Additionally, tax reform also was implemented in all three countries. Estonia was the first country to put in place a flat tax in 1994, with Latvia and Lithuania to follow (State Department Background Notes Estonia; Daniel Mitchell). Estonia went a step further, and eliminated its corporate tax on reinvested profits, meaning that only disbursed profits (e.g. dividends) are taxed (Tupy). Beginning at independence the Baltic governments also began structural changes to their economies, changing what they produced, how they produced it, and who they sold it to. In terms of how they produced, all three went through, to varying degrees, sweeping privatizations (Dunn and O’Mahony; Morrison and Dunn; Girnius: Economy). Latvia and Lithuania have gone from a planned economy in 1990 to currently having more than 70% of output produced by the private sector (State Department Background Notes Latvia; Lithuania). It was these economic reforms that have largely lead to the enormous gains in economic freedom in the Baltics from 1995 to 2004. Of these, by far the largest driver of the increase was Baltic monetary policy. Following years of high inflation after independence, all three countries’ EFW “sound money” scores improved dramatically. Latvia improved its sound money score 200%, and it was the least among them; Estonia improved 317.4% and Lithuania 411.1% (EFW Database). All three countries saw inflation fall, with the greatest decrease occurring in Lithuania, decreasing from 38.1% in 1995 to 1.20% in 2004, and EFW’s measure of their standard deviations fell drastically as well (EFW Database). Estonia, Latvia, and Lithuania also have established strong political institutions. All three are considered “free” according to Freedom House’s Freedom in the World Survey, scoring on average a 1.5 (1 is the highest score) in 2004. While all three countries are multiparty democracies that protect their citizens political and civil rights, one question has loomed large since independence: what defines citizenship? Both Estonia and Latvia had enormous ethnic Russian populations purposely shipped in to dilute their ethnic make-up. Before World War II, ethnic Latvians made up 75% of Latvia’s population; by the mid-1980’s, it was down to 52%. A similar story is found in Estonia, where prior to the Soviet dominion Estonians comprised 90% of its population and only 61.5% after (Kasenkamp: Estonia; Kasenkamp: Latvia). Consequently, both Estonia and Latvia initially granted citizenship only to those who were citizens in the independent inter-war period, as well as those descended from them (Polity IV Country Report: Estonia; Kasenkamp: Latvia). This comprised 60% of the population, most of which were ethnically indigenous (Polity IV Country Report: Estonia). All others would have to apply for citizenship, and pass citizenship requirements (Polity IV Country Report: Estonia). One such requirement in both countries was passing a literacy test in the national language. This was difficult for many of the ethnic-Russian residents because the lingua franca during Soviet control was

36 Russian; many had never learned Estonian or Latvian. By the year 2000, one-third of the Estonian population were not citizens, and consequently disenfranchised. While Latvia has relaxed these restrictions, Estonia has largely resisted which has lead to the disparity in Polity IV scores between the Baltic nations (Kasenkamp: Latvia). Lithuania, which largely avoided massive influxes of ethnic Russians, granted universal citizenship after independence, including to their ethnic Russian minorities (State Department Background Notes: Lithuania). Consequently, it has a perfect POLITY score of 10; Latvia, with its relaxed citizenship requirement, scores an 8; and Estonia, with its strict language requirement scores a 6 (Polity IV Database). According to Polity IV, this damages political competition if not everyone is allowed to participate in the process (Polity IV Database). Over the past 15 years, the Baltic region has boomed, both economically, as well as institutionally. Economic growth continued into the 2000’s, recording some of the highest growth rates in the world; the Baltic average annual GDP growth from 2001-2005 was 7.73% (World Development Indicators). During this period they have recovered from disastrous planned economies, vastly increased their wealth, solidified strong economic institutions, and entered the world stage, joining organizations like the EU, WTO, and NATO. Although the enormous economic and institutional growth is obvious, why these reforms and improvements occurred is less so. Some theories are:

1. After 50 years of Soviet domination, the population of Estonia was looking for drastic economic change. The country was so sick of communism that it was willing to stomach enormous structural reforms in order to move toward a free economic system. As major economic reformer, and former Estonian prime minister Mart Laar notes:

After 50 years of Soviet occupation, Estonia was in ruins. Our economy was in shambles, the spirit of our people was spoiled by the socialist heritage. Shops were empty of goods, and money no longer had any value. Fuel prices rose by more than 10,000 percent over one year, while inflation was running more than 1,000 percent per annum. People stood for hours and hours in line to buy food.” (Laar)

This was a people who had been ruined by non-free market policies, and were willing to experiment with radical free market ideas. This argument, of course, doesn’t explain why other countries similarly left in ruins by communism do not respond as radically.

2. The Baltics couldn’t help but improve. After being a part of a system that destroyed many formal political and economic institutions, Estonia, Latvia, and Lithuania had nowhere to go but up. As the previous quote from Mart Laar illustrates, the system was crumbling, to the point where any economic change would have been an improvement.

3. The Baltic countries had indigenous peoples with strong senses of nationalism, as seen in the strong Estonian and Latvian citizenship policies. This allowed for social

37 cohesion, even through tough economic times, and made it easier to push through economic reforms. But given the large Russian minority this argument is difficult to reconcile with empirical work that suggests ethnic fractionalization may be a detriment to economic freedom.

4. The Baltic countries made radical reforms because they did not realize how radical they were. In the words of former Estonian prime minister Mart Laar:

I had read only one book on economics—Milton Friedman's Free to Choose. I was so ignorant at the time that I thought that what Friedman wrote about the benefits of privatization, the flat tax and the abolition of all customs rights, was the result of economic reforms that had been put into practice in the West. It seemed common sense to me and, as I thought it had already been done everywhere, I simply introduced it in Estonia, despite warnings from Estonian economists that it could not be done. They said it was as impossible as walking on water. We did it: we just walked on the water because we did not know that it was impossible." (Cato)

5. Proximity to Europe allowed institutional “seepage”. Institutional quality crossed over its borders from neighbors or countries in the region with stronger political and economic institutions. Alternatively, these countries could have acted as models for the building of institutions.

6. Entrance into the European Union gave the Baltic countries an incentive for rapid reform. The advantages of EU membership propelled Estonia, Latvia, and Lithuania to move quickly in order to assure them entry as soon as possible. This also could have been further hastened by their desire to also leave the Russian sphere of influence. Thus international political calculations may have played a large role in the rush to reform. This is an argument that has also been developed in relation to other countries with potentially imperial neighbors such as Taiwan and South Korea.

7. Small size and coastalness with large ports may have also provided greater access to external forces and influences allowing greater population movement and external influence.

38

Table 3.4: Estonia Estonia 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ NA NA 3787.1 2906.17 3996.34 5327.9 GDP_per_capita_PPP_2000$_Gro wth% NA NA NA -23.26 37.51 33.32 P4_POLITY2 NA NA NA 6 6 6 FreedomHouse_Political_Rights NA NA NA 2 1 1 FreedomHouse_Civil_Liberties NA NA NA 2 2 1 HeritageEF_Score NA NA NA 2.45 2.19 1.76 EFW_Size_Govt NA NA NA 4.41 5.43 6.69 EFW_Legal_System_Protec_Prop _Rights NA NA NA 6.5 6 6.52 EFW_Access_To_Sound_Money NA 8.77 4.48 2.3 8.62 9.64 EFW_Freedom_Trade_Internat NA NA NA 8.57 8.86 8.48 EFW_Regulation NA NA 2.47 6.22 6.57 7.26 Fraser_EFW_INDEX_Total Score NA NA NA 5.6 7.09 7.72 Human_Devel_Index(HDI)_Value NA NA 0.813 0.793 0.831 0.858

Table 3.5: Latvia Latvia 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 7586 8717 3901 2364 3302 4537.37 GDP_per_capita_PPP_2000$_Gr - - owth% NA 14.91 55.25 39.40 39.69 37.40 P4_POLITY2 NA NA NA 8 8 8 FreedomHouse_Political_Rights NA NA NA 2 1 1 FreedomHouse_Civil_Liberties NA NA NA 2 2 2 HeritageEF_Score NA NA NA NA 2.69 2.41 EFW_Size_Govt NA NA NA 4.06 5.18 6.52 EFW_Legal_System_Protec_Prop _Rights NA NA NA 5.96 5.95 5.75 EFW_Access_To_Sound_Money NA NA 6.43 2.98 8.59 8.99 EFW_Freedom_Trade_Internat NA NA NA 8.02 7.2 7.45 EFW_Regulation NA NA NA 4.28 6.05 6.7 Fraser_EFW_INDEX_Overall NA NA NA 4.6 6.6 7.1 Human_Devel_Index(HDI)_Value 0.795 0.809 0.803 0.769 0.815 0.845

39

Table 3.6: Lithuania Lithuania 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ NA NA 4354 2570 3275 4481 GDP_per_capita_PPP_2000$_Gro wth% NA NA NA -40.96 27.40 36.82 P4_POLITY2 NA NA NA 10 10 10 FreedomHouse_Political_Rights NA NA NA 1 1 2 FreedomHouse_Civil_Liberties NA NA NA 2 2 2 HeritageEF_Score NA NA NA NA 2.84 2.19 EFW_Size_Govt NA NA NA 4.23 5.59 6.58 EFW_Legal_System_Protec_Prop _Rights NA NA NA 5.87 5.81 5.05 EFW_Access_To_Sound_Money NA NA 7.49 1.85 7.1 9.17 EFW_Freedom_Trade_Internat NA NA NA 8.17 7.29 7.58 EFW_Regulation NA NA 2.47 4.52 5.63 6.39 Fraser_EFW_INDEX_Total Score NA NA NA 4.93 6.29 6.96 Human_Devel_Index(HDI)_Value NA NA 0.825 0.789 0.83 0.857

Chile

From 1980 to 2004, Chile’s political and economic institutions improved markedly, showing some of the strongest growth in the world. According to the Fraser Institute’s Economic Freedom of the World index (EFW), Chile has improved its score just over 40%, improving a total of 2.14 points, which was the twelfth best percentage improvement during the period. (EFW Database) The improvements of Chile’s political institutions are just as dramatic. Under the dictatorship of General Augusto Pinochet, in 1980 Chile was assigned a score of -7 by Polity IV, denoting a strongly authoritarian regime. By 2004, with the resurrection of constitutional democracy in Chile, Polity IV assigned a score of 9, nearly the best possible score and an improvement of 16 points. (Polity IV) A similar success was had in terms of political rights and civil liberties. As measured by Freedom House’s Freedom in the World Survey, in 1980 Chile was given the second worst possible score of 6 for both categories, and the country was graded as “not free”. By 2004 these scores had improved to the top possible scores, denoting Chile as a strong protector of individual rights and freedoms. (Freedom in the World Survey) Chile has been free from colonial rule for almost two hundred years, gaining independence in 1818, shortly after which it became a constitutional multi-party democracy. During the 19th and early 20th century, this political system was dominated by the wealthy elite, as was the economy through ownership of land, mines, and trade. Political power was freely and peacefully passed within this elite until the 1920’s. In 1920 a social and economic reformist candidate narrowly won the presidential elections. After being stymied by congress for four years, the military (which hadn’t been paid in months) intervened, overthrew the government, and began to force reforms.

40 Within a year democracy had returned, followed by a series of contrasting governments, including a “socialist republic” in 1932. (O’Brien: History) The next thirty-five years saw a variety of ruling coalitions, as well as a large increase in state intervention in the economy. In 1970, the socialist and communist parties united with the long-established Radical Party, nominating Marxist Salvador Allende for president. Allende won a plurality by only 39,000 votes over his nearest competitor in an electorate of 3.5 million, garnering 36% of the vote. (O’Brien: History) Although lacking an electoral mandate, Allende went forward with what he termed the “Chilean road to socialism”, which was meant to preserve Chile’s constitutional democracy while implementing radical economic and social change. Using a forgotten law leftover from the brief “socialist republic” of 1932, Allende expropriated industries that “failed to supply the people”. His government also used the state development bank to buy shares of privately held companies. Using these tools, many banks and industries passed into state hands. (O’Brien: History) In addition, the Allende government instituted price, exchange and commodity controls, further entrenching the government in the economy (O’Brien: History). By the end of 1973 the nominal average tariff for imports was 105%, with a maximum of 750% (Buc). These radical changes caused unrest within the country. Revolutionary groups pressured the government for further reforms by inciting workers to seize estates and factories. Although the government condemned the action, opponents of the regime complained that the government was not doing anything to stop the seizures. (O’Brien: History) With inflation out of control, reaching 414% in 1973, the military, led by General Augusto Pinochet, staged a coup, bombarding the presidential palace, where president Allende lost his life (World Development Indicators). Congress was dissolved, and political parties were suspended, and many Allende supporters were killed, arrested, or exiled (O’Brien: History). In the one year period from 1972 to 1973, measurements of freedom in Chile plummeted. Chile’s Freedom House score2 fell 5.5 points from “free” to “not free” and its POLITY score plunged 13 points, from democratic to strongly authoritarian. (Freedom House; Polity IV Database) However, the Pinochet government implemented reforms meant to extricate the state from the economy. It privatized many industries, reduced government expenditures, and reduced tariff barriers to a flat 10%, one of the lowest in the world at the time. This had a “shock effect” on domestic businesses, forcing them to compete against foreign firms. (O’Brien: Economy) Additionally, Chile became the first country in the world to have a fully funded private pension system (Piñera and Lukas). This allowed all Chilean workers to become capitalists themselves, vesting them in the health of the world economy (Piñera and Lukas). Also, exports were diversified, reducing dependence on as an export from 75% of total exports in 1970 to 50% in 1980 (O’Brien: Economy). Although the economy sharply declined in 1982 due in part to a banking crisis, the structural changes were generally kept in place, and growth continued (O’Brien: Economy). With the government’s pro-market approach, growth averaged 4.39% during

2 Freedom House Score=(Political Rights Score + Civil Liberties Score)/2

41 the 1980’s, compared with the Latin America and Caribbean average of 1.74% (World Development Indicators). The 1980’s saw the largest increase in Chile’s Economic Freedom of the World score, with most of the improvement during the entire 25-year period from 1980 to 2004 found during this decade. Of the 38 spots Chile moved up in the EFW rankings during the 25-year period, 33 were during the first ten years. (EFW Database) By far the largest component of Chile’s large economic institutional growth comes from its monetary policy. It’s score for the EFW category “sound money” improved 213% from 1980 to 1990. Inflation was not just brought down, from 28.8% in 1980 to 1.2% in 1990, but also steadied, with the standard deviation falling from 80.6 to 4.23. Additionally, by 1985 Chileans were allowed to own foreign currency bank accounts. (EFW Database) These reforms were significantly driven by the presence of the “Chicago Boys” in positions of influence in the Chilean government. For years Chile had a program to send students to the economics department at the University of Chicago where they were trained in the Chicago school of economics including the monetarist ideas advanced by Milton Friedman, particularly in his Money and Banking workshop and Arnold Harberger’s Latin American Finance workshop. (Valdes 1995) Matching these economic improvements in the 1980s were Chile’s political institutions. 1988 saw the Pinochet government hold a plebiscite on whether General Pinochet should receive another term as president, with a “no” vote leading to multi-party elections. The electorate decisively chose “no”, garnering 55% of the vote to 43% supporting General Pinochet continuing. This lead to the opening up of the political system, and elections were called for late 1989. (O’Brien: History). The 1989 elections were deemed free and fair, as have every presidential election since (State Department). Successive governments have had to deal with important, core issues leftover from the Pinochet era, including national healing after more than an estimated 3,000 murders during the Pinochet regime, as well as revising the constitution created in 1981 under Pinochet himself (State Department; O’Brien: History). These constitutional issues include an amendment that appointed former presidents as senators- for-life, which gave Pinochet and others complete immunity from prosecution, as well as an avenue to tip the congressional scales against certain legislation (O’Brien: History). In 2005, this status was amended, and the lifetime jobs abolished (Freedom House Country Report: Chile). While Chile is still sorting out and strengthening its hold on democracy, there is no question that the country’s institutional reforms have taken root. 1999 saw a socialist, Ricardo Lagos, democratically-elected, who served without dismantling the reforms that the conservative Pinochet regime had put in place. The Chilean economy grew strongly until the current worldwide downturn, averaging growth of 5.59% between 1990 and 2007, more than doubling the Latin America and Caribbean average of 2.77 (World Development Indicators).

3 As measured by Economic Freedom of the World: 2006 Annual Report (Gwartney and Lawson)

42 Table 3.7: Chile Chile 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 4673 4969 3069 4262 4880 5436 GDP_per_capita_PPP_2000$_Gro wth% NA 6.33 -38.22 38.86 14.49 11.39 P4_POLITY2 -7 -6 8 8 9 9 FreedomHouse_Political_Rights 6 6 2 2 2 1 FreedomHouse_Civil_Liberties 5 5 2 2 2 1 HeritageEF_Score NA NA NA 2.6 2.04 1.91 EFW_Size_Govt 5 5.71 6.51 7.3 7.12 6.34 EFW_Legal_System_Protec_Prop _Rights 6.43 5.02 6.19 6.75 6.53 6.09 EFW_Access_To_Sound_Money 2.31 6.97 7.23 8.65 9.3 9.48 EFW_Freedom_Trade_Internat 6.82 5.81 7.17 7.59 7.5 8.39 EFW_Regulation 5.7 5.74 5.84 7.06 6.99 6.9 Fraser_EFW_INDEX_Total Score 5.25 5.85 6.59 7.47 7.49 7.44 Human_Devel_Index(HDI)_Value 0.741 0.765 0.787 0.818 0.843 0.859

Congo, Republic of

The Republic of the Congo’s (Congo) overdependence on oil for the majority of GDP and government revenue has fueled competition for control of the government since independence in 1960. This incessant conflict has lead to the erosion of already tenuous property rights and legal system in the country and has resulted in its being one of the few countries in the world to experience a gradual decline in its economic freedom score since 1980. This decline was briefly interrupted between 1985 and 1995 but picked up again in the past decade. Congo’s Economic Freedom of the World (EFW) score slightly increased during the period immediately preceding the most recent violence, increasing from 4.6 in 1985 to 4.7 in 1990 and 4.9 in 1995. An opposite gradual trend in Congo’s EFW score, a decrease to 4.1, reflects the social and institutional instability caused by the conflicts of the late 1990s. Congo’s history lends support to Acemoglu’s contention (2001, 2002) that colonial origins play a significant role in determining institutional quality, and its recent experiences suggest that prolonged violence over control of natural resources may lead to a resource curse, further weakening institutional quality. France won control of the Congo in 1891 at the conclusion of a territorial dispute with Belgium in which France won control of most territories on the northern bank of the Zaire River. The French used the area mainly for resource extraction with little attention paid to institution building. After independence a series of coups led to nearly continuous political and institutional instability with governments characterized by various versions of socialist allegiance. A period of relative political stability was begun in 1979 when Denis Sassou Nguesso organized the Congress of the Labor Party that elected him president and ruled until 1992 (State Department). The 1980s saw a cessation of the military, political, and economic upheaval that plagued Congo since independence. Nguesso made use of this period of relative peace and (perhaps?) small amounts of

43 foreign aid to stabilize and even slightly increase Congo’s economic performance. The increase in Congo’s EFW scores in the 1980s from 4.6 in 1985 to 4.9 in 1995 reflects these slight improvements. Oil revenue flooded government coffers with money and led to 5% per year GDP growth throughout the 1980s, one of the highest rates in Africa at the time (CIA). An ambitious 5 year economic and social development plan focusing on infrastructure development initiated in 1981 required government investment to increase an average of 15% per year in the first half of the decade (IMF). Increased oil revenue alone could not sustain these large increases in development spending. The government never fully reaped the benefit of these higher oil prices because it secured much of the borrowing for investment by mortgaging future oil earnings (CIA). The cost of servicing Congo’s national debt doubled between 1980 and 1984 and then again between 1985 and 1989 (IMF). The sudden drop in oil prices in the mid-1980s4 compounded the debt burden (IMF). The government responded to this increase in national debt by cutting government spending, beginning structural reforms in the government, and entering into an agreement formalizing these efforts with the IMF in 1986. Most economic activity stagnated and debt skyrocketed despite these efforts (IMF). The emergency reforms instigated by the IMF intervention saw Congo’s “size of government” EFW score increase from 2.4 to 4.7 between 1985 and 1995 and its other scores remain relatively stable. Congo abandoned its ideological and diplomatic ties with the socialist countries after the collapse of the Soviet Union in 1991. Congo then embraced multi-party elections in 1992 and liberal economic reforms such as reducing the bloated civil service. However, while the factions and coalitions of traditional Congolese politics relinquished their socialist ideals they retained their habit of political violence motivated by oil patronage and ethnicity. The transition to a multi-party democracy led to peaceful election in 1992 of Pascal Lissouba, who had previously served as Alphonse Massamba-Débat’s prime minister during his 1963-1968 presidency (State Department). Lissouba dissolved the National Assembly and called for new elections in 1993 despite the international community’s determination that the 1992 elections were peaceful and fair (State Department). Various political factions contested the results of this second election with widespread civil unrest and violence. All parties eventually accepted the decision of international arbiters in 1994 that Lissouba had won this election (State Department). Nguesso’s loss in the 1992 election and Lissouba’s subsequent dissolution of the National Assembly dominated by Nguesso’s Congolese Labor Party alienated Nguesso and his political and ethnic supporters. Tensions between the Lissouba and Nguesso camps mounted as the presidential elections planned for 1997 approached. These tensions erupted in a siege by Lissouba’s government forces of Nguesso’s compound in Brazzaville (State Department). Four months of conflict between supporters of the two groups destroyed most of Brazzaville. The conflict ceased when Angolan troops, with French political support, invaded the country on Nguesso’s behalf and he declared himself president (State Department, Freedom House). Nguesso publicly expressed interest in completing the reforms begun by his predecessor when he assumed the presidency in 1997 (CIA). In 1998 he declared his

4 Oil prices dropped from $31 per barrel between 1981 and 1985 to $18 per barrel between 1986 and 1990 (IMF).

44 intention to renew the privatization initiative begun by Lissouba in 1994 although this second phase was less successful than the first (out of six state enterprises earmarked for privatization in the first phase, only one had actually been privatized). The World Bank canceled its International Development Association credit initially implemented for the privatization program due to this perceived lack of commitment to privatization (OECD). The Congolese judiciary suffered a complete collapse during the chaos of the late 1990s. Most records were lost during that period and the court served as a political arm of the state, leaving it overburdened, underfinanced, and subject to influence and bribery (IEF). Reports of corruption in the oil industry are widespread despite Congo’s 2004 enrollment in the Extractive Industries Transparency Initiative (Freedom House). Congo ranked 142nd (out of 163 countries) in Transparency International’s 2006 rankings and was suspended from the diamond industry’s Kimberly Accord (the body certifying that diamonds do not fund conflict) in 2004 (Freedom House). Although it experienced slight increases in economic freedom between 1985 and 1995, after 1995 most components of economic freedom declined due to continued conflict, the weakening of the judicial system and rampant corruption. As an outgrowth of these problems the Area 2 score of the economic freedom index, Legal Systems and Protection of Property Rights, has led the overall decline in institutional quality. The area 2 score of 4.67 in 1980 declined to a mere 1.93 by 2004.

Table 3.8: Republic of Congo Congo, Republic of 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 765 1025 1113 978 936 940.22 GDP_per_capita_PPP_2000$_Gr - owth% NA 33.99 8.61 12.08 -4.30 0.38 P4_POLITY2 -9 -9 -8 0 0 NA FreedomHouse_Political_Rights 6 7 6 7 7 6 FreedomHouse_Civil_Liberties 6 7 6 6 6 6 HeritageEF_Score NA NA NA NA 4.2 3.9 EFW_Size_Govt 1.86 2.37 3.47 4.7 3.53 4.23 EFW_Legal_System_Protec_Prop _Rights 4.67 3.05 3.02 3.24 2.39 1.93 EFW_Access_To_Sound_Money 5.32 6.06 5.83 5.69 4.32 4.37 EFW_Freedom_Trade_Internat 7.05 6.11 5.84 6.76 6.81 5.48 EFW_Regulation 5.16 5.49 5.13 4.35 4.84 4.68 Fraser_EFW_INDEX_Total Score 4.81 4.62 4.66 4.95 4.38 4.14 Human_Devel_Index(HDI)_Value 0.423 0.431 0.422 0.392 NA 0.391

45 El Salvador

Although El Salvador does not have a history of strong economic institutions, its economic institutions have notably improved recently. In 1985, its score was 4.6 and ranked 86th overall. By 1995 it had improved its score to 7.0, and was ranked 28th overall, moving up 58 spots. From 1980-2004, it improved 52% in relation to its possible improvement, the sixth largest overall improvement during the period. El Salvador has had a long history of political repression. Its Polity IV score was negative (autocratic) for nearly all of the nineteenth and twentieth centuries. It became positive for the first time in 1984, with free elections. Polity IV assigns the current regime in El Salvador a 7 on a scale of 10 in terms of POLITY, noting that while the constitution outlines strong checks on the executive, in practice the legislative and judiciary branches have struggled to do so (Polity IV Country Report). El Salvador is the smallest and most densely-populated country in Central America. It was settled by the Spanish in the 16th century, who established large plantations for export, continually pushing the native population onto smaller and smaller common lands. After independence in the early 19th century, a small group of indigenous landowners and merchants transformed the country. In 1882, all common lands were privatized, with ¾ of that land going to families comprising only about 2% of the population. The majority of the population became permanent wage laborers or seasonal migrants on these new large plantations. The repercussions of this situation, basically undisturbed for the next hundred years, are still playing out today. (Bounds and Sanchez- Ancochea: History) Over this century-long period, the country was economically and politically dominated by what became known as the “Fourteen Families”, who controlled the state, land, markets, and capital. Although democratic institutions were formally followed, power was controlled by, and kept within this oligarchy. In 1931, in the midst of a worldwide depression that ensnared El Salvador a reform-minded president was elected. The elite, fearing creeping communism and massive uprising, supported a military coup. (Bounds and Sanchez-Ancochea: History) The oligarchy, grateful to the military, ceded it control of politics. Over the next fifty years, this relationship was basically respected, with the military guaranteeing the privileges of the oligarchy, while the military was allowed to promote its own interests as the ruling political institution. (Bounds and Sanchez-Ancochea: History) The 1970’s brought a climate of change. Political violence flared, with rightist groups established as early as 1969 to assassinate and intimidate those who advocated for reform and change. Similarly, leftists used violence in attempts to overthrow the government. The Catholic Church, long a dominant conservative institution in the country, began to go left, preaching “liberation theology”. Combine these situations with an economic downturn driven in part by the 1973 oil shock and the return of thousands of Salvadoran refugees being expelled from Honduras after a war and border-dispute El Salvador was a tinderbox waiting to explode. The spark came from neighboring Nicaragua, with the Sandinista revolution in 1979 sending a shockwave through El Salvador’s political system. (Bounds and Sanchez-Ancochea: History) The military overthrew the president just months after the Sandinista takeover, getting rid of their own man. This led to the eventual forming of a military-civilian junta.

46 At this time (1980), 70% of all agricultural land was owned by less than 1% of the population (Kandell WSJ). The junta, attempting to defend against a possible leftward surge of its populace, expropriated all plantations of more than 500 hectares, which was roughly 20% of all agricultural land (Kandell WSJ; Bounds and Sanchez-Ancochea: Economy). The government also nationalized banks in order to provide credit to the newly-landed peasant, as well as nationalized exports (Kandell WSJ). The land was turned into cooperatives, with farmers given no individual property rights to ensure they didn’t turn around and sell the land back to the elite landowners (Kandell WSJ). Civil war raged through the 1980s, fought by the leftist, guerrilla FMLN, and the government. This civil war cost El Salvador more than 80,000 people and displaced one million (Bounds and Sanchez-Ancochea: Economy). By early 1988, per capita had fallen to 1961-levels (WDI; Asman WSJ). Only 30% of the remaining productive farms were producing any coffee at all. Half of the government budget was going to the military. The FMLN frequently used economic terrorism, such as cutting power lines, destroying crops, and mining highways, to cripple the government (Bounds and Sanchez-Ancochea: History). Between 1980 and 1990, El Salvador’s EFW score actually regressed, moving backwards 1/10 of a point, and dropping four spots in the ranking, to 86. While categories such as “size of government” and “freedom to trade internationally” improved, the overall fall is due largely to a decrease in the quality of the legal system and property rights institutions, to the massive land reform in 1980. In addition, the overall score was hurt by an uptick in inflation, which reached over 22% in 1990 (EFW Database). The 1989 presidential election produced an economic policy sea-change, with the election of center-right party ARENA. This party, which has held the presidency (although not the assembly) in free and fair elections since, immediately began major economic reforms (Freedom House Country Report). Buying wholesale into the “Washington Consensus”, successive ARENA governments have reformed the economy. The government has privatized a multitude of industries5, with government enterprises and investment as a share of GDP falling from 28.4% in 1985 to 1.9% in 2004 (EFW Database). Public spending was cut, so that by 2003, spending as a percentage of GDP had fallen to 7.1%, one of the lowest percentages in the region (Bounds and Sanchez- Ancochea: Economy). The government also lowered tariffs, with the mean tariff rate falling from 48% in 1980 to 5.4% in 2004 (Bounds and Sanchez-Ancochea: Economy; EFW Database). In addition, the government privatized its pension system, simplified the tax system, eliminated price controls, and reduced or abolished various subsidies (Bounds and Sanchez-Ancochea: Economy). One of the largest reforms occurred in 2001, when the ARENA government “dollarized” its economy, weaning itself off of its native currency in order to increase foreign investment and lower interest rates (Bounds and Sanchez-Ancochea: Economy). Within a year, interest rates fell from 25% to 6% (O’Grady WSJ). Additionally, in 2004 El Salvador joined the Central American Free Trade Agreement (CAFTA) (Bounds and Sanchez-Ancochea: History). These economic reforms have helped increase El Salvador’s Economic Freedom of the World index score. From 1980 to 2004 its score improved 2.85 points, and moved

5 Privatization occurred in the following areas: sugar refineries, textile mills, hotels, fish processing, banks, and financial institutions (Bounds and Sanchez-Ancochea: Economy)

47 up 62 spots in the rankings. This improvement was buoyed by overall increases across the board, with increases in every category. The largest of these increases are the categories of “sound money” and “freedom to trade internationally.” In terms of sound money, by 2004 inflation was steady and low, down to 4.45%, from 17% in 1980. Also, citizens were allowed to own foreign currency bank accounts (EFW Database). As mentioned, El Salvador’s “freedom to trade internationally” increased greatly as well, improving by 97.2% during the period. This is due in part to the mean tariff rate falling 42.6% (EFW Database). Similarly, El Salvador’s rating from the Freedom in the World Survey has improved since 1980, although it is still far from perfect. In 1980, El Salvador was considered “partly free”; today it is considered “free”, although barely. Freedom House notes that while personal and civil rights are generally respected, they are occasionally violated, especially in dealing with the country’s current crime problem (Freedom in the World Survey). Overall, this data shows a country with no history of strong political and economic institutions trying to grow them while recovering from a brutal civil war. Unlike the case of Congo, El Salvador seems to have emerged from civil war and economic stagnation with a strong appetite for free-market reforms.

Table 3.9: El Salvador El Salvador 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 4187 3523 1638 1993 2091 2106 GDP_per_capita_PPP_2000$_Gro - wth% NA 15.86 -53.49 21.65 4.92 0.71 P4_POLITY2 -2 6 6 7 7 7 FreedomHouse_Political_Rights 5 3 3 3 2 2 FreedomHouse_Civil_Liberties 5 4 4 3 3 3 HeritageEF_Score NA NA NA 2.89 2.1 2.24 EFW_Size_Govt 6.34 6.41 7.14 8.59 8.42 9.18 EFW_Legal_System_Protec_Prop _Rights 2.54 1.99 1.95 5.37 4.51 4.14 EFW_Access_To_Sound_Money 5.26 5.5 5 8.88 9.42 9.63 EFW_Freedom_Trade_Internat 3.64 3.67 4.8 6.69 7.57 7.06 EFW_Regulation NA 5.38 5.15 5.68 6.37 6.23 Fraser_EFW_INDEX_Total Score 4.44 4.59 4.81 7.04 7.26 7.25 Human_Devel_Index(HDI)_Value 0.589 0.61 0.651 0.69 0.715 0.729

48 Ghana

Ghana is a rare institutional success story in Africa. Despite a history of countless military coups, a faulty economy and human rights neglect, this nation evolved as a leader among other African countries. Ghana captured nearly 52 percent of the possible improvement in its Economic Freedom of the World score between the years of 1985 to 2004. The 1960 election for the newly independent country placed Kwame Nkrumah, Ghana’s first president, into office. Nkrumah led authoritatively and often threatened Western nations by attempting to spread socialism throughout Africa. Nkrumah described the weaknesses of multiparty parliamentary democracy as a system that delayed decision- making processes and, therefore, the ability to take action to foster development. Attempted forced urban development and unsound fiscal and monetary policies left the nation with extensive foreign debts. The country experienced seven different governments over the course of the thirteen years between 1966 and 1979, considered to be the “Second Republic of Ghana” (U.S. Library of Congress). During this time, a series of coups were accompanied by failed attempts to turn around Ghana’s economy. This revolving door government and shifting priorities resulted in unreliable institutions, an unstable monetary regime, high inflation, extensive government control of the economy and corruption. By 1980 Ghana’s EFW score of 2.3 was among the lowest in the world. Lt. Jerry John Rawlings seized control of the country in 1981. Ghana’s economy faced stagnant agricultural and industrial production, unmanageable public debt, thriving black market activities, high crime rates, significant unemployment, extensive foreign exchange constraints, and a deteriorating transportation system (The World Factbook). In 1983 the government launched the Economic Recovery Program (ERP) under the guidance of the World Bank and the International Monetary Fund (IMF). This program was considered stringent and consistent compared to other African reforms due to the nature of Ghana’s militant regime. Rawling’s militant government faced virtually no pressure from sources outside of the IMF and World Bank (Nordic Africa Institute). This factor allowed the ERP to expediently implement major economic reforms. The ERP transitional policies included management of the budget deficit through increased government revenues and decreased spending; removal of trade barriers such as tariffs and other high tax deterrents to increase capital flow into Ghana and availability of essential consumer goods; and more strict monetary policy. Exchange rates were allowed to float. The first phase of reform occurred from 1983 to 1986. This era focused on the reduction of government expenditures in attempt to gain control of national debt issues. To spur private production and entrepreneurial ventures, the ERP enacted policies such as tax reforms and the removal of controls on trade. Economic growth continued throughout the second phase of the ERP plans, which occurred during the years of 1987-1989. In attempt to make Ghanaian goods more competitive in the global market and increase exports, Ghanaian currency (the cedi) went through steady depreciation (OECD). In an attempt to liquidate some of the nation’s assets and maintain the trend of lowering national debt there was a course of privatization.

49 The EFW score for Ghana significantly improved between 1985 and 1990. Alongside ERP success, legal systems and property rights improved by 42.5%, sound money by 28.04%, and freedom to trade internationally by 36.7%. (EFW Database). During the early 1990’s, Ghana’s commitment to foreign loan payments gave the nation a favorable reputation in the international community. Economic reforms through the ERP and strategic implementation by Rawling’s government reached the goal of advancing the country’s economy and continued repayment of international loans. While ERP improved Ghana’s economy through fiscal reforms, the program often ignored areas that did not involve exports. Additionally, the program further geared Ghana’s economy toward one dimensional success in agriculture, specifically cocoa, thought to be a comparative advantage for Ghana internationally. Increased economic freedom continued in the 1990s with the help of a 50% improvement in the Top Marginal Tax Rate category. 1991 began a trend continued through 1995 in the overall decrease of top marginal tax rates. Market based adjustments yielded slow but steady growth rates. Efforts appeared to be frustrated on the surface when incremental growth occurred throughout 2000s, much different than the giant leaps made in the late ‘80’s.

Table 3.10: Ghana Ghana 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 1720 1439 210.82 227 250.27 277.09 GDP_per_capita_PPP_2000$_Gro - wth% NA 16.34 -85.35 7.70 10.23 10.72 P4_POLITY2 6 -7 -7 -1 2 8 FreedomHouse_Political_Rights 2 7 6 4 2 2 FreedomHouse_Civil_Liberties 3 6 5 4 3 2 HeritageEF_Score NA NA NA 3.54 3.24 3.35 EFW_Size_Govt 4.7 4.9 5.32 6.61 6.09 5.64 EFW_Legal_System_Protec_Prop_ Rights 2.76 2.69 5.79 5.6 4.45 5.06 EFW_Access_To_Sound_Money 1.15 1.76 4.07 4.13 5.82 7.5 EFW_Freedom_Trade_Internat 1.66 2.06 5 5.81 7.25 7.22 EFW_Regulation 4.4 4.67 4.67 5.69 5.88 6.09 Fraser_EFW_INDEX_Total Score 2.93 3.21 4.97 5.57 5.9 6.3 Human_Devel_Index(HDI)_Value 0.467 0.482 0.511 0.531 0.555 0.532

Hungary

Hungary’s history is mostly colored by foreign domination, having been under some form of foreign influence since the sixteenth century, weathering the Ottomans, Habsburg Austria, Nazis, and finally, the Soviet Union (Peter).

50 Before Soviet control Hungary had established European institutions like the market system, private ownership, and rule of law (Peter). Hungary also had developed a reliance on free trade due to its strategic geographic position in Europe and poor natural resource wealth (State Department). Under the Soviets, all of these institutions were lost. However, “de-Sovietication” does not explain the post-Cold War improvements in Hungarian institutions; many countries went through this, and many, like Belarus, are not doing nearly as well. During this 24-year period, Hungary’s Economic Freedom of the World (EFW) score increased from 4.2 to 7.4, the third highest percentage of possible increase. This large increase in score moved Hungary up 55 spots, from 78th to 23rd (EFW Database). Hungary’s political institutions improved as well. Its POLITY rating improved from a -7 under communist rule to a perfect 10 since 1990 (Polity IV). This was the first time its POLITY score had been positive, much less strongly democratic, in the nearly 150 years Polity IV has ratings assigned for Hungary (Polity IV). In terms of political and civil rights, as measured by Freedom House’s Freedom in the World Survey, Hungary has improved from a 6 (not free) to a perfect score of 1 in both categories. All of these measures indicate a large change in Hungary’s economic and political institutions; however, the question remains of what exactly occurred during this period. The Hungarian economy before World War II was primarily focused on agriculture and small scale . Starting in the 1950’s, Soviet pressure forced a rapid industrialization, using the Stalinist idea of self-sufficiency (State Department). By the 1970’s, the Hungarian economy had begun to flag (State Department). The period of 1979-1984 saw a 10% decline in real wages (Peter). With the economy stagnating, there was pressure to make the export economy more competitive on the world market (Berend: 399). In an early 1980’s reform, factory prices were tied to prices of the international market, the first time this had been done in a socialist state (Berend: 399). Also in the early 1980’s, the government began to break-up the big state-owned monopolies into small- and medium-sized enterprises, as well as began encouraging private and co-operative undertakings (Berend: 399). As the Soviet Union began to show signs of cracking, the Hungarian (communist) government pushed further reforms. The Companies Act of 1988 essentially began privatization, and the government also granted foreign trade rights and created a two- tiered banking system6 (Berry). These reforms, and the attitude of the government that instituted them, led the way for a relatively smooth transition from communism to free- market democracy. While these moves toward a market economy may have smoothed the transition, as well as signaled change, they did little to improve Hungary’s economic institutions, as measured by the Economic Freedom of the World index. The period from 1985 to 1990 saw little change in its overall score, improving from 78th to 74th, an increase of only 2/10 of a point (EFW Database). In 1988, parliament voted for a “democracy package,” which included trade union pluralism; freedom of association, assembly, and the press; new electoral laws; and a

6 Two-tiered banking system refers to dividing the state bank into state-owned banks. These state-owned banks were then either privatized or kept in state hands. (Bloom: 1568)

51 radical revision of the constitution (State Department). Additionally, the communist party also changed its name to the Hungarian Socialist Party (HSP), and to this day competes in the Hungarian political sphere. Even with this change, the first elected Hungarian government consisted of no former communists, which was unique for the region (Peter). This new government inherited an economy on an unsustainable path, with high levels of external debt (Berend: 399; Berry). During the communist era, Hungary mainly exported to the Council for Mutual Economic Assistance (CMEA) countries, a market which consisted of Soviet-bloc countries. With the dissolution of the Soviet Union, this market virtually dried up, and Hungary was forced to compete on the world market against superior competitors for consumers with discerning tastes (Havas: 382). While Hungary is not credited with going through a rapid, “shock therapy”-type transition, it did go through a robust process into a market economy. In 1990, the private sector accounted for only 25% of GDP; by 2000 the private sector produced 90% (Havas: 382). Inflation, which averaged 22.1% from 1990-99, fell to 6.67% on average annually from 2000 to 2005 (WDI). Also, the central bank was made independent, and the corporate tax rate was reduced to 16% (Berry; Edwards). The beginning of the transition was marked by economic hardship. From 1990- 94, real gross domestic product decreased by 17%, unemployment increased to 12% from virtually zero, and inflation averaged 25.4% (Berry; WDI). This period was followed by a financial crisis in 1995, which the (elected, socialist) government responded to by reducing overall government expenditure, including reducing public sector employment and healthcare spending. It also devalued the currency by 9% (Berry). While these measures had a deleterious short-term effect on the standard of living and real wages - and the government lost the next election, a recurring theme in post- communist Hungary - the economy began to improve. The Hungarian economy grew by an average of 4.2% annual from 1996-2005 (Political Risk Yearbook). Today, Hungary’s economic institutions are at their highest since measurement began (EFW Database). During the period from 1990 to 2004 Hungary has improved its EFW score 49%, increasing from 78th to 23rd overall. Its largest improvements in its score have come in the areas of “size of government”, “freedom to trade internationally”, and “regulation” (EFW Database). Hungary’s size of government score has improved 84% over this fifteen year period, albeit starting from a very low base. The major increase was driven mainly by the top marginal tax rate being cut 12%, to 38%, and by a decrease in government enterprises and investment as a share of gross investment (EFW Database). Similarly, Hungary’s freedom to trade internationally improved 84.4% (EFW Database). In 1989 65% of trade was with the CMEA; by the end of 1997 trade with the OECD accounted for 85% of Hungary’s total (State Department). In terms of regulation, Hungary has seen its largest increase in economic freedom. Its score has risen 114.7% over the fifteen year period, rising from 4.5 to 8.3 (EFW Database). Many factors have driven this increase, including the elimination of military conscription and an increase in the extension of credit, as well as the privatization of the banking sector (EFW Database). Foreigners currently control 70% of the financial sector, drastically increasing the percentage of deposits held in private banks (State Department).

52 However, this does not translate into halcyon days in Hungary. Economic reforms have largely stalled, and the government doubled the minimum wage, added a 13th month of payments to pensioners, and increased public sector salaries by 50% (Perry WSJ). In September 2006, it was revealed that the current government had been lying about the economy for years, in order to improve its electoral chances in the April 2006 election by making the economy appear better performing (Economist 9/21/06). This admission led the government to come clean, admitting a staggering government deficit over 10%, double what it stated before the elections (Economist 9/21/06). This deficit is by far the highest in the EU and portrays a Hungarian economy standing dangerously close to the edge (Economist 9/21/06). Tangled in all of this are hopes that Hungary, which joined the EU in 2004, will qualify for the European Monetary Union by 2010. However, this involves having a budget deficit of 3% or less for two years before the euro is to take effect (Dunai WSJ). The government, which is still in place half a year after admitting its malfeasance, has proposed an austerity program that includes raising taxes, cutting spending, trimming the public payroll, reducing the number of top officials, ending universal healthcare at the point of delivery, increasing tuition fees for higher education, lowering gas subsidies, and cutting pensions (Economist 9/21/06). While these reforms show promise, the Hungarian public since 1990 has responded poorly to policies that hurt their standard of living, even if only in the short-run (Berry). In terms of Hungary’s ability to improve institutions over the past twenty five years, there are some things that should be noted: 1. Hungary is largely homogenous. Hungary is 90% Magyar, with 4% Romany and a sprinkling of regional ethnicities (State Department). 2. It has a history of free trade, brought about by geography and poor resource wealth (State Department). 3. After the fall of communism, there may have been nowhere to go but up. Institutions possibly improved because any reforms were bound to be better than what was in place under communism. 4. Hungary is European, and best practices and institutions have possibly seeped over borders. 5. Hungary was the first former Soviet bloc country to reform, and subsequently had a first mover advantage in terms of foreign investment. 6. The Hungarian communist government laid the groundwork for smooth, peaceful transition. This meant few resources were wasted in sectarian fighting or oligarchic competition.

While none of these, or even all of these, may fully explain Hungary’s huge increase in institutional quality over the past twenty five years, they may have some explanatory power, especially when viewed cumulatively. There are many former Soviet bloc countries whose institutions did not improve nearly as much as Hungary’s, or grow economically as robust.

53 Table 3.11: Hungary Hungary 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 9768 1106 4166 3712 4606 5482 GDP_per_capita_PPP_2000$_Gro wth% NA 13.28 -62.35 -10.89 24.07 19.03 P4_POLITY2 -7 -7 10 10 10 10 FreedomHouse_Political_Rights 6 5 2 1 1 1 FreedomHouse_Civil_Liberties 5 5 2 2 2 1 HeritageEF_Score NA NA NA 2.93 2.38 2.55 EFW_Size_Govt 3.77 2.92 2.94 4.73 4.76 5.27 EFW_Legal_System_Protec_Prop_ Rights NA 6.78 7.25 7.6 7.01 6.42 EFW_Access_To_Sound_Money 6.48 6.82 5.65 6.24 7.11 9.46 EFW_Freedom_Trade_Internat 4.35 4.46 4.86 7.11 7.77 8.34 EFW_Regulation 3.82 3.37 4.61 6.05 6.99 7.27 Fraser_EFW_INDEX_Total Score 4.6 4.87 5.06 6.34 6.73 7.35 Human_Devel_Index(HDI)_Value 0.798 0.811 0.811 0.815 0.845 0.869

Iceland

Iceland has one of the world’s highest levels of gross domestic product (GDP) per capita, it has one of the smallest populations in Europe, with 300,000 ethnically homogenous Icelanders. It has no army, and is isolated on an island the size of Ireland just below the Arctic Circle. Since 1980, Iceland’s Economic Freedom of the World (EFW) score has increased significantly. In 1980, its score was 5.1, and was ranked 67th overall. By 2004, its score had improved 2.81 points and was ranked 9th overall, jumping 58 spots. Even more remarkably, it is possible percentage increase was 59%, the highest for the time period, beating better known success stories like Ireland, the Baltic countries, and the Asian tigers (EFW Database) Iceland was the last European country to be settled. Members of the Norwegian aristocracy fled to Iceland in the 10th century, then an uninhabited island, seeking independence. Even with its late founding, Iceland was the first country in Europe to adopt a representational parliamentary system. (Horton) Historically, Iceland has been dominated by , which controlled it for over 500 years, until the 20th century (Horton). During this time, Denmark dominated Iceland’s political and economic institutions, with its king having absolute control over Iceland politically, as well as holding a foreign trade monopoly (Horton). Trade restrictions with the rest of the world were not lifted until 1862, and by 1904 Iceland had gained home rule. In 1944 it gained complete independence from Denmark, and has been a republican democracy since (Horton). Its elections are free and fair, and Freedom House’s Freedom in the World Survey has given Iceland its highest scores for political rights and civil liberties since the Survey began in 1972 (Freedom in

54 the World Survey). In addition, Iceland is tied for the top spot (with Finland and New Zealand) on Transparency International’s Corruption Perceptions Index (CPI). While Iceland’s political institutions have historically been strong, its economic institutions have not fared as well. Iceland’s economy has battled large swings in inflation, growth, and recession over the last fifty years, recording negative annual growth rates 13 times (Snaevarr). The period between 1980 and 2005 has echoed these large swings in economic growth. While maintaining healthy averages, annual growth fluctuated wildly during the 1980’s and 1990’s, moving from high growth one year, to zero or negative growth the next7 (Snaevarr). During the 1980’s, Iceland averaged annual GDP growth of 3.2%, and 2.3% in the 1990’s. What has changed over the past ten years is that Iceland has maintained strong and steady growth, rather than the wild swings it saw in previous periods. During the ten years from 1996 to 2005 Iceland averaged 4.2% annual GDP growth, with only a brief recession in 2002, brought on by a worldwide downturn (World Development Indicators; State Department). These wild fluctuations are in part due to the small size of the economy and its lack of diversification. Iceland has little mineral wealth, although an abundance of geothermal resources, which it is exploiting in order to entice energy intensive businesses with its low cost energy (Snaevarr). Iceland’s economy is largely dependent on the fishing industry. Even today, the fishing industry provides almost 60% of export earnings, swaying the economy with its annual catch (CIA). This sector came under increasing pressure in the 1970’s and 1980’s, as Iceland suffered from overinvestment in fisheries and depletion of its stocks (Snaevarr). In order to counteract this, in 1984 the government instituted a property rights regime for the stocks through a quota system, where property rights were assigned on the basis of a firm’s previous three-year catch history (Gissurarson; Snaevarr). These rights were then transferable to other firms, creating a market for potential fish catches, as well as an incentive for long-term preservation (Gissurarson). While Iceland is not part of the European Union, it is part of the European Economic Area (EEA), which it joined in 1993 (Snaevarr). This allows most of Iceland’s goods free access to the EU common market, where, in 2005 Iceland sold 77.2% of its exports (Snaevarr). During the 1980’s, Iceland had enormous monetary problems. For the decade, inflation averaged 39.3% annually, and reached as high as 83% in 1983 (World Development Indicators). In turn, roughly half of Iceland’s improvement in the Economic Freedom of the World index during the twenty five year period was found between 1985 and 1990. Most of this improvement was realized through improving monetary policy. The “sound money” score improved 240%, after beginning the period at 2.0. Inflation, though still high in 1990, had been stabilized. And Icelanders are able to own foreign currency bank accounts both at home and abroad. (EFW Database) Overall, from 1980 to 2004, Iceland improved in every category, though two in particular stand out: Iceland’s “sound money” and regulation scores. Monetary policy continued to make improvements, the EFW in area 3 increased an astounding 275% since 1980. This is due to the previously mentioned reasons, along with inflation falling from 52.5% in 1980 to 2.8% in 2004. (EFW Database)

7 For instance, in 1987 Iceland’s growth rate was 9%; in 1988 it was slightly negative.

55 Also, in 2001 the central bank was made independent, and the national currency was freely floated on the market (Central Bank of Iceland). The central bank is mandated with keeping inflation low, targeted at 2.5%, with bands of 1.5% on either side (Snaevarr). If either band is violated, the central bank is directed to return the inflation rate to within the band as soon as possible (Snaevarr). Iceland also markedly improved in terms of “regulation”, increasing its score by 54.5% (EFW Database). The commercial banking sector, which had formerly been dominated by state banks, was completely privatized (Gissurarson). In addition, interest rate regulations were largely eliminated, with interest rates now primarily determined by the market (EFW Database). By the mid 1990’s, both long- and short-term capital controls had been removed (Snaevarr). The corporate tax system was restructured during this period, reducing it to 18% (WSJ). As the corporate tax rate fell between 1991 and 2001 from 45% to 18%, revenues tripled. Also during this period, the top marginal tax rate was cut, from 63% to 39% (EFW Database). Icelanders currently have: the second highest score on the Human Development Index (Human Development Report); the eighth highest average life expectancy in the world, at 80.31 years (CIA); full literacy (State Department); the highest per capita publication of books and magazines (State Department); and high marks on numerous other quality-of-life measures. While Iceland’s reforms were achieved on the heels of economic swings in the 1980s those swings were far from extraordinary on a global scale. Other factors that may have contributed to Iceland’s large increase in economic institutional quality following the 1980s include:

1. Iceland is homogenous. Nearly all of its people are indigenous, and nearly all belong to the same faith (90% Lutheran), as well as speak the same language.

2. Iceland is a small island. With exceptionally strong social bonds created through a small population with little access to, or interference from outsiders, these bonds can help smooth over rough patches caused by reforms.

3. Even though it is isolated, it is European. Best practices and strong institutions are found throughout Europe, and potentially crossed its borders. Also, Icelanders are originally Norwegian, which has a history of strong political institutions8 (Polity IV).

4. Iceland is a member of the European Economic Area. Through this it has access to an enormous market for both exporting and importing.

5. Iceland has a very even standard of living distribution (Horton). This may decrease social fissures.

8 received Polity IV’s highest rating for the entirety of the 20th century, excluding the years of Nazi occupation (Polity IV).

56 Table 3.12: Iceland Iceland 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 20622 22343 26483 25502 30704 33824 GDP_per_capita_PPP_2000$_Gro wth% NA 8.35 18.53 -3.70 20.40 10.16 P4_POLITY2 NA NA NA NA NA NA FreedomHouse_Political_Rights 1 1 1 1 1 1 FreedomHouse_Civil_Liberties 1 1 1 1 1 1 HeritageEF_Score NA NA NA NA 2.11 2.05 EFW_Size_Govt 5.12 5.35 6.03 5.72 5.91 6.75 EFW_Legal_System_Protec_Prop _Rights 6.83 7.88 8.35 8.3 9.03 8.86 EFW_Access_To_Sound_Money 2.38 2.05 6.79 9.45 9.18 9.02 EFW_Freedom_Trade_Internat 5.57 5.59 5.86 6.5 6.9 6.39 EFW_Regulation 5.5 5.51 5.76 7.01 7.56 8.51 Fraser_EFW_INDEX_Total Score 5.08 5.28 6.56 7.4 7.72 7.91 Human_Devel_Index(HDI)_Value 0.888 0.897 0.916 0.921 0.945 0.96

Ireland

For much of the twentieth century, Ireland was the sick man of northwestern Europe. Its economy steadily declined in relation to its neighbors from the beginning of the century through the 1950’s (Powell 2003: 432). Ireland’s people regularly left its shores seeking work, leaving an economy that simply couldn’t sustain them. However, in the late-twentieth century the Irish economy sky-rocketed, producing among the highest growth rates in the world. The “Celtic tiger”, as it has been nicknamed, became one of the most dynamic economies in the world, seemingly overnight. However, it was much longer in the making. While economic growth may have taken off in the last quarter of the 20th century, Ireland’s political institutions were already strong and stable. Ireland has been assigned Polity IV’s highest POLITY score since 1952, and was highly rated for most of the rest of the century. Freedom House’s Freedom in the World Survey has given Ireland its highest score in both political rights and civil liberties since 1976. Both of these measures demonstrate the free and stable nature of Ireland’s political institutions. Ireland’s economic institutions have rapidly improved. Ireland’s Economic Freedom of the World (EFW) score increased 1.9 points from 1980 to 2004, rising in the overall rankings from 22nd to 7th, which translated into the eleventh highest percentage improvement in relation to possible improvement. While Ireland’s economic rise began in earnest in 1987, the roots of this growth were planted much earlier. In the 1960’s the Irish government began a new strategy emphasizing exports (Considine and O’Leary 1999: 117, as cited by Powell 2003: 433). It unilaterally cut tariffs in 1964 and 1965 and entered into a trade agreement with the United Kingdom. During this decade Irish output expanded by 4.2% annually; however, Ireland did not improve its living standards in relation to the rest of Europe, which

57 experienced average annual growth of 4% (EIU 2000: 5, as cited by Powell 2003: 433; Powell 2003: 433). In 1973 Ireland joined the European Economic Community, the forerunner to the European Union. This year also marked the beginning of a large increase in government spending. Responding to the first oil shock and lasting through the second one in 1979, the Irish government tried to increase aggregate demand by increasing government spending (Powell 2003: 433). This translated into large government debts. For instance, in 1977 the government raised spending, which increased public sector borrowing from 10% to 17% of GNP, even though it was accompanied by an increase in taxes (Powell 2003: 433-434). From 1977 to 1981, all categories of government spending increased. Compounding this, international interest rates were at all-time highs, and Ireland was required to pay a high risk premium (Powell 2003: 434). By 1987, Ireland was on the brink of a fiscal crisis, which forced radical changes. The recently-elected government drastically cut government expenditures, even though it had previously campaigned on more spending (Powell 2003: 435). This was done out of necessity. Increasing taxes hadn’t worked, and since Ireland had joined the European Monetary System, it couldn’t monetize the debt (Lane 2000, as cited by Powell 2003). It cut spending across the board9 and eliminated 10,000 public sector jobs, through early retirement and other voluntary incentives (Jacobsen 1994: 177-78, as cited by Powell 2003: 435). The budget for 1988 contained the biggest spending cuts in 30 years, reducing current spending by 3% and capital spending by 16% (The Economist 1988: 9, as cited by Powell 2003: 435). Between 1987 and 2000, the Irish economy grew, on average, 6.9%, including average annual growth just under 10% between 1995 and 2000. In 1987, Irish GDP per capita was about 63% of that of the United Kingdom. By 2000, Ireland’s GDP per capita was 114% of the United Kingdom’s (World Development Indicators). During this period of high economic growth, the government cut both personal and corporate taxes. In 1985 the top marginal tax rate was 65%; by 2001, it was 44%. By 2000, the standard tax rate was down to 22%, from 35% eleven years earlier (Powell 2003: 436). And most dramatic of all, the corporate tax rate by 2003 had fallen to 12.5%, from 40% in 1996 (Department of State; Powell 2003: 436). According to Economic Freedom of the World measures, Ireland’s economic institutions improved in all areas from 1980 to 2004. Of these, the two largest percentage increases have been in “sound money” and “size of government”. Ireland’s score in the category of “sound money” increased 67.2%. This was due in part to average growth of the money supply minus real GDP decreasing from 12.9% in 1980 to 0% in 2004. Another driver of this growth was the decrease in inflation, which fell from 14.7% to 2.19% during this period. (EFW Database) In terms of “size of government”, Ireland’s score improved 36.2%. This was due largely to the decrease in government enterprises and investment as a share of gross investment, from 24.6% in 1980 to 11.3% in 2004. Additionally, Ireland’s top marginal tax rate was cut to 42% by 2004, an 18% improvement over 1980. (EFW Database) Until the current economic crisis, which hit Ireland particularly hard in real estate and building, the Irish economy performed strongly in the new millennium, although

9 The cuts were: healthcare 6%; education 7%; agriculture 18%; roads and housing 11%; and military spending 7% (Powell 2003: 435)

58 down from the high growth rates of the late 1990’s. The Irish economy grew at 5.5% in 2005 and is forecasted to grow at 5% in both 2006 and 2007 (Europa Ireland). The Irish government’s economic policy is still kept in check by both the European Monetary System and the Treaty of Maastrict, which it signed in 1992 (Powell 2003: 436). These bind the government’s ability to use inflation, fiscal deficits or debt to finance increases in spending (Powell 2003: 436). Consequently, the only way to increase spending is through higher taxation, which the voters can keep in check. Quite possibly the greatest sign of economic health is that after the reforms took hold Ireland achieved its highest population since 1861, largely due to Ireland converting from a net exporting of people to a net importer with strong immigration into the country for the first time.. Not coincidentally, the largest group of immigrants coming to Ireland are the Irish themselves, returning home after working abroad (Zuleeg).

Table 3.13: Ireland Ireland 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 10381 12229 13784 16794 25271 29060 GDP_per_capita_PPP_2000$_Gr owth% NA 17.80 12.72 21.84 50.47 15.00 P4_POLITY2 10 10 10 10 10 10 FreedomHouse_Political_Rights 1 1 1 1 1 1 FreedomHouse_Civil_Liberties 1 1 1 1 1 1 HeritageEF_Score NA NA NA 2.2 1.86 1.79 EFW_Size_Govt 4.67 4.26 5.56 5.76 6.13 6.4 EFW_Legal_System_Protec_Prop _Rights 7.08 6.65 7.73 9.09 8.97 8.78 EFW_Access_To_Sound_Money 5.77 6.63 6.77 9.6 9.44 9.74 EFW_Freedom_Trade_Internat 7.53 7.46 7.35 8.61 9.1 8.58 EFW_Regulation 5.97 6.26 6.32 7.8 7.01 6.99 Fraser_EFW_INDEX_Total Score 6.2 6.25 6.75 8.17 8.13 8.1 Human_Devel_Index(HDI)_Value 0.828 0.848 0.873 0.897 0.932 0.956

Israel

The Israeli economy has undergone a profound shift in the last 25 years from one that was heavily socialist, in the western European sense, to one that while still largely hindered by government regulation, is much freer today. Several prominent developments can help explain this transformation. In addition to a broader world-wide disillusionment with socialism since 1990, Israel has been influenced politically by a large influx of Jews from the former Soviet Union. And the wide-spread failure of kibbutzim combined with the experiences of Jewish emigrants from the Soviet bloc has lead to increased demand for market reforms. Economic crises in the 1980s that led to high levels of inflation

59 further increased demands for reform. And the election of a conservative government in response to the renewed intifada of 2000 brought political power to the hands of pro- market reformers. In the period from 1980 to 2004 Israel was the second largest improver in the EFW rankings based on available improvement. During the same period, 1980 – 2004, the number of religious kibbutz communities declined. Kibbutzim were socioeconomic systems based on the principle of joint ownership of property, education, equality and cooperation. In the early 1980’s, Israel experienced hyperinflation of almost 400% a year. Kibbutzim borrowed heavily with the expectation that the inflation would eliminate their debt. When the Israeli government reduced the inflation to 20% the kibbutzim were heavily in debt. Even though only 4% of the population was involved in kibbutz they were held 15 % representation in the country’s legislative body. The government intervened in 1996 and reached an agreement with bank lenders and kibbutz communities to pay between 25% and 35% of the debt, and receive in return 27% of their land. The failure and decline of kibbutzim coincided with more widespread disillusionment with socialism at the end of the Cold War. After decades of uncertainty about its security in the Middle East, by the late 1980s Israel seemed to shift focus away from purely survival to economic development and modernization. Since the 1980’s Israel has entered into 35 agreements for the promotion and protection of investment and some 34 agreements on the avoidance of double taxation. Agreements were signed with many trading partners – the European Union, China, Hong Kong and Singapore. Israel has been a member of the WTO and its predecessor GATT since 1962. For the past twenty years, Israel has sought to more steadily integrate the economy into world markets. The US – Israel Free Trade Agreement, which took effect on Sept. 1, 1985 was designed to stimulate bilateral trade between the US and Israel. The agreement eliminated duties on all merchandise from Israel entering the US (USTR). In 1985 all exports from Israel to the US were accorded duty-free treatment. The United States became the main trading partner of Israel, receiving 41% of total Israeli exports. The Israeli economy is a diversified and technologically advanced mixture of private, state and cooperative ownership. The public sector is substantial but decreasing and government companies still play significant role in Israel’s economy. Subsidies were reduced noticeably after 1985 when the government adopted the Economic Stabilization Program. This was a comprehensive program designed to reduce high inflation rates and constant budget deficits (Israel Ministry of Finance). Water, public transportation and agricultural productions remained under governmental protection, while big enterprises like El Al (airline industry), Zim (navigation), and Bezeq (communication) were privatized, along with another 79 companies. (Europa: Economy, Alan J. Day) By the early 1990s there seemed to be a growing consensus that the only effective way to achieve the goal of increased economic competitiveness, and thus security, was to privatize enterprises, eliminate subsidies and reduce the budget deficit. Israeli economic growth received a big boost after communism in Eastern Europe collapsed and over 1.2 million people of Jewish background, predominantly from the former Soviet Union, immigrated to Israel. This transfer of human capital was enormous for a country the size of Israel. As a result there was a rapid increase of the unemployment rate. Highly skilled, well educated immigrants brought their wealth and

60 knowledge to Israel and created the potential for knowledge intensive industries to grow along with a strong distaste for the former Soviet economy. A policy adopted by the Israeli government in the early 1990s intended to expose the domestic economy to foreign competition and as a first step trade barriers and import restrictions were eliminated and tariff rates have been reduced. The policy’s goal was to deepen economic activities in old and new markets, improve Israel’s export, create an attractive climate for potential investors and enhance the competitiveness of Israeli economy in domestic and foreign markets. The average rate of tariffs in 2005 was 2.4 percent (source Index of Economic Freedom 2007). The remarkable economic development of Israel in the last decades is also a result of better access to sound money. The area rating for sound money in the EFW index shows that Israel’s monetary score moved from an abysmal 1.75 in 1980 to 9.36 in 2004. There has also been improvement in the banking and financial sectors although they are still heavily burdened by regulation. And comprehensive legal reform in areas, such as intellectual property and competition law, directly related to deregulation has created a more favorable business environment for foreign investment. After the renewal of the intifada in 2000 a conservative government under the leadership of Ariel Sharon came to power and has promoted broad economic liberalization. Finance Minister, and former Prime Minister, for the Sharon government, Benjamin Netanyahu, has lead much of the reform effort. Netanyahu unveiled a “Program for the Resuscitation of Israel’s Economy” that included broad decreases in public spending, government layoffs, and stepped up privatization. Since 2000 Israel’s score in Area One, size of government, has improved significantly from 2.65 to 5.78, leading the continued improvement in its overall economic freedom score.

Table 3.14: Israel Israel 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 15519 16534 14505 16697 18363 17772 GDP_per_capita_PPP_2000$_Gro wth% NA 6.54 -12.27 15.11 9.98 -3.22 P4_POLITY2 9 9 9 9 10 10 FreedomHouse_Political_Rights 2 2 2 1 1 1 FreedomHouse_Civil_Liberties 2 2 2 3 3 3 HeritageEF_Score NA NA NA 2.9 2.7 2.41 EFW_Size_Govt 1.87 2.55 3.29 2.83 2.65 5.78 EFW_Legal_System_Protec_Prop _Rights 4.06 6.78 4.39 6.98 8.01 6.74 EFW_Access_To_Sound_Money 1.75 1.25 2.95 7.43 8.09 9.36 EFW_Freedom_Trade_Internat 6.68 6.65 6.68 6.35 7.9 7.94 EFW_Regulation 3.52 3.34 4.27 4.97 5.91 5.92 Fraser_EFW_INDEX_Total Score 3.57 4.11 4.32 5.71 6.51 7.15 Human_Devel_Index(HDI)_Value 0.829 0.85 0.867 0.89 0.918 0.927

61 Jamaica

The island of Jamaica has experienced significant transitions over the last fifty years. Once Great Brittan’s highly profitable agrarian slavery hub, the nation gained full independence in 1962. After independence and under the leadership of a series of successful conservative Prime Ministers, Jamaica’s economy grew at an average of 6% per annum over ten years. This expansion complemented private industrial investments in bauxite (used in the production of aluminum), manufacturing and tourism. These advancements successfully transitioned the island’s economy away from reliance on agricultural products. The Jamaican Labor Party (JLP), one of two major political players in the country, led the country’s economy through significant growth. Enhanced exports and heightened tourism fueled the country’s economy until 1972 when political power transitioned into the hands of the People’s National Party (PNP), lead by Michael Manley. Manley’s campaign benefited from the unpopularity of the incumbent, Hugh Shearer. Shearer caused unrest when he expelled a popular Jamaican historian who advocated increased living standards for the poor. Manley gained office with his platform of “a new hope for Jamaica” (Country Case Studies). Alongside Manley, democratic socialism- the PNP platform- turned the nation’s policies toward interventionism. Throughout his leadership during the 1970s, Manley promoted economic interventionism; Manley introduced several key policies which took Jamaica’s once growing economy on a downward spiral (Essix). Manley furthered his socialist measures through extensive social welfare programs, which were implemented within his first year of power. These reforms involved highly subsidized food, housing, education, health, and countless other goods and services throughout Jamaica (Essix). As the economy became stifled, unemployed rural citizens flooded the coastal cities in hopes of finding work – now the urban slum areas characterize Jamaica today (The World Factbook). This demographic transition accompanied inflation of more than 50%. Political tension between the JLP and PNP increased and led to a spurt of politically affiliated rival gang violence, considered a Jamaican civil war. Violence escalated throughout Manley’s second term beginning in 1976. Manley’s second term as Prime Minister proved even more devastating to the nation’s previously thriving economy. Throughout the late 70s, Manley allied Jamaica with the Cuban government in attempts to create solidarity between third world nations. Jamaican officials quickly lost support from global leaders- including the United States. Manley’s actions fueled political hostility. The trend of violence and socialist policy continued until the 1980 elections when the JLP again took office under Edward Seaga. This transition marked the second highly significant shift in policy since the nation gained independence. Manley’s depleting number of followers opened the door for Seaga and the JLP party to enter office (Country Case Studies). The decade of socialist reign forced Jamaica into extreme levels of poverty and debt for a once thriving economy. The 1980 Economic Freedom of the World Index (EFW) rated Jamaica at 3.87.

62 This period marked the beginning of a turnaround for an economy on the brink of destruction. Embarking on macroeconomic and institutional reforms to liberate Jamaica’s economy, the administration made economic growth and taming high inflation a priority (COHA). Policy adjustments were made to remove state control over prosperous enterprises. The administration took a new pro foreign investment stance on Jamaica’s economy. Throughout the early 1980’s, Seaga’s efforts to turn the economy into a more market oriented direction were frustrated as growth only occurred sporadically. As the JLP focused on long term development within the country, Jamaican citizens associated the JLP with stagnant change throughout the decade. New economic reform began to take place in the late 1980s with assistance from the World Bank and the IMF. These reforms were initiated due to Jamaica’s extensive international debt. These plans involved reduced tariffs, and devaluation the Jamaican dollar (J$). Seaga approached national budget management through layoffs of ineffective public sector employees, government divestment in enterprise, and tax reforms. Significant tax cuts occurred for top marginal tax rates. Between 1980 and 1990, Jamaica lowered its top marginal tax rate from 58 to 33 percent (Reynolds). The EFW Rankings reflect this change in the 1985-1990 Size of Government breakdown. This particular category improved by 34.8% in five years. While two of the subcategories that comprise the Size of Government rank slightly decreased, the Top Marginal Income Rate on Taxes improved a significant 66.7% (Freedom in the World). In 1989 the historically economically devastating PNP won another election. The party succeeded in the election through a nationally proclaimed change in platform, which focused on economic development through a “realist” point of view- forgoing the party’s original socialist platform. Some scholars have suggested that the unexpected electoral shift occurred – in spite of economic growth – due to dissatisfaction in the JLP’s aide during the devastating 1986 Hurricane Gilbert. While certain sectors of the economy suffered throughout the late ‘80s due to the natural disaster, the economy overall only suffered mildly. New leadership under the PNP inherited one of the largest per capita national debts in the world. Throughout the 1990s, the administration under James Patterson followed Seaga’s footsteps in attempts to reduce inflation and unemployment. Jamaica established and maintains a floating exchange rate (Jamaica Economy). While Patterson’s administration took effective measures to lower inflation, the unemployment level remained unchanged (The World Bank). As of 2004, Jamaica’s legal system made a 29.2% improvement, yet remained relatively low at a 5.4 rank. The creation of a sound monetary system represents the most significant change in economic freedom during this time—a 78.3% increase in the access to sound money ranking. This factor alone greatly contributes to Jamaica’s overall EFW rank improvement by thirty-five slots (75th place worldwide in 1980 to 40th in 2004) within twenty-four years. Between the years of 1980 and 2004, Jamaica surpassed international expectations. While the island-nation remains in considerable debt, its once out of control inflation and unemployment levels have become more manageable. In the 2004 EFW report, Jamaica ranked 8th worldwide for most increased percentage change since 1980 (EFW Database).

63 Table: 3.15: Jamaica Jamaica 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 3185 3144 2770 3240 3100 3248 GDP_per_capita_PPP_2000$_Gr - owth% NA -1.29 11.87 16.95 -4.34 4.78 P4_POLITY2 10 10 10 9 9 9 FreedomHouse_Political_Rights 2 2 2 2 2 2 FreedomHouse_Civil_Liberties 3 3 2 3 2 3 HeritageEF_Score NA NA NA 3.11 2.66 2.81 EFW_Size_Govt 2.23 5.41 6.99 7.36 7.52 7.68 EFW_Legal_System_Protec_Prop _Rights 3.28 3.52 4.23 5.14 5.17 5.42 EFW_Access_To_Sound_Money 5.15 3.98 4.57 6.1 8.72 8.72 EFW_Freedom_Trade_Internat 4.87 6.2 5.34 7.47 7.2 6.96 EFW_Regulation 5.85 5.62 6.52 6.23 6.35 6.24 Fraser_EFW_INDEX_Total Score 4.28 4.95 5.53 6.46 6.99 7.01 0.69 Human_Devel_Index(HDI)_Value 0.695 9 0.719 0.725 0.737 0.724

Kuwait

Kuwait’s economic freedom score has increased significantly in the last two decades. The score in 2004 was 7.4 up from 5.8 in 1980. Kuwait’s economic reforms have largely been influenced by two things, the 1990 invasion by Iraqi and the fluctuation in world oil prices. Periods of high oil prices have provided cover for interest groups afraid that pro-market reforms would weaken their influence and have been used as an excuse to put off needed reforms. Kuwait became independent from the British Empire in 1961. The British withdrew their special court system, which was used to govern cases of foreign residents in Kuwait. The Kuwaiti Government established a new legal system with new laws written by an Egyptian jurist. Kuwait’s future development was transformed when in 1938 it was discovered that the country is enormously rich in oil. Refining operations in Kuwait started in 1949, after a delay caused by World War II. During the same year Kuwait became a founding member of the Organization of Petroleum Exporting Countries (OPEC). The cartel became a major political force in 1973 when the Arab members of OPEC formed an overlapping group and boycotted the United States and Western Europe for their support of Israel in the Yom Kippur War of 1973. The rapid increase in oil prices gave the countries an opportunity to achieve significant economic growth and also signaled the importance of their natural resources and the potential of using it as a tool to control oil prices on the world markets. But the oil boom also allowed Kuwait and other oil rich countries to avoid the reality of the need for institutional reform as oil money smoothed over what was otherwise an inadequate economic system. (Al-Ebraheem 1996)

64 In 1976 The Government using the rate of return from high oil prices, established The Reserved Fund for Future Generations with an initial endowment of 7 billion US dollars. Money from oil revenue was invested in foreign property and industries. In the late 1980’s Kuwait was earning more from its overseas investments than from the direct sale of oil (Crystal 1989). The Kuwaiti Government is the main employer in the country. Kuwaitis are guaranteed state jobs and preferential treatment, including salaries and pensions. And the government provides a generous cradle-to-grave entitlement system. Nationals are entitled to free education, health care and variety of subsidized services like marriage bonuses, housing loans, etc. (Crystal 1989). Additionally, the government subsidizes power, water, bread and other essential products. Kuwaiti citizens are guaranteed jobs by the state and all, except 7% of the workforce are civil servants. This situation raises a dilemma – it is virtually impossible for the private sector to fill available mid-level job vacancies. A side effect of the status quo is the lack of desire to take entrepreneurial risks (Economist 2001). The Iraqi invasion of Kuwait in the summer of 1990 had an enormous negative impact on Kuwait’s short-run economic development. The country was looted as many valuables were taken from the local population and transported to Iraq. And the oil industry was significantly damaged by the fires set by the retreating Iraqi army. After the end of the Gulf War Kuwait began economic reforms aimed at encouraging international investment to overcome war losses. It allowed 100% foreign ownership of firms based in Kuwait with the exception of the oil extraction industry. The Kuwaiti government also reduced discrimination against foreign companies by reducing corporate profit taxation from 55% to 25% (local companies are not tax liable). There was already no income tax as over 90 percent of government revenue comes from government owned firms. One of the issues driving reform was the inefficiency of Kuwait’s oil pumping—Kuwaiti technology was outdated and some 20 years behind its competitors. Attracting foreign capital could finance the processes of modernization and bring technical expertise. (Pfiefer 2002) Kuwait passed the Foreign Direct Investment Act in March of 2001. The Act guaranteed long-term protection against expropriation and eliminated the requirement that a foreign company needs to have a Kuwaiti sponsor or a partner. Property rights, while stronger than in pre-invasion Kuwait, are still weakened by a judicial system that is seen as non-independent and biased against foreigners. All judges are appointed by the Emir and dependent on his approval for reappointment. Unlike many countries surveyed in this chapter Kuwait’s scores in terms of sound money were significantly higher than its scores in other areas in 1980 and have improved even more in recent years as inflation has been lowered and foreign banks have been allowed greater access to the country, (Siddiqi 1999) although the government retains significant stakes in Kuwait’s banks. Stability of the local currency, the Kuwaiti dinar, was further improved through formally “tying” it to the US dollar. A group of six Gulf monarchies agreed in 2003 to a plan to create a single currency zone in the Gulf by 2010. As part of the plan their currencies were pegged to the U.S. dollar. With the falling value of the dollar in recent years, the plan has begun to break down and in the summer of 2007 the Kuwait government revalued the currency and there is speculation that several other

65 Gulf regimes will follow suit, although the Kuwaiti central bank maintains its public commitment to the idea of currency union by 2010. During the late 1990’s there was a broad consensus that reliance on a single commodity and extremely high level of government spending was cause for concern and required immediate response to strengthen financial security. There is continued talk within the government that privatization and deregulation programs could promote growth and diversification of the private sector, yet vested interest groups and high oil- revenue have limited action in recent years. Prime assets for privatization are Kuwait Airlines, telecom networks, electricity and water supplies. Economic reforms in Kuwait have been closely associated with talk of political reforms. Following the American led liberation of the country and reestablishment of the Kuwaiti government in the early 1990s there was a broadly pro-Western attitude in the country and women gaining the right to vote was considered a serious possibility. The first attempt at granting women suffrage failed in the 1990s but was finally achieved in 2005 . However, Kuwait remains a monarchy with most real power vested in the ruling family. Further progress toward greater civil liberties was made in 2006 when rights of public assembly with government permits were expanded. The Freedom House scores for Political and Civil liberties have improved slights from their lows in 1980 of 6 to a 4 for Political freedom and a 5 for civil freedom today. Concerns about the need for economic reforms are raised every time the price of oil falls and the country faces difficulties paying for government expenditures. The government’s interest in economic reforms seems to follow the price of oil. When the price is high there are not any real incentives to open the economy and risk alienating powerful interests.

Table 3.16: Kuwait Kuwait 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 19579 11952 NA 19048 17222 19551 GDP_per_capita_PPP_2000$_Gro - wth% NA 38.96 NA NA -9.58 13.52 P4_POLITY2 -10 -8 NA -7 -7 -7 FreedomHouse_Political_Rights 6 6 7 5 4 4 FreedomHouse_Civil_Liberties 4 5 7 5 5 5 HeritageEF_Score NA NA NA NA 2.5 2.75 EFW_Size_Govt 2.97 1.19 3.15 3.83 6.12 6.06 EFW_Legal_System_Protec_Prop _Rights 1.84 5.85 2.73 6.49 6.95 6.81 EFW_Access_To_Sound_Money 4.86 8.56 7.06 8.89 8.08 9.3 EFW_Freedom_Trade_Internat NA 6.94 6.96 6.8 7.23 6.68 EFW_Regulation 5.13 5.49 3.5 4.89 5.14 7.6 Fraser_EFW_INDEX_Overall 5.8 8.0 5.1 6.6 6.7 7.4 Human_Devel_Index(HDI)_Value 0.778 0.781 NA 0.814 0.841 0.871

66 Myanmar

The country of Myanmar is governed by a repressive military regime. This regime changed the name of the country from “Burma”, although the deposed democratically elected Parliament of 1990 still refer to the country by its original name. The State Peace and Development Council (SPDC), the military junta, rules by decree, controlling the legal institutions and depriving the country’s citizens of many civil and political rights. The regime conducts rampant human rights abuses, which has led to economic sanctions by the international community and impeded developmental progress. The Economic Freedom of the World: 2006 Annual Report ranks Myanmar as 129, out of 130 countries, as one of the two least economically free countries, only ahead of Zimbabwe. (Gwartney and Lawson 2006) The British controlled parts of Burma as early as 1824 and ruled until 1948. Britain implemented administrative institutions and reorganized the agriculture industry, enabling Burma to become a leading exporter of rice by 1939. After World War II Burma gained independence, a constitution was completed in 1947 and independence was achieved in January 1948. The top administration members were assassinated before the constitution went into effect. The ensuing chaos plunged the country into economic crises and internal violence among political and ethnic rivals. (US Dept of State 2007) Burmese armed forces, led by Ne Win, staged a coup d’etat in 1962 and established a one-party state under the Burma Socialist Program Party (BSPP). The military government abolished the constitution and implemented the Burmese Way to Socialism, which included socialist economic policies, isolationism, and a police state. These policies had a detrimental effect to the Burmese economy, and reversed the fortunes of a Southeast Asian country that had prospered under a parliamentary British system. (US Dept of State 2007) The BSPP and Ne Win controlled the political system until 1988, when extensive student-led demonstrations forced the resignation of Ne Win as party chairman and San Yu from the head of government. General Saw Maung and Brigadier General Khin Nyunt ordered the country placed under military rule. This strategy has been interpreted as a means of Ne Win to retain power through an indirect military coup and in turn create the State Law and Order Restoration Council (SLORC). Once established, the SLORC targeted and minimized political opposition. The SLORC ruled by martial law without a constitution, until international pressure caused them to hold a national parliamentary election in May 1990. Although the opposition, the National League for Democracy (NLD), won 392 out of 485 parliamentary seats, the SLORC did not allow the NLD legislature to assemble. The ruling junta refused to accept defeat and proceeded to jail dozens of those connected with the NLD. (Freedom House 2007) Already low, Myanmar’s score on the Economic Freedom of the World Chain-Linked Summary fell even further from 4.1 in 1985 to 2.8 in 1990. In 1997 the SLORC changed the name to the State Peace and Development Council (SPDC) and worked on improving their international image. Since the overthrow of the 1990 election there had been a lack of foreign investment, and sanctions related to human rights abuses were having negative effects on economic improvement. In an attempt to strengthen democratic opposition, the NLD helped establish the Committee Representing the People’s Parliament (CRPP) in September 1998. This parallel

67 government was soon crushed by the SPDC, and the SPDC received extensive international coverage and criticism. (Marshall 2003) In early 2001 international efforts to liberalize the political atmosphere intensified and the SPDC engaged in talks with Aung San Suu Kyi, leader of the NLD and winner of the Nobel Peace Prize, who was under house arrest since September 2000. By 2002 she was released and sanctions on the NLD were lessened. By 2003 the NLD were regaining their original popularity and shortly thereafter there was an ambush on an NLD convoy by SPDC supporters. (Freedom House 2007). Suu Kyi and her followers were detained and the offices were once again shut down. An important internal power struggle was occurring during this time within the junta between the army chief, Maung Aye, and chief of military intelligence, Khin Nyunt. The infighting led to a restructuring of personnel within the army and military government, strengthening the hand individuals supportive of the reform efforts of Khin Nyunt. (FreedomHouse 2007) Nyunt was the voice of reform within the military junta, believing that the economic interests of Myanmar would be improved with less government restrictions and less hostilities toward the ethnic minorities. The Military Intelligence Bureau had been the governmental entity conducting dialogue with the NLD and among the battling ethnic factions. However, this victory was short-lived as opposition within the junta united against Nyunt, transferring him from First Secretary of the ruling State Peace and Development Council to the post of Prime Minister, and then replacing him in October 2004. Many of his allies within the government and intelligence were also removed, marking a severe blow to any hopes of reform. (US Dept of State 2007) In October 2006 The National Convention was reconvened by the military regime with the stated intent of drafting a constitution and moving toward democracy. This Convention was boycotted by opposition parties due to the restrictive format of the convention, the ongoing targeting of opposition parties, continued house arrest of Suu Kyi and the numerous human rights violations around the country. (Freedom House 2007) The current polity IV score for Myanmar is (-8)—highly autocratic. The date of the most recent polity transition, consisting of a 3 or more point change, last occurred between March 2, 1962 and July 1, 1963. These dates coincide with the coup led by Ne Win, before which Myanmar had a positive polity score of 8. The consistency of achieving a negative score since that time demonstrates the lack of political progress within the country over the past 40 years. (Marshall 2003) Myanmar’s Summary of Economic Freedom score of 3.3 and its 7 on the Freedom in the World Survey are likewise among the worst in the world. And the country is continuously plagued by ethnic unrest and violence. Although numerous agreements have been reached to attempt to thwart ethnic violence, fighting continues, and in 2005 the military launched an assault on minority groups, displacing thousands of villagers and committing extensive human rights abuses. (Freedom House 2007) Due to such human rights abuses the U.S. has economically sanctioned Burma, banning Burmese imports and the export of U.S. financial services to Burma in 2003. (US Dept of State 2007) The low scores achieved by Myanmar on each index are indicative of the lack of a rule of law within the country. The EFW score shows that economic freedom decreased

68 from 4.5 in 1980 to 3.3 in 2004. Among the many components of economic freedom that declined the impartiality of courts is a telling example. The score shows a steady decline in impartiality from a rating of 4.1 in 1995, 3.8 in 2000 and a further reduction to 2.7 by 2003. These negative changes coincide with junta’s unlawful abolishment of the CRPP in 1998 and persecution of the LCD in 2003. There is no constitution, no parliament and the judiciary system is dictated by the junta. Individual rights are repressed; detention for political reasons is rampant, holding prisoners for extended periods of time without due process. Transparency International’s 2006 Corruption Perceptions Index ranked Burma 160 out of 163 countries, stating the country consists of a corrupt system that lacks accountability. Without independent courts it is difficult to protect private property from a corrupt state. The military has seized property and altered existing laws to derive personal benefit. (Bertelsmann 2006) The government regulates and controls most aspects of everyday life. Through strict intimidation academic freedom is limited, freedom of association and assembly are restricted, privacy rights are ignored, religious freedom is somewhat limited and the media is highly censored. Laws make it a criminal offense to own many electronic devices without prior registration. (Freedom House 2007) Myanmar’s economy is considerably weaker than those of its East Asian neighbors and currently stands as one of the poorest in the world. The country’s gross domestic product is much lower than the neighboring countries of Cambodia, Laos and Bangladesh. (McDonald-Gibson 2007) “Lacking monetary or fiscal stability, the economy suffers from serious macroeconomic imbalances- including rising inflation, fiscal deficits, multiple official exchange rates that overvalue the Burmese Kyat, a distorted interest rate regime, unreliable statistics, and an inability to reconcile national accounts to determine a realistic GDP figure.”i (CIA 2007) The Independent Evaluation Group of the World Bank currently listed Myanmar as one of 26 countries that are considered “fragile” and have the potential to collapse due to extensive poverty and political instability. (World Bank 2007) The World Bank stopped lending the country money in 1987 due to accounts being in arrears and refusal to enact necessary reforms. As it stands the country is over $7 billion in foreign debt. (US Dept of State 2007) According to the Human Development Index, Myanmar’s level of development is one of the lowest in the region. (UN 2007) Crony capitalism is rampant within Myanmar, providing loyal companies with monopolies and beneficial policies. Energy, heavy industry and the rice trade remain state-controlled. These industries provide extensive monetary incentive for skewed market policies The government also controls a series of state banks, which are provided privileges over private banks. The private banks are required to abide by tight restrictions when providing credit to the private sector. The foreign banks present in Myanmar are only allowed to service foreign clients. (Bertelsmann 2003) With little hope for political reform or economic liberalization the economic and human prospects for Myanmar remain bleak for the foreseeable future.

69 Table 3.17: Myanmar Myanmar 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ NA NA NA NA NA NA GDP_per_capita_PPP_2000$_Gro wth% NA NA NA NA NA NA P4_POLITY2 -8 -8 -7 -7 -7 -8 FreedomHouse_Political_Rights 7 7 7 7 7 7 FreedomHouse_Civil_Liberties 6 7 7 7 7 7 HeritageEF_Score NA NA NA NA 4.28 4.4 EFW_Size_Govt NA NA NA NA 3.5 3.5 EFW_Legal_System_Protec_Prop _Rights 5.35 3.99 3.5 4.69 3.25 2.22 EFW_Access_To_Sound_Money 6.81 7.2 3.85 4.84 5.39 3.94 EFW_Freedom_Trade_Internat 2.13 1.66 1.66 1.66 1.66 1.88 EFW_Regulation 3.91 3.81 3.63 3.81 4.01 5.04 Fraser_EFW_INDEX_Total Score 4.55 4.17 3.16 3.75 3.56 3.32 Human_Devel_Index(HDI)_Value NA NA NA NA NA 0.581

New Zealand

New Zealand has a history of strong political institutions, dating back to the mid- 1800s. It’s POLITY score has been a perfect 10 since 1893, and its scores on the Freedom in the World survey have been perfect since the survey’s commencement in 1972 (Polity IV; Freedom in the World). While New Zealand’s political situation may be strong and stable, its economic institutions have grown much stronger over the past quarter century. In 1980 it scored a 5.9 on the Economic Freedom of the World index, ranking 19th overall. By 2004 its score had increased to 8.2 and the country moved up to 3rd overall, in front of, Ireland, the United Kingdom, and the United States (Lawson and Gwartney 2006). This improvement was the second highest worldwide by percentage in relation to possible improvement. In the 1950’s New Zealand was the third richest country in the world, acting as the United Kingdom’s breadbasket; the UK purchased nearly two-thirds of all Kiwi exports in 1950 (Economist; Europa: Economy). It was sparsely populated and agricultural, which contributed to its high levels of gross domestic product (GDP) per capita (Economist). In the 1950’s, this was 20% above the Organization for Economic Development and Cooperation (OECD) average; by the mid-1980’s it had fallen to a third below the OECD average (Economist). The 1970’s were a difficult decade for New Zealand. While oil prices soared, the United Kingdom joined the European Economic Community (EEC), the forerunner to the European Union (Sautet 2006: 9). This had a disastrous effect on New Zealand, no longer giving Kiwi farm products preferential access to the UK market (Economist). Meanwhile, the New Zealand labor market was marked by cradle-to-grave welfare,

70 foreign exchange controls were in place, and import licensing was the norm (Sautet 2006: 9 & 10). The Kiwi government responded with a large fiscal expansion, handing out big subsidies for industry and farming, as well as investing heavily in industrial projects (Economist). From 1970 to 1983, government spending in relation to GDP grew from 22% to 35% (Sautet 2006: 10). Inflation soared, averaging 12.21% over the 14-year period, and the government responded by freezing wages, prices, and rents (WDI; Economist). In 1984, markets lost faith in the Reserve Bank of New Zealand to control inflation with its crawling peg, which allowed the Bank to adjust the currency even though it was technically fixed (Sautet 2006: 10). This loss of faith was in part due to the Bank fixing the currency at a rate that lacked credibility (Sautet 2006: 10). This caused a run on the currency, with the Bank losing nearly all of its foreign currency (Sautet 2006: 10). 1984 saw a new labor government come to power which took the opportunity to change course. The reforms were nicknamed “Rogernomics” after finance minister Roger Douglas, who spearheaded them. Over the next few years, the government drastically changed economic institutions, as witnessed by its large improvement on the Economic Freedom of the World index. Between 1985 and 1990, New Zealand improved its EFW index score from 6.1 to 7.1, and rose from 30th to 15th in overall rankings (EFW Database). Although all five areas of the EFW index improved, there were two very large improvements: “size of government”, and “sound money” (EFW Database). This was largely due to the top marginal tax rate being halved, to 33%, as well as a decrease in government enterprises and investment as a share of gross investment, from 31.4% in 1985 to 25.3% in 1990 (EFW Database). The other major driver was the improvement in sound money, which improved 21.7% during this period. This was in large part because of the elimination of currency controls, allowing Kiwis to own foreign currency bank accounts at home and abroad, along with a large decrease in inflation, falling from 14.2% in 1985, to 2.7% in 1990 (EFW Database). By 1988, Roger Douglas had fallen out of favor with Labour, and reforms lost steam, with the exception of making the Reserve Bank independent in 1989. However, 1990 brought the opposition National Party to power, which continued to reform the economy. As with the past reforms, these greatly affected the EFW index. After the early 1990’s reforms, New Zealand shot up to third overall in the EFW index (EFW Database). Its scores markedly improved in the categories: “size of government”, “sound money”, and “regulation”. The size of government score improved 36.4% through two main improvements. First, transfers and subsidies as a share of GDP decreased from 27.5% in 1990, to 12% in 1995 (EFW Database). Second, government enterprises and investment as a share of gross investment decreased from 25.3% in 1985 to 12.0% in 1990 (EFW Database). The sound money category also continued to improve. During this period its score increased 32.9%, due to a tightening of the money supply, as well as low and stable inflation (EFW Database).

71 Lastly, New Zealand’s regulation score improved 33.3%, due in large part to passing the Employment Contracts Act in 1991 (EFW Database). This greatly reduced the influence of unions, decentralized wage bargaining, and eliminated multi-employer contracts (Economist). As a consequence, direct contracts between employer and employee became the norm and union membership fell 50% (Sautet 2006: 13; Europa). Trade liberalization was also pushed during this period, which included signing a free trade agreement with Australia in 1990 (Sautet 2006: 10). The government announced a plan to completely eliminate tariffs by July 2001; however, the next labor government rescinded the plan (Sautet 2006: 13).

Table 3.18: New Zealand New Zealand 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 14653 16895 11551 12636 13653 15151 GDP_per_capita_PPP_2000$_Gro wth% NA 15.30 -31.62 9.39 8.05 10.96 P4_POLITY2 10 10 10 10 10 10 FreedomHouse_Political_Rights 1 1 1 1 1 1 FreedomHouse_Civil_Liberties 1 1 1 1 1 1 HeritageEF_Score NA NA NA NA 1.8 1.7 EFW_Size_Govt 3.82 3.54 5.55 7.46 6.68 6.74 EFW_Legal_System_Protec_Prop _Rights 8.04 7.88 8.35 9.17 9.1 8.9 EFW_Access_To_Sound_Money 6.25 6.03 7.28 9.75 9.55 9.56 EFW_Freedom_Trade_Internat 7.42 7.2 7.87 8.09 8.55 8.01 EFW_Regulation 5.68 5.78 6.59 8.76 7.89 7.91 Fraser_EFW_INDEX_Total Score 6.25 6.09 7.13 8.65 8.36 8.22 Human_Devel_Index(HDI)_Value 0.855 0.868 0.876 0.906 0.925 0.936

Nicaragua

For most of its history Nicaragua suffered under foreign interference, ruthless dictatorships, bloody insurgencies and mishandled natural disasters. Yet after serving as a proxy battle between the United States and the Soviet Union during the 1980s Nicaragua embarked on a series of economic reforms that have greatly improved its economic system and performance, although it remains a very poor country. Indirect US intervention in Nicaragua began in the mid 1800s, when American William Walker seized the presidency only to be quickly ousted. Direct intervention commenced in 1912 – when the US stationed troops in Nicaragua – and continued through 1933. In the last six years of this period, the forces of General Augusto Sandino (whose cause would inspire the Sandinista movement three decades later) fought the US and the US-supported central government in a guerrilla war (State Department).

72 In 1934, Sandino was assassinated by US-backed Nicaraguan National Guard Commander Anastasio Somoza, who was elected president in 1936. For the next 44 years, he and his two sons ruled Nicaragua, fully centralizing power and haphazardly rewriting the constitution. They also appropriated vast land holdings and considerable portions of infrastructure, such as the railroads, for their own use (http://lcweb2.loc.gov/cgi-bin/query/r?frd/cstdy:@field(DOCID+ni0021). Immediately following World War II, Nicaragua experienced an economic growth spurt, caused by a worldwide rise in demand for its primary export, cotton. Import- substitution industrialization (ISI), whereby the government seeks to promote economic development and retain currency reserves by subsidizing local industries to produce substitutes for imports, was the primary government development plan. Sporadic growth continued through the 1960s but proved unsustainable with the volatility of international commodity prices and the ineffectiveness of ISI programs. In 1972, a powerful earthquake devastated the capitol, Managua. The gross abuse of relief loans by Somoza’s second son, who profited an estimated $400 million, led to widespread outcry and gave impetus to the Sandinista revolution (http://lcweb2.loc.gov/cgi-bin/query/r?frd/cstdy:@field(DOCID+ni0021). The Sandinista National Liberation Front (FSLN), led by Daniel Ortega, capitalized on the leader’s mismanagement, and won a major electoral victory, steering Nicaragua in a decidedly leftist direction for the next decade. The EFW’s Chain-Linked Summary for Nicaragua begins a year after the FSLN victory, in 1980. A major reversal of economic freedom occurred in the period from 1980 to 1985, dropping from 3.8 to 1.7. Economic freedom continued to be low for the remainder of the party’s rule, coming in at 2.4 in 1990. Specifically, the FSLN immediately nationalized all Somoza land and business holdings and turned them into cooperatives for farmers. “Decree 3” authorized the confiscation of all land held by the Somozas, civil servants associated with the regime, and National Guard officers. “Decree 760” announced that all land classified as abandoned or idle for more than six months was allowed to be seized (Everingham). Overall, about a third of arable land was affected by reforms. The economy contracted 8 out of the 11 years of the party’s rule. GDP growth slid from around 5 percent in 1980-81 to rates for most years hovering around -1.0, with the exception of -4.1 in 1985 and a whopping -12.4 percent in 1988 (IMF World Economic Outlook Database). Another considerable factor of economic decline was the heavy economic sanctions imposed by the US and the warfare caused by the covert CIA operation in Central America in the 1980s. Under the Reagan administration, the US supported the covert Contras operation stationed in Honduras specifically for the purpose of combating the Ortega regime (State Department). Peace, and with it, economic stability, began to emerge in 1990, beginning with the seven year presidency of US-backed candidate Violetta Barrios de Chamorro. In 1995, she oversaw a major constitutional revision for the ninth time in Nicaragua’s history, adding in 65 amendments that transferred many powers previously held by the executive to the National Assembly (Polity IV). She made addressing the FSLN’s ambiguous property rights and land ownership provisions the centerpiece of her administration. By 1996, 351 enterprises were privatized (Everingham 66) Economic freedom grew substantially under her rule, doubling from a paltry 2.4 in 1990 to a 5.5 in 1995. Access to Sound Money grew a phenomenal 520% in the same

73 time period. During her presidency, she privatized much of the industry nationalized under the previous regime, significantly reduced the military and eliminated mandatory military service. In 1995 the Sandinista army was finally brought under civilian rule (Freedom House). Although in the first three years of her term Nicaragua experienced negative growth the next four years saw GDP rise between 4 and 6.3 percent and Nicaragua has experienced positive growth ever since then (IMF World Economic Outlook Database). Running on an anti-Sandinista, anti-leftist platform, Arnoldo Aleman succeeded Chamorro in 1998. Aleman further opened the country to economic trade. Initially, Nicaragua experienced growth and the second year of Aleman’s presidency saw Nicaragua’s GDP grow by 7 percent. Each subsequent year, though, growth slowed. Aleman’s administration was plagued by corruption and his dubious power sharing deal with Ortega that eliminated political competition and allowed him to embezzle approximately $100 million (http://www.time.com/time/world/article/0,8599,1616952,00.). Transparency’s International described him as one of the world’s 10 most corrupt leaders. Another factor in limiting growth was the devastation that Hurricane Mitch wrought in 1998. Nicaragua’s main urban center, Managua, was especially hard hit, leaving about 3,000 dead and making 20 percent of the population homeless (Washington Post, 1998). Economic freedom did increase under Aleman, from 5.5 in 1995 to 6.4 in 2000, and continued to hover in the low 6 range through 2004. President Enrique Bolanos succeeded Aleman and served from 2002 to 2007. His presidency was mired by the meddling of two former presidents, Aleman and Ortega and thus lacked widespread legitimacy (International Herald Tribune, 2005) In 2004, Nicaragua received massive debt absolution from the US, World Bank, Russia and the IMF under HIPC (heavily indebted poor countries initiative). Sandinista Daniel Ortega was reelected in 2006, and promises that he will promote economic stability and “run an investor-friendly government.” His support of Nicaragua’s participation in the Central America Free Trade Agreement (CAFTA), the regional trade agreement with the US, lends credence to his promise, but as of this writing, the road his administration will take is still uncertain (http://www.economist.com/world/la/displaystory.cfm?story_id=8525840). In 2004 Nicaragua achieved a 6.2 out of 10 in economic freedom. It is particularly weak in the area of Legal Structure and Security of Property Rights. It receives a high score of 8.8 for Access to Sound Money and comes close to the US in Freedom to Trade Internationally with a 7.3. Polity IV gave Nicaragua an 8 overall as its score on democratic processes. Its score on Executive Constraints was 7, as the judiciary, although independent, is still susceptible to executive interference (Polity IV). Freedom House gave Nicaragua a 3 out of a scale from 1 to 7 for its level of democratic freedom. The index points to corruption and, once again, the influence it has on the country’s judiciary as main weaknesses.

74 Table 3.19: Nicaragua Nicaragua 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 4386 3957 7120 6880 8000 8590 GDP_per_capita_PPP_2000$_Gro - wth% NA -9.78 82.00 -3.39 16.25 7.40 P4_POLITY2 0 -1 6 8 8 8 FreedomHouse_Political_Rights 5 5 3 4 3 3 FreedomHouse_Civil_Liberties 5 6 3 4 3 3 HeritageEF_Score NA NA NA 4.08 3.65 2.99 EFW_Size_Govt 5.03 3.36 3.43 5.63 6.31 6.15 EFW_Legal_System_Protec_Prop _Rights 2.58 2.59 3.99 4.47 4.07 2.86 EFW_Access_To_Sound_Money 5.47 0 0 5.2 8.64 8.8 EFW_Freedom_Trade_Internat 3.13 2.32 5.46 7.11 7.07 7.26 EFW_Regulation NA 3.21 2.92 6.25 6.12 6.11 Fraser_EFW_INDEX_Total Score 4.05 2.3 3.16 5.73 6.44 6.23 0.60 Human_Devel_Index(HDI)_Value 0.595 3 0.61 0.642 0.667 0.698

Peru

In the last forty years Peru has experienced governments spanning the political spectrum from military dictatorship to participatory democracy. The economy has paralleled this volatile pattern, with leadership espousing clearly socialist policies interspersed with attempts at market-based reform. Although policies have widely varied, one common thread between all governments since 1968 is the high activity of reforms with each new administration. General Juan Velasco Alvarado staged a coup in 1968 in an effort to create a “more equal and cooperative society” through “state-led capitalism”. Reforms included immediate nationalization of a majority of the two leading industries, petroleum and mining; organization of labor through vast union recognition; extensive state control and even hostility to foreign direct investment and trade; and, most notably, the reduction of almost all large landholdings (haciendas) into communal cooperatives, with little regard for output (Sheahan 1999). Not surprisingly, the policies failed to achieve Alvarado’s major egalitarian aims, including ironing out income distribution or helping a significant amount of the rural poor. His policies set the precedent for abrupt switches in economic structure and thus sowed the seeds that would lead to a legacy of poor performance over the next two decades. Indeed, in contrast to the postwar period from 1950-1965 (when Peru displayed above average growth for Latin America), per capita GDP growth dipped well below the regional average from 1965 until the 1990s (Sheahan 1999, 7). In 1975, Alvarado was replaced in another coup by General Morales Bermudez, who fared little better than his predecessor during his five year rule, increasing Peru’s EFW only by 0.1 to 3.9 in 1980. In 1980, a civilian president, Fernando Belaunde, was

75 elected. During the 1980s, a fall in international commodity prices combined with natural disasters brought on by El Nino exacerbated an already worsening economy (http://www.state.gov/r/pa/ei/bgn/35762.htm#econ). Belaunde’s half-hearted efforts at liberalizing the economy only to reverse policies once under pressure only served to worsen the situation. Such conditions led to widespread malcontent and became fertile grounds for extremist groups to mobilize. Most notorious was the Shining Path, a militant offshoot of the Peruvian Communist Party. In the next two decades, the violence resulting from the Shining Path guerrilla insurgency and another Marxist-Leninist rebel group, the Tupac Amaru Revolutionary Movement, would kill close to 70,000 people, according to the Truth and Reconciliation Commission conducted in 2002-2003, as well as gravely disrupt political and economic stability (http://news.bbc.co.uk/2/hi/americas/4832034.stm). The mid 1980s heralded the beginning of the presidency of Alan Garcia Perez, who would return in 2006 as Peru’s current president. Garcia took a classically populist approach to what he viewed as policies to put Peru back on track, including keeping the price of public services and energy resources well below their actual cost and financing the resulting government deficit by expanding the money supply. His aborted plan to nationalize Peru’s banking system further exacerbated the worsening economic situation, and led to widespread conflict with the private sector, eventually causing a detrimental loss in private investment (http://news.bbc.co.uk/2/hi/americas/country_profiles/1224690.stm). Indeed, Peru received its worst EFW score of 2.9 in 1985 and its rating for Sound Money was at rock- bottom zero for that year, rising only to 1.3 in 1990. In addition to all the problems at home, Garcia purposefully alienated the international financial community by aggressively pushing Peru’s non-payment of debt as a central issue. His policies left a legacy of vast corruption, food shortages, worsening insurgency, and hyperinflation that peaked at above 7600% (http://www.inei.gob.pe/). At the end of his term Garcia had to flee Peru and was replaced by Alberto Fujimori in 1990 (http://news.bbc.co.uk/2/hi/americas/5047896.stm). Fujimori, a citizen of both Peru and , was a surprise winner in the 1990 election. He immediately embarked on a mission of transforming Peru into an “Andean tiger.” (Fujimori Sells 1996). Reforms included selling off some 70 state-owned enterprises, removing price controls and protectionist policies, subsidies, letting the sol appreciate to its real value and, in general, “reducing the role of the state in almost all spheres of the economy.” (http://news.bbc.co.uk/2/hi/americas/705482.stm). Despite short-term hardship, the shock therapy set the stage for Peru’s strong economic growth beginning in the early 1990s. In contrast to Peru’s zero for Sound Money during the Garcia presidency, it rose to 5.1 in 1995, 8.8 in 2000 and 9.5 in 2001. Even with the 1997-1998 Asian economic crisis that spread to Peru, economic growth rebounded and has generally increased since 2002. Fujimori also took a heavy hand in dealing with the insurgencies. With the backing of the military, he dissolved Congress and the courts in 1992, a move he claimed was necessary to give him the leverage to deal with the insurgency. In 1993, he rewrote the Constitution, a move that narrowly won referendum approval and reinstituted a unicameral Congress that “would be more closely controlled by the president” (Freedom House). In effect, Fujimori ruled the country until 1995, when, responding to international pressure to return to democracy, he reinstated a new Congress. In the same

76 year, he won a second term, during which he successfully dealt with a tense hostage situation, ensuring the return of almost all 70 hostages despite the death of all 14 hostage takers (http://news.bbc.co.uk/2/hi/americas/4832034.stm). In 2000, he tried to run for a Constitutionally-prohibited third term, but amid scandals of bribery, oppression, and electoral fraud, he fled Peru. Alejandro Toledo, the first president of indigenous Peruvian origin, served as the next president from 2000-2005. In the twilight hour of his administration, Peru reached a free trade agreement with the US, which is still pending approval in the US Congress as of this writing (“White House Announces Agreement on Language for Peru Free Trade Deal.” The Associated Press June 25, 2007. Retrieved June 29, 2007 from Lexis Nexus Academic Database). Toledo generally maintained the growth initiated during Fujimori’s rule. Alan Garcia returned as president in mid 2006. In order to reduce Peru’s high poverty rate (at over 50%) President Garcia launched the Sierra Exportadora program, which will spend $106.5 million over the next five years by investing in infrastructure, public health, and agriculture (financing export of products normally traded domestically only) in the poorer Andean regions of the country. Although Garcia seems enthusiastic about social spending, he is counterbalanced by his economic minister, Luis Carranza, who is described by the Council of Hemispheric Affairs as having a “powerful distaste for public spending.” (http://www.coha.org/2006/10/09/president-garcia-comes). EFW also reveals that Peru partly follows the pattern exhibited by the economically developed countries of the world, which usually rate very high for size of government, Access to Sound Money, and Freedom to Trade Internationally. Peru, at 9.6, parallels Switzerland and the USA, both at 9.7, for Access to Sound Money. Likewise, for Size of Government, it is on par with the USA at 7.6, and surpasses Switzerland, which is at 7.4. Contrary to the developed state model, however, Peru receives a low score, 4.0, for Legal Structure and Security of Property Rights as well as 5.7 for Regulation of Credit, Labor and Business. A characteristic typical of developing countries, Peru lacks a fully legitimate and complex legal and regulatory framework, demonstrating that a limited government is not enough on its own to assure growth. Polity IV, a measure of political freedom and democratic processes, gives Peru a rating of 9 out of 10 in its measure of political freedom (with 10 being the highest score) (http://www.cidcm.umd.edu/polity/country_reports/Per1.htm). Freedom House ratings confirm this evaluation, deeming Peru a free country, but one that falls into a category of needing to improve on combating corruption, discrimination and/or violence as well as increasing civil liberties. Both Freedom House and Polity IV emphasize that the courts present a large problem, as the “judiciary is the single most mistrusted institution in Peru,” saddled with severe slowness and unpredictability (http://www.freedomhouse.org/template.cfm?page=22&).

77 Table 3.20: Peru Peru 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 5307 4869 1659 1977 2053 2227 GDP_per_capita_PPP_2000$_Gro wth% NA -8.25 -65.93 19.18 3.85 8.47 P4_POLITY2 7 7 8 1 NA 9 FreedomHouse_Political_Rights 2 2 3 5 3 2 FreedomHouse_Civil_Liberties 3 3 4 4 3 3 HeritageEF_Score NA NA NA 3.59 2.69 2.88 EFW_Size_Govt 5.72 5.42 7.38 8.21 8.07 7.56 EFW_Legal_System_Protec_Prop _Rights 3.77 2.23 2.93 4.76 3.94 4.01 EFW_Access_To_Sound_Money 1.32 0 1.25 5.13 8.78 9.62 EFW_Freedom_Trade_Internat 4.77 3.46 4.72 6.92 7.33 7.19 EFW_Regulation 3.46 3.39 3.78 6.48 6.58 5.74 Fraser_EFW_INDEX_Total Score 3.81 2.9 4.01 6.3 6.94 6.82 Human_Devel_Index(HDI)_Value 0.675 0.699 0.708 0.735 0.76 0.767

Poland

During the period from 1985-2004 Poland’s political and economic institutions improved significantly. The EFW score improved from 3.8 in 1985 to 6.7 in 2004; the second largest relative improvement of any country in the period. That moved Poland in the rankings from 100 to 53 at the end of the period. Poland’s political institutions improved significantly as well. The end of communism and total political transformation led the country in a completely new direction. The Polity IV rating was 5 at the end of the communist era and improved to a perfect 10 by the end of the period 1990 – 2004. In terms of political and civil rights, measured by Freedom House’s Freedom in the World Survey, Poland also scored the perfect score of 1 during the same period of time 1990 – 2004. On May 3, 1791 Poland produced the first written Constitution in Europe. The Constitution established a separation of powers among the legislative, executive and judicial branches and also established the notion of “people’s sovereignty”. (Library of the Congress, Country studies – Poland) Yet, Poland’s geographical position between and Russia meant fighting for survival that resulted in enormous human and material losses. The Second World War was extremely costly for Poland in economic and human terms -- 6 million Poles lost their lives and 2.5 million were deported to Germany as forced labor. The country’s economy was completely destroyed. (U.S. State Department; background Note: Poland) After the Yalta Conference in 1945 Poland became part of the Soviet bloc. The Communist party of Poland, under the control and with the assistance of the Red Army, established a dominant regime and nationalized the economy. The economy became centralized and planned, almost completely under state control, especially in

78 nonagricultural sectors. Private undertakings were confined to personal crafts, trades and agriculture. (Encyclopedia of the nations: Europe, Poland) A major turning point in recent Polish history occurred on August 31, 1980 with a massive labor strike at the Gdansk Shipyard (Shipyard Strike 1980). This was not the first time workers of the shipyard raised their demands for change, but the significance of the labor strike from 1980 is derived from the events that followed. In a sign of solidarity with shipyard workers, workers from several other plants joined their strike. Demands were typical for any labor strike – better wages and benefits, better living standards and the right to organize a strike. The crisis ended with an agreement between workers and the government which guaranteed workers’ right to form labor unions and gave them the right to organize labor strikes, something unheard of for communist regimes in Eastern Europe. A labor union named Solidarity was formed in September and became popular instantly. For a period of 15 moths union membership grew from 1 million people to 9 million or a quarter of the country’s population (Radio Free Europe 2005). To a great extent workers’ demands were political, and achieving their goals was a strong signal that Poland had developed a strong opposition against the communist regime. That led the government to declare martial law in December 1981. It closed universities and jailed leaders of Solidarity. The creation of Solidarity in Poland and the reaction of the communist government was a strong signal that the Soviet bloc was shaking from inside. The international reaction prevented the communist regime from using excessive force as it did in Hungary in 1956 and Czechoslovakia in 1968. Pope John Paul II, who was a Polish national met with Solidarity leader Lech Walesa and expressed his support to the newly formed union. Lech Walesa was recognized in 1983 with the Nobel Peace Prize. In 1988, British PM Margaret Thatcher visited Poland and met with Solidarity leaders and expressed her support for their work. This could be considered an act that legitimized the union and officially recognized the need of real political and economic reforms in Poland. In early 1989 the government officially recognized Solidarity. The process of democratization in Poland continued with roundtable talks and an agreement to hold the nation’s first free elections. The outcome of that election was a full victory for Solidarity which formed the first non-communist government. The fall of communism in 1989 marked the beginning of the period of transition to a market economy. The Sejm (the legislative body of Poland’s government) approved a program to transform the Polish economy from a centrally planned to a market oriented one. Reforms implemented in 1990 included liberalizing controls on prices, eliminating most subsidies, free establishment of private businesses and liberalization of international trade. Industrial production grew by 3.5% and inflation was lowered from 600% in 1990 to 43% in 1992. It was in single digits in 1993. The biggest change came from the growth of the private sector, which in 1993 produced 45% of the GDP and employed between 56-60% of the work force in the country. Prior to reform, state-owned enterprises accounted for 82 % of total output and 71 % of employment in Poland. As a result of the privatization and price liberalization, Poland’s unemployment rate almost doubled in 1991 to 12%. By 1998 new private firms accounted for almost 80% of all private sector jobs. Unemployment soared but privatization of small and medium size businesses offset the loss of jobs in state-run sectors. By 1992, more than 700,000 new companies operated in Poland offering millions of new jobs (Poland 2007).

79 Regarded as Eastern Europe’s “tiger,” Poland was a favorite of the investment community in the 1990s. In 2000, however, the economy showed signs of slowing down – the unemployment rate was on the rise and foreign direct investment was half what it was in the 1990s (BBC News 2001). Heavy industries like coal and steel still dominated Poland’s economy and were generally less competitive to foreign imports of the same products. Economic problems were compounded by political problems – the government was a product of a right - center political coalition between Solidarity Electoral Action and Freedom Union. The coalition failed and ended with Freedom Union leaving the government. In the following elections in 2000 the former Communist party, renamed to Democratic Left Alliance (SLD) won the majority and the right to create a government without seeking the support of coalition partners. Poland joined the European Union on May 1st, 2004 accomplishing its goal with another 9 newly admitted members. Polish membership naturally developed expectations for real economic convergence (Danuta 2004). Poland’s membership in the EU presents a mix of opportunities and challenges; massive EU subsidies could dampen the perceived need for further reform. The country is one of the big supporters of the Common Agricultural Policy (CAP) of the EU. According to Polish officials, Poland expects to receive 3 billion Euro per year in direct payments for its farmers (http://www.euractiv.com/en/cap/common-agricultural-policy-reform/article-109963). In comparison to the other members of the EU, where agriculture contributes only 2.5 % to GDP and 5.7 % to total employment, Poland employs over 20% of its workforce in agriculture (Kryn 2003). Poor and inefficient farming relies on European subsidies and Polish officials are pushing for reforms in CAP. Proposals for reforms are to increase subsidies for new members and make them equal to subsidies paid to farmers in “old” members. This populist approach may be beneficial for recipients of agricultural aid and Poland’s political parties but is highly inefficient and comes at the expense of further reforms. The shortsighted solution may lead to long-run harm for the Polish economy.

Table 3.21: Poland Poland 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ NA NA 3099 3413 4455 5031 GDP_per_capita_PPP_2000$_Gr owth% NA NA NA 10.13 30.53 12.94 P4_POLITY2 -6 -7 5 9 9 10 FreedomHouse_Political_Rights 6 6 2 1 1 1 FreedomHouse_Civil_Liberties 4 5 2 2 2 1 HeritageEF_Score NA NA NA 3.51 2.84 2.81 EFW_Size_Govt 4.1 3.54 2 2.62 4.75 5.84 EFW_Legal_System_Protec_Prop _Rights NA 4.78 6.19 6.84 6.5 5.77 EFW_Access_To_Sound_Money 7.42 4.43 2.5 6.03 7.47 9.16 EFW_Freedom_Trade_Internat NA 3.33 5.52 6.27 6.88 7.05 EFW_Regulation 3.1 3.13 3.49 4.46 5.86 5.86 Fraser_EFW_INDEX_Total Score NA 3.84 3.94 5.24 6.29 6.74 Human_Devel_Index(HDI)_Value NA NA 0.807 0.82 0.848 0.862

80 Tanzania

The relative success story of Tanzania gets to the debate concerning the efficacy of foreign aid in economic development10. Ideological camps on opposite sides of the debate often rely on Tanzania as an example of their position (Economist: 9/26/06). The contingent arguing that foreign aid does not stimulate economic development would perhaps point to the tremendous amount of aid received by the socialist government of Julius Nyerere (1964-1985). Conversely, the contingent arguing for the effectiveness of foreign aid might ascribe the recent relative success of Tanzania to the institutional changes undertaken in response to large amounts of conditional foreign aid. Tanzania enjoyed a major upward trend in all of its Economic Freedom of the World (EFW) scores in the 1990s, improving from 4 to 6.4 between 1990 and 2004 after the poor economic performance of the Nyerere years (1964-1985). Tanzania’s debt load has remained approximately constant since independence while conditions attached to foreign loans changed over time with the identity of the donors. Tanzania’s mottled recent history of successes and failures provides ample ammunition to either side of the debate. Tanzania has a long history of international trade. The region developed in the twelfth century when Persian and Arab traders began to frequent the eastern coast of Africa. Portugal then claimed control of trade centers on the coast from approximately 1506 to 1841. Germany followed Portugal in 1884 and instituted a more thorough colonization of the area until the First World War. Julius Nyerere organized his political party TANU (Tanganyika African National Union) in 1954 and won a handful of seats in the elections of 1958, 1959, and 1960. These legislative gains led the UK to agree to internal self-government in 1961 and eventually to independence in 1962. The island conglomerate of Zanzibar gained independence in 1963 and Tanganyika and Zanzibar unified in 1964 to create Tanzania, governed by Julius Nyerere from 1964 until his retirement in 1985 (State Department). The lack of economic freedom that led to economic stagnation in the Nyerere administration (1964-1985) translated into low EFW scores of 4.0 in 1985 and 1990. Nyerere instituted a socialist command economy; creating over 400 public corporations during the 1960s and 1970s to manage the economy. Only a handful ever produced a profit (NPR). Nyerere dubbed his political movement “Ujaama” after the semi-collectivized villages to which he forcefully relocated 70% of the rural population (Daniels). The economic system accompanying Ujaama dictated that several parastatals process and redistribute all agricultural production. These parastatals set prices so low that the forced transaction from peasant farmers to the government basically comprised a confiscation (Daniels). The central government consistently maintained the established prices they would pay for the peasants’ crops below those peasants’ aggregate input costs. The economy was soon mostly demonetized; farmers referred to the money they were given as “Picha wa Nyerere”, or “pictures of Nyerere”, which was the only value the money possessed (Daniels). Peasants soon refused to produce above the requirements of

10Jeffery Sachs champions the argument in favor of foreign aid as a tool for economic development and the alleviation of poverty while William Easterly champions the contrary argument that foreign aid has no or deleterious effects on economic development.

81 subsistence and limited local trading. Surplus production was simply not economical because the government compelled the sale of surplus at such low prices (Daniels). This pricing scheme created massive economic contraction because agriculture was and is Tanzania’s main export (85% of exports at independence). Tanzania could not feed itself and became a recipient of foreign aid which was received by and distributed through the Nyerere government (Daniels). The “socialist experiment” of Tanzania drew in many donors of similar political persuasions during the 1960s and 1970s, especially the Scandinavian countries (NPR). The Scandinavian countries supported Ujaama with a total of $10 billion over 20 years while the economy contracted at 0.3% a year from 1980 to 1992 and average personal consumption declined 43% from 1973 to 1988 (Ayodele, Bandow). The influential development economist Peter Bauer satirizes this Western Socialist tendency to secular canonization of Nyerere and his policies by referring to him as “St. Julius” (Daniels). Nyere retired in 1985 and the CCM handpicked his successor, Ali Hassan Mwinyi. Mwinyi ruled until elections in 1995, instituting reforms reflected in EFW score increases between 1990 and 1995 in “size of government” (from 2.9 to 4.3) and “freedom to exchange with foreigners” (3.7 to 6.0). The government moved towards liberalization in 1986 as a result of donor and domestic pressure. The threat of economic collapse loomed over Myinwi’s assumption of power in 1985. The shilling was devalued 25% in 1984, inflation neared 40% and the very “Ujaama” that gave Nyerere’s movement its name were collapsing as rural dwellers abandoned their communal villages (PBS). Nyerere persisted in emphasizing social welfare and rebuffing the IMF’s conditional aid by refusing to liberalize the economy until he retired in 1985 (PBS). Mwinyi agreed to a reform program in 1986 while facing this economic collapse and subsequent default on external debt (PBS). The initial reform plan included dismantling state economic controls, reducing the budget deficit, improving monetary control, depreciating the overvalued exchange rate, liberalizing the trade regime, removing most price controls, easing restrictions on the marketing of food crops, freeing interest rates, and restructuring the finance sector (State Department). Privatization of parastatals and other core assets is nearly complete. The initial movement to streamline the bloated civil service associated with the large public sector led to the improved “size of government” EFW score during this period. The “size of government” and “freedom to exchange” EFW scores increased most significantly between 1990 and 1995 as a direct result of Mwinyi’s reforms. The government gradually reduced the number of items under controlled prices between 1986 and 1991 until the National Price Commission, the state body that set prices since its inception in 1973, was finally abolished in 1991. The adoption of an Open General License scheme liberalized international trade in 1989 by gradually changing import restrictions from a “positive” (permitted items listed) to a “negative” system (prohibited items listed) scheme. The government also reduced the simple average tariff from 32.1% in 1986 to 19.5% in 1994 (Muganda). The general stability of the money supply also contributed to the EFW score increase from 1990 to 1995. The government freely floated the currency in 1996. The government also liberalized the financial sector into a more market-oriented body through Treasury Bill auctions in 1993 and a liberalized interest rate regime, leading to the founding of two private commercial banks that year (Muganda).

82 While the government was decreasing in size due to the exit of the central government from previously state-owned enterprises, the government was also questionably taking active steps to encourage investment. The National Investment Promotion and Protection Act (NIPPA) created the Investment Promotion Center (IPC) in 1990 to approve, monitor, and facilitate foreign direct investment11 (Muganda). Reforms derailed between 1992 and 1995 primarily due to the larger problems of corruption and waning governmental interest in reforms. The real GDP growth of the previous reform period stagnated; GDP growth averaged less than 2% between 1991 and 1995 and poverty may have increased as much as 40% between 1991 and 1994 (Muganda). Many proponents of the effectiveness of foreign aid emphasize the process that occurred between Tanzania and its donor countries as an example of the requirements of a beneficial donor-donee relationship. The “Helleiner process”12 began in 1994 as mediation between Tanzania and its donors. The negotiations resulted in the creation of the Independent Monitoring Group (IMG). The IMG encouraged transparency, accountability, and Tanzanian ownership of the loan-driven continuation of reforms. The government also authored the Tanzanian Assistance Strategy (TAS) with the aim of formalizing the role of foreign donors in domestic development and creating a framework for cooperation. The IMG has also enacted periodic evaluations of the government’s and the donors’ performance in adhering to the framework created in the Helleiner process. One party rule officially ended in 1992 but 1995 saw the CCM, the party founded by Nyerere in 1954, win overwhelmingly in parliamentary elections. 2000 saw the first multi-party presidential elections, with the new president Benjamin Mkapa winning 71% of the vote (State Department). The CCM’s main opposition party, the Civic United Front (CUF), garners most of its support from the islands of Zanzibar and Pemba, and has consistently run on a more anti-market platform than the CCM. Both elections were poorly organized and the government illegally used state owned media and other resources to sway public opinion (CIA). However, no violence occurred during either election (CIA). Continued cooperation with donors led the Paris Club organization of donors to forgive most of Tanzania’s bilateral debt in 2001 and the G8 nations forgiving most of Tanzania’s institutional debt (World Bank, IMF, African Development Bank) in 2005. EFW numbers reflect the continuing effort to privatize the economy and reduce the governmental footprint; the size of government score jumped 2 points (or 28%) between 1990 and 2005, from 2.9 to 4.9. The reduced burden on the government from the divestiture of all the poorly managed parastatals created two windfalls. This divestiture created room in the budget to further ameliorate deficit problems and eliminated the need for as large a civil service as existed under Nyerere. The civil service shrank from 355,000 to 264,000 employees between 1992 and 1998 and was made more efficient due to a performance enhancement system and streamlined pay structure (Muganda). Unfortunately the administrative and regulatory apparatus, the “cost of doing business”,

11 In 1997, after the aid hiatus of 1992-1995, the NIPPA was replaced by the Tanzania Investment Act and the IPC was transformed into the Tanzania Investment Center, which operates as a “one stop” investment center (Muganda). 12 The Helleiner process was an initiative of the Danish government to evaluate Tanzania-donor relations during 1994, led by Professor Jerry Helleiner of the University of Toronto (Muganda).

83 is so high that 98% of businesses were informal in 2005, neither benefiting from nor contributing to the formal economy (OECD). The government established the Regulations Unit in 2005 to implement the Business Environment Strengthening for Tanzania (BEST) plan to eradicate these administrative and procedural barriers (OECD). Mkapa’s anti-corruption efforts resulted in the first National Anti Corruption Strategy Action Plan (NACSAP-I), which existed between 2003 and 2005. Jakaya Kikwete, the CCM party’s winning candidate in the 2005 presidential elections, both ran on his commitment to curbing corruption and persisted in that commitment after winning the election. His government launched the second NACSAP in 2006 and introduced bills into the legislature that would increase the prosecutorial powers of the second NACSAP and the PCB. These bills also incorporated all of the anti-corruption agreements Tanzania had previously signed internationally into domestic law (OECD). The judiciary is taking notice and beginning to censure the government’s excesses (Freedom House). In 2006 the Tanzanian High Court ruled in favor of a legal rights organization that challenged the officially sanctioned practice of “takrima”, the provision of free goods to voters by candidates during election campaigns (Freedom House). In 1999 a commercial court was established to resolve commercial disputes and facilitate contract negotiations. This court’s goal is to keep the average period for case resolution to six months or less (Muganda). Tanzania represents an interesting case study of the potential impact of foreign aid on institutional quality. While aid does not seem to have directly improved economic growth it does seem possible that aid made contingent on institutional reforms may have played a role in Tanzania adopting institutions that will be more conducive to long run growth although its over score remains very low.

Table 3.22: Tanzania Tanzania 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ NA NA 259.28 240 261.18 314.2 GDP_per_capita_PPP_2000$_Gro wth% NA NA NA -7.30 8.67 20.30 P4_POLITY2 -7 -7 -7 -1 2 2 FreedomHouse_Political_Rights 6 6 6 5 4 4 FreedomHouse_Civil_Liberties 6 6 5 5 4 3 HeritageEF_Score NA NA NA 3.79 3.58 3.24 EFW_Size_Govt 5.83 3.79 2.92 4.34 4.88 5.15 EFW_Legal_System_Protec_Prop_ Rights 6.13 5.85 5.21 5.41 6.15 5.91 EFW_Access_To_Sound_Money 4.11 4.92 4.58 5.02 8.84 9.45 EFW_Freedom_Trade_Internat 3.67 2.9 3.74 5.98 5.56 5.71 EFW_Regulation 4.35 2.59 3.6 3.75 3.73 5.54 Fraser_EFW_INDEX_Total Score 4.82 4.01 4.01 4.9 5.83 6.35 Human_Devel_Index(HDI)_Value NA NA 0.437 0.423 0.42 0.43

84 Uganda

Similar to other newly independent African countries in the 1960’s, the Ugandan economy possessed significant natural capital. Unfortunately, Uganda went into isolation under the rule of authoritarian regimes, resulting in the country becoming one of the most impoverished areas of the world. Uganda has changed over the past few decades from a country with some of the world’s worst human rights abuses, economic chaos and internal guerrilla warfare, to a country with greatly improved institutional quality and relative stability. In the mid-1990s relative political stability and peace led to economic reforms that have increased economic freedom, although it remains low by Western standards. The eight year rule leading up to 1980 of one of history’s most notoriously violent leaders, , left Uganda in ruins physically, politically and economically. Amin’s seizure of government in 1971 came as a relief to Ugandans, who aspired for deliverance from President who had assumed extensive power. It was hoped Amin’s rise to power would put the country on the path to democracy. Amin quickly crushed such visions when he rewrote Obote’s constitution, disbanded the parliament and gave himself absolute rule over Uganda. Ugandans experienced extensive ethnic persecution and political repression. Estimates place the direct human toll of Amin’s “reign of terror” at between 100,000 and 500,000 lives (State Department). Amin expelled all non-citizens, including Asians, who made up a large portion of Uganda’s population and participated significantly within the business community. This expulsion removed a significant amount of human capital from the country and dissolved a large number of businesses operated by Asians. Amin isolated the country from the rest of the world devastating Uganda’s economy and living standards. The nation’s war-ridden infrastructure was nearly obsolete by the end of Amin’s reign in 1979. After failed military incursions into Tanzania in 1979 Amin fled into exile in Sauid Arabia, where he died in 2003. Following Amin’s abdication the Uganda National Liberation Front (UNLF)—a group of exiled Ugandans—formed a new government. The UNLF developed a parliamentary system, the National Consultative Commission (NCC). The elections of 1980 returned power to President Obote. Many Ugandans felt Obote’s party, the Ugandan People’s Congress (UPC), rigged the elections. Political conflicts led to guerilla warfare, killing over another 100,000 people (The World Factbook). In attempts to suppress warfare within Uganda, Obote dramatically increased military spending and inflation spiked. Obote pursued a series of failed economic reforms in conjunction with international lenders. Among other things the plans were intended to remove price controls that set export prices artificially high and often contributed to shortages within the economy. Throughout the remainder of his presidential term, Obote raised public sector wages by a fourfold. Loans to the federal government increased by 70% and the money supply increased by 127% (Bigsten & Kayizzi-Mugerwa). Obote allocated large foreign loans to nonproductive military uses and domestic manufacturing came to a virtual standstill. The public had limited access to equipment, spare parts, and raw materials

85 As elections drew near and with little chance of reappointment, Obote continued to use international loans in inefficient areas. Irresponsible government spending and neglect of IMF’s priorities led to removal of significant international donations and loans. The economy continued to collapse until 1985 when Obote fled to Zambia after an army coup (State Department). During this time, the 1985 Economic Freedom in the World Index (EFW) ranked Uganda at 2.9 on a 10 point scale (EFW). In 1986, the National Resistance Army (NRM) led by assumed control of the country. The NRM under Museveni’s leadership had engaged in guerilla warfare since the days of Amin. The NRM quickly set up government with Museveni as Uganda’s new president. The NRM proclaimed greater concern for Ugandan human rights abuses, but insisted initially on socialist economic policies. Due to political instability, few reforms of any kind were implemented (Bigsten & Kayizzi-Mugerwa). By1990 the EFW score for Uganda had decreased from 2.9 to 2.4. Something of a pragmatist, Museveni brought a broader array of Uganda’s constantly fighting ethic fractions into his government. With little hope of survival for his regime without increased economic growth Museveni began to shed the Marxist ideology of his early political life and started to embrace economic reforms in exchange for assistance from the IMF and World Bank. Due to his improvement in the country’s civil rights record Musevini enjoyed widespread support among Western governments and was optimistically hailed as an example of a “new generation” of African leaders. He called upon the International Monetary Fund (IMF) and The World Bank to guide the nation through revitalization. The influx of foreign assistance funding helped solidify the stability of his government, and he has ruled Uganda since. The official Economic Recovery Program (ERP) was implemented under the supervision of international lenders. The ERP, as most international aid programs at the time, emphasized questionable subsidies to areas such as commercial agriculture, tourism, and export led manufacturing development. But it also encompassed sound monetary reform which led to a sharp reduction in the countries persistently high inflation. Inflation fell from 200 percent in 1987 to 6 percent in 1993 (World Bank Uganda Brief). Economic standards within Uganda began to sharply increase throughout the early 1990s while government spending declined. The government lowered expenditures by 70% in the early 1990s, specifically in inefficient public services developed by Obote. A national enterprise privatization program was launched in 1992 under pressure from foreign lenders. However, corruption and administration problems put divestment on hold until the later part of the 1990s (OECD). Significant improvements in Uganda’s economic freedom score (EFW) followed in the mid to late 1990s. The “Access to Sound Money” category shows impressive improvement between the years of 1990 and 1995. The monetary system moved from a 0.3 to a 4.6 by 1995, still low but greatly improved. Area 1, Size of Government, improved from 4.5 in 1990 to 6.3 in 2000 and has remained around 6.0 since. Area 4, international trade, showed significant improvement due to lowering of trade barriers and rose from 3 in 1990 to a high of 7.2 by 2001. Musevini implemented a formal constitution in 1995. The constitution formed a republic with judicial, legislative and executive branches (Department of the State). The new constitution gave Ugandans voting rights in presidential elections. However, since

86 Musevnin’s revision of the constitution in 2005 to allow him to seek a previously prohibited third term in 2006 elections, his status as a symbol of democracy in Africa has been diminished.

Table 3.23: Uganda Uganda 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ NA 826 173 206 243.8 262.61 GDP_per_capita_PPP_2000$_Gro - wth% NA NA 79.02 19.27 17.98 7.72 P4_POLITY2 3 0 -7 -4 -4 -4 FreedomHouse_Political_Rights 4 5 6 5 6 5 FreedomHouse_Civil_Liberties 4 4 5 4 5 4 HeritageEF_Score NA NA NA 3.15 3.15 2.7 EFW_Size_Govt NA 3.07 4.52 6.47 6.3 5.96 EFW_Legal_System_Protec_Prop _Rights 2.76 2.93 2.44 4.35 4.6 4.22 EFW_Access_To_Sound_Money 1.04 0 0.28 4.62 9.3 9.05 EFW_Freedom_Trade_Internat 4.34 3.76 2.99 5.1 6.95 6.37 EFW_Regulation 4.72 4.7 4.46 5.18 5.6 6.22 Fraser_EFW_INDEX_Total Score 3.21 2.89 2.94 5.14 6.55 6.36 Human_Devel_Index(HDI)_Value NA 0.41 0.411 0.413 0.474 0.502

United Kingdom

The Second World War was a turning point in the contemporary history of the British Economy. The state had taken control of the economy to lead the war effort and was viewed as a vital part of the allied victory leading many to wonder that if the government could plan for victory in the war why not let it plan the peace-time economy as well. The rising prominence of British economist John Maynard Keynes’ theories about the cause and solution to the Great Depression lent academic credibility to this emerging popular consensus. Nationalization and planning became the primary drivers of post-War economic policy and an extensive welfare state with cradle to grave support was implemented. Initially economic performance was positive. The economic growth achieved by the UK in the postwar years is often referred as the “Golden Age”. After the Second World War Britain’s economic growth was significant and history seemed to justify the post-War consensus of planning and nationalization. However, long-term problems were growing that couldn’t be ignored forever (Floud 1994; Yergin 1998). British investment in nationalized industries was unusually high and the return on these frequently unprofitable industries was extremely low. By the 1970s many British public corporations failed to generate enough revenue to cover even wages. That led the

87 government to pay subsidies or guarantee loans for the public sector corporations. Strong unionization and stringent labor laws prohibited cost cutting measures and labor saving innovations (Eltis 1983). Increasing economic malaise was accelerated by higher oil prices in the beginning of the 1970s. The government under the Labor party from 1974 to 1979 was beset by economic crisis. By the mid-70s the government was virtually bankrupt and had to seek emergency loans from the IMF. Price controls were leading to shortages and labor union demands led to a general strike in the winter of 1978/9, which became known as the “winter of discontent” and public attitudes toward Labor soured even further as it was viewed as incapable of ending the public disruptions caused by the strike—the conservative’s slogan “labor isn’t working” captured the public sentiment. (http://politics.guardian.co.uk/election2001/images/0,,449826,00.html). In 1979 elections brought change; conservatives won the vote and thus the right to form the government under the leadership of Margaret Thatcher. From the beginning the Thatcher government emphasized free markets and free enterprise. The government took steps to limit its influence over the economy and expand the private sector through privatization and deregulation and income taxes were eventually cut from 33% to 25% for the bottom rate and from 98% to 40% for the top rate and interest rates were raised to fight the effects of inflation (Holmes 1985). The first public enterprise to be transferred to private hands was British Petroleum. The process of rolling back the state continued with a number of companies, the most significant of which was the sale of British Telecom, the telecommunication company of the UK. That sale attracted nearly 2.3 million shareholders, many of whom were buying shares for the first time. The government’s approach was to offer the shares at 10 to 20 per cent below its market price and incentivize purchases by small investors. Private enterprises were born from privatized state monopolies of gas, electricity and water (Yergin 1998). But privatization was not easy and led to large increases in unemployment as workers at formerly state owned enterprises were let go due to the need for the newly private companies to become competitive and self-sufficient. The period of adjustment was long and severe. The spike in unemployment did not begin to erode until 1986. The Thatcher government was granted a new lease on life, despite the dismal economic realities of the early 1980s by the government’s victory over in the Falkland’s War of 1982. The victory ensured the conservative victory in the 1983 elections and bought time for the continued deregulation and privatization of the Thatcher economic policy to take effect (http://www.margaretthatcher.org/essential/default.asp). The eventual long-term victory of Thatcher’s economic liberalization was finally assured by the collapse of the coal miners union in 1985. The union was militantly opposed to Thatcher’s policy and her efforts to close uneconomic pits. The union led a year long strike from 1984-85 in response to the government proposal to close a large number of uneconomical mines; the strike was viewed as the critical challenge to Thatcher’s privatization and deregulation agenda. The government closed 25 pits in 1985 and 97 by 1992 with the rest being privatized by 1994 (UK Coal 2004). The collapse of the strike and the miners union after one of the longest and most violent strikes in British history proved a tipping point in public sentiment toward deregulation/denationalization and broader political support for Thatcher’s efforts (Homes 1985; Yergin 1998; Wilenius

88 2004). Indeed successive governments, conservative and labor, have adopted most of the key elements of Thatcher’s economic policy including sound money, deregulation and denationalization (Thatcher’s Legacy 1999). The Thatcher reforms had a profound impact on the economic freedom scores of the United Kingdom. The UK showed the world’s 8th largest improvement in economic freedom between 1980 and 2004 with its summary score rising from 6.16 in 1980 to 8.1 in 2004. The majority of improvements occurred between 1980 and 1995 when the score reached 8.07. In terms of size of government the score rose from 3.44 in 1980 to 6.7 by 2004 and the sound money score moved from 5.8 to 9.4 in the same time. Regulation was the other big improvement area increasing from 6 to 8.3 by 1995. Polity IV and Freedom House variables remained top scores during the period.

Table 3.24: United Kingdom United Kingdom 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 17208 18822 19647 21123 24150 26582 GDP_per_capita_PPP_2000$_Gro wth% NA 9.38 4.38 7.51 14.33 10.07 P4_POLITY2 10 10 10 10 10 10 FreedomHouse_Political_Rights 1 1 1 1 1 1 FreedomHouse_Civil_Liberties 1 1 2 2 2 1 HeritageEF_Score NA NA NA 1.8 1.9 1.84 EFW_Size_Govt 3.44 4.36 5.65 5.42 5.97 6.7 EFW_Legal_System_Protec_Prop _Rights 7.05 6.65 7.73 8.84 9.29 8.86 EFW_Access_To_Sound_Money 5.82 8.91 8.11 9.6 9.32 9.43 EFW_Freedom_Trade_Internat 8.47 8.53 8.22 8.2 8.46 7.89 EFW_Regulation 6 6.62 6.79 8.3 8.08 7.64 Fraser_EFW_INDEX_Total Score 6.16 7.02 7.3 8.07 8.22 8.1 Human_Devel_Index(HDI)_Value 0.859 0.868 0.889 0.927 0.939 0.94

Venezuela

As one of the world’s largest exporters of petroleum Venezuela became one of the wealthiest nations in South America during 1940-1970. Prior to the start of a downward spiral in the early 1980s Venezuela thrived. The robust economy experienced an influx of immigrants searching for opportunities throughout this period. President Carlos Perez’s led the country from 1974 to 1979. During the late 1970’s Perez cautiously pursued policies to open the Venezuelan economy and limit state intervention, governmental control and subsidies (Tarver 2004). Prosperity and living standards initially soared during the 1970s, however, poverty remained a serious problem for many Venezuelans. Statistically Venezuela’s economy experienced steady growth until the

89 collapse in global oil prices in 1986. Global prices shocked Venezuela’s economy and massively increased foreign debt. The lack of a multidimensional economy left Venezuela operating on depleting oil revenues; petroleum had accounted for 80 percent of GDP. The government used international loans to finance programs that previously operated on petroleum revenues (Hellinger 1991). The Banco Central de Venezuela (Central Bank of Venezuela), BCV, instituted monetary reforms during the late 1980s in an attempt to gain control on the money supply, which had been controlled by a fixed interest rate. After the BCV allowed the interest rate to move in response to markets, investment and savings surged within Venezuela. This growth proved short lived when the federal government eventually overrode BCV authority. By the 1980’s financial deterioration weakened BCV authority, numerous devaluations, and fiscal deficits combined to push consumer prices and inflation up in the late 1980s. The average consumer price index rose by 85% in 1989 (Haggerty 1990). While improving slightly with BCV reforms from 7.2 in 1980 to 8.3 in 1985 the country’s access to sound money collapsed to 4.43 in 1990 and 1.9 in 1995. In the early 1990’s, the Venezuelan community reassessed the original assumption that oil reserves would preserve and grow the nation’s wealth. Oil-based growth had proved sporadic as world demand set prices for the commodity. “The social welfare system adequately financed under the previously thriving economic conditions, failed to provide basic needs of many Venezuelans under the extraordinary circumstances that prevailed under the second Carlos Perez administration (1989-1993)” (Haggerty 1990). Perez survived two attempted coups during his second term when the Venezuelan Supreme Court removed him on charges of corruption with the misuse of federal funds. Taking leadership of the country in 1994 Rafael Caldera Rodriguez implemented plans for economic revitalization in 1996 with the privatization of many state-run companies. Declining oil returns and rising foreign debt during the 1990’s limited Venezuela’s political leverage and led to public impatience. (Canache & Kulisheck). Economic despair impacted politics. Popular distrust of political institutions increased, alongside social unrest and violence among the nation’s people. Rodriguez’s efforts to move Venezuela to a more market-based society were short lived. Due to the public’s lack of patience and the desire for life prior to the oil crisis, disapproval for Rodriguez remained widespread (Hellinger 1991). Democratically elected in 1998 and with widespread support from a public impatient with market reforms, President Hugo Chavez initiated a socialist economic agenda. Chavez became fixated on the elimination of U.S. influence in Venezuela and the rest of Latin America. Chavez’s implemented a socialist system in which the nation acts as one large corporation. This transition significantly contributed to the country’s economic downturn. Chavez halted previously planned privatization of state assets. Declaring a state of emergency, he approved a law enabling him to rule as dictator for six months. Oil production in Venezuela was cut to limit supply and increase prices. Venezuelan economic output dropped by7.2% throughout 1999 and a steep downturn in international oil prices during the first half of the year fueled the recession. An assembly consisting of Chavez, Congress, and the Judiciary drafted a new constitution in 1999. Strongly influenced by Chavez the assembly developed a constitution that established a strong president with a six-year term and ability to run for reelection. In the same month of the constitution’s approval, Venezuela experienced its

90 worst natural disaster of the century. Torrential rains caused devastating mudslides along the Caribbean coast. As many as 5,000 people were killed (Haggerty 1990). Chavez remained popular among the lower class as he redistributed wealth to gain public support during the crisis. A major critic of neoliberal globalization, Chavez worked to localize benefits from oil deposits and has been a strong advocate for spreading socialism in Latin America. Economic freedom scores have collapsed under Chavez’s rule decreasing from 5.5 in 2000 to 4.4 in 2004. And real per capita income in Venezuela has actually decreased since 1980 from $6,700 to just under $4,600 in 2004. Venezuela serves as an unfortunate reminder that democratic elections are not a sufficient condition for economic prosperity.

Table 3.25: Venezuela Venezuela 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 6753 5821 4823 5119 4818 4595.56 GDP_per_capita_PPP_2000$_Gr - - owth% NA 13.80 17.14 6.14 -5.88 -4.63 P4_POLITY2 9 9 9 8 7 6 FreedomHouse_Political_Rights 1 1 1 3 3 3 FreedomHouse_Civil_Liberties 2 2 3 3 5 4 HeritageEF_Score NA NA NA 3.23 3.38 4.23 EFW_Size_Govt 6.29 6.86 5.95 6.13 5.95 5.46 EFW_Legal_System_Protec_Prop _Rights 6.22 5.25 5.7 3.84 3.75 1.79 EFW_Access_To_Sound_Money 7.28 8.3 4.43 1.93 5.56 4.85 EFW_Freedom_Trade_Internat 8.08 5.34 6.81 5.2 7.18 5.83 EFW_Regulation 5.04 5.39 4.6 4.01 5.16 4.27 Fraser_EFW_INDEX_Total Score 6.58 6.23 5.5 4.22 5.52 4.44 Human_Devel_Index(HDI)_Value 0.734 0.742 0.76 0.768 0.774 0.784

Zambia

Zambia’s recent history is the source of many “resource curse” studies and opinions. Zambia experimented with complete government control of all aspects of the copper industry and suffered a national economic shock after the world price for copper plummeted in 1975 following the OPEC crisis. Zambia began partially privatizing its industry in 1991 and has since continued a path of liberalization and privatization. While still implementing reforms, Zambia enjoyed the largest percentage increase in their Economic Freedom of the World (EFW) score between 1990 and 2004 among the 130 rated countries, the overall score rose 106%, from 3.3 to 6.8. The world price of copper has steadily increased since 2004 so the contention that a liberal, privatized economy will

91 better mitigate a sharp price decrease than a nationalized economy has not yet been tested—the world price of copper feel sharply in 2008 but recovered quickly (www.metalprices.com)—but the economy should be much better able to guard against these shocks than the previous incarnation that failed to deal with the 1975 price shock. Copper accounted for 95% of exports at independence in 1964, making Zambia the third largest copper exporter in the world behind the US and the Soviet Union (BBC). Unfortunately for Zambia, the expertise and infrastructure that had created this boon was exclusively European. To add to the burden immediately after independence, Zambia had the misfortune of being the only independent African nation surrounded by anti-colonial struggles in Southern Rhodesia (eventually Zimbabwe), Mozambique and Angola (State Department). Zambia supported the independence movements in these struggles militarily and accepted a flow of refugees immediately after independence. After independence, Zambia followed the Soviet model and instituted two development plans to spur investment in infrastructure and manufacturing. Kenneth Kaunda, the independence fighter and first president of Zambia, adopted “Zambian Humanism”, loosely adapted from various Soviet communist thinkers, which condemned human exploitation and stressed cooperation. Kaunda inherited a nation in which the local black Africans were nearly completely divested of both land and capital and adopted social welfare policies to address these inequalities after independence (Simutanyi). Kaunda was influenced in this view by other freedom fighters turned socialist dictators in Africa, such as Ghana’s Kwame Nkruma and Tanzania’s Julius Nyerere. The major planning initiative occurred 4 years after independence with the Mulungushi Economic Reforms of 1968 in which the government declared its intention to acquire 51% or more of a number of key foreign-owned firms, to be controlled by the Industrial Development Corporation (INDECO). In 1970 the government had a majority holding in the 2 largest foreign mining operations, which became Nchanga Consolidated Copper Mines (NCCM) and Roan Consolidated Mines (RCM). The government then created another company; the Mining Development Corporation (MINDECO), and yet another; the Finance and Development Corporation (FINDECO), which allowed the government to gain control of insurance companies and building interests. In 1971, INDECO, FINDECO, and MINDECO joined to become Zambia Industrial and Mining Corporation (ZIMCO), creating one of the largest companies in Africa. In 1982 the two major mines, now NCCM and RCM, merged into Zambia Consolidated Copper Mines Ltd. (ZCCM), giving the government of Zambia de facto control of the entire copper industry (Stoever). The secondary effects of the OPEC oil crisis of 1973 eventually caused the world price of copper to drop drastically in 1975, with severe implications for the undiversified Zambian economy—the demand due to the Vietnam War had ceased, and the major input cost of fuel for transport of copper rose drastically. The Portuguese coup of 1974 created two newly independent states in Mozambique and Angola but also two new civil wars that created a refugee population in Zambia and further limited land-locked Zambia’s export transportation options. The sudden drastic drop in world copper prices, coupled with a bloated civil service, corruption, and mismanagement caused per capita income to decrease nearly 5% annually from 1974-1990 (World Bank). The IMF intervention that occurred in the aftermath of the copper price drop created one of the most indebted nations in the world (relative to GDP) by the mid 1980s.

92 Eventually the IMF started insisting on policy changes that would lead to a more stable and structured economy in exchange for their continued support. The IMF insisted on diversification of the economy away from copper, termination of price controls, devaluation of the currency, reduction of government expenditures, and cancellation of subsidies for maize, petrol, and fertilizer (Kalinda). The relaxation of price controls and subsidies on basic foodstuffs led to rioting in 1987, causing Zambia to break with the IMF until reconciliation in 1989. The ideological underpinning of Kaunda’s “Zambian Humanism” was struck a blow when the Soviet Union collapsed in 1990 and he realized he would have to change his policies to stay politically viable. He signed a constitutional amendment ending Zambia’s existence as a one-party state and ran amongst several new parties. Kaunda’s political support was hard to measure at this point, as he had previously simply won uncontested elections in 1978, 1983, and 1988. He lost the 1991 election to the Movement for Multiparty Democracy’s (MMD) Frederick Chiluba who won by capturing an astonishing 81% of the vote (State Department), and would rule Zambia until his electoral defeat in 2001. Chiluba instituted broad privatization of the giant state firms, raised interest rates to fight inflation, eliminated exchange rate controls, reestablished donor support for the balance of payment deficit (State Department). The withdrawal of the government from the industrial sector of the economy due to privatization is reflected in the EFW “size of government score” increase from 3.5 to 7.4 from 1990 to 2004. The privatization of the mega-firm ZCCM was the crowning accomplishment of the Chiluba years, although it took 4 years before it was completely privatized in 2000 (Economist: 5/18/07). GDP grew at 3.5% in 2000 and inflation was at the lowest level in 20 years (World Bank). 2001 was the first full year of complete privatization of the copper industry and was also the first year of increased production since 1973. (Economist 5/18/07). Surging copper prices in 2004 due to the worldwide demand for electronics have increased investment and somewhat alleviated the balance of payments problem. Chiluba’s privatization efforts were not an unmitigated success. While legal immunity and tax concessions encouraged foreign investment, the development agreements that conferred these benefits were the result of much political bribery and risk alienating public opinion when those legal immunities are exploited. The development agreements have also been clouded by lingering bribery allegations. Chiluba’s presidential immunity was later removed by his successor, Levy Mwanawasa, and various members of his government were charged with corruption in connection with the signing of these development agreements. Chiluba attempted to amend the constitution to allow him to run for a third term but pressure from his own MDD party and public outcry caused him to withdraw from the elections. The MDD’s candidate, Levy Mwanawasa, was elected with a mere 29% plurality in the 2001 presidential elections amid claims from his competitors that the MDD used vote rigging, fraud, unfair coverage by state television, and public resources. Three petitions filed in 2002 were dismissed in 2005 and the 2006 elections in which Mwanawasa was again elected president were deemed free and fair (CIA). Concerns that Mwanawasa was merely a puppet for the continuing rule of Chiluba were immediately assuaged by the anti-corruption policies that Mwanawasa instituted

93 upon taking office. He immediately lifted Chiluba’s presidential immunity, started a corruption task force, and pushed for Zambian courts to hear corruption charges against Chiluba’s government. He appointed an Electoral Reform Technical Committee and a Constitutional Reform Committee (State Department). He was so serious in insisting that senior officials and ministers not bid on contracts that he sacked his own vice president in 2003 for his involvement in an irregular oil contract (Freedom House). Mwanawasa has also continued the drive to privatize industries that were almost all nationalized under Kaunda (www.zpa.org.zm). In 2006 he implemented the Private Sector Development Action Plan and the Zambian Development Agency Act. The Zambian Development Agency Act combined 5 agencies in charge of development into one agency, the Zambian Development Agency, and the results were immediate. In 2006 the average time to register a new business dropped from 55 to 9 days and more reduction in regulation is expected. Perhaps the biggest impact that Mwanawasa has had on the Zambian economy is the reciprocal relationship he has nurtured with donor countries. The copper price crisis in 1975 led to a balance of payments crisis that was staunched by various donors, making Zambia one of the most indebted countries in the world from the mid 1980s to the 1990s. While Zambia had $4.4 billion of external debt and public debt made up 65.7% of GDP in 2006, the total external debt as a portion of GDP has been drastically reduced by debt relief (CIA). Public sector reforms, improved governmental fiscal responsibility, and a successful poverty reduction strategy have led to Zambia’s completion of the criteria of the World Bank’s Highly Indebted Poor Countries (HIPC) initiative and of their subsequent qualification for the Multilateral Debt Relief Initiative (MDRI) (OECD). This debt relief resulted in a decrease in external debt from $7 billion in 2003 to less than $1 billion in 2007 (OECD). Most multilateral partners have canceled 100% of Zambia’s debt. Zambia still relies on donor assistance for more than 30% of the government budget and to ensure that the debt relief does not lead to backsliding, further aid is conditioned on the successful implementation of the Public Expenditure Management and Financial Accounting (PEMFA) system launched in 2005 (OECD). The completion of the HIPC program frees the Zambian government from the burden of debt service and government borrowing is down from 5.2% of GDP in 2003 to 1.8% in 2006 (OECD). Another major initiative of the Mwanawasa administration has been an attempt to both secure the Zambian economy against future copper price shocks and to satisfy donors by diversifying the economy away from copper. In 2006 copper and cobalt exports were 64% of all exports, down from 95% at independence but still dominant enough in the economy to create vulnerability to a price shock (CIA). The government is pursuing an economic diversification program that attempts to exploit other natural resources, namely agriculture, tourism, gemstone mining, and hydro-electric power (State Department). Zambia’s Private Sector Development (PSD) program was influenced by an earlier government initiative, the National Economic Diversification program which emphasized agriculture, agro-processing, and tourism (UN Investment). The government also approved action plans for the Ministry of Tourism, Environment, and Natural Resources to streamline licensing requirements in non-copper industries and for the Ministry of Commerce, Trade, and Industry to reduce administrative barriers (UN Investment). Non-traditional exporters are taxed at a lower rate (UN Investment). Of the 6.99% of the land in Zimbabwe that is arable, only .04% is being used for permanent

94 crops (State Department). Tourism is also enjoying a boom, with visitors taking advantage of Zambia’s diverse flora and fauna and the beautiful waterfalls in twice as many numbers in 2005 as in 2003, but is also suffering from a lack of infrastructure (OECD). Growth averaged 4.8% from 2000-2005 (OECD). While overall poverty has decreased, 70% of the population still lives in poverty, per capita income is $627, half the level it was at independence, life expectancy is an incredibly low 38 (just barely above Zimbabwe’s world low), and 16% of the adult population has AIDS/HIV (State Department). Zambia seems to be another example of a country that was able to make some institutional progress at the behest of international donors but that has stagnated after initial progress.

Table 3.26: Zambia Zambia 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 1185 1079 361.43 295 302.53 338 GDP_per_capita_PPP_2000$_Gro - wth% NA -8.95 -66.50 18.37 2.54 11.94 P4_POLITY2 -9 -9 -9 6 1 5 FreedomHouse_Political_Rights 5 5 6 3 5 4 FreedomHouse_Civil_Liberties 6 5 5 4 4 4 HeritageEF_Score NA NA NA 3.15 2.99 3.55 EFW_Size_Govt 2.56 3.15 3.47 5.93 7.1 7.38 EFW_Legal_System_Protec_Prop_ Rights 6.09 3.99 3.7 5.91 5.85 5.47 EFW_Access_To_Sound_Money 6.05 3.26 0.11 0.65 7.15 7.54 EFW_Freedom_Trade_Internat 5.72 5.15 4.84 6.73 7.78 6.93 EFW_Regulation 5.26 4.37 4.2 4.69 5.55 6.47 Fraser_EFW_INDEX_Total Score 5.14 3.98 3.26 4.78 6.69 6.76 Human_Devel_Index(HDI)_Value 0.477 0.486 0.464 0.425 0.409 0.407

Zimbabwe

In recent years Zimbabwe has approached total economic collapse due to the perfect storm of economic and political mismanagement by its “democratically” elected president, Robert Mugabe. Zimbabwe suffers from a near complete lack of foreign exchange, a dilapidated infrastructure, 80% unemployment (Schaefer: Crisis), and hyperinflation. The resulting human toll has been tremendous. One quarter of the population (most of the working-age demographic) has fled to neighboring countries, the government stifles or disenfranchises most political opposition, and life expectancy for both men and women is now the lowest in the world—34 for women and 37 for men (Gerson).

95 Structural problems have plagued Zimbabwe since independence in 1980 but Mugabe has increased the pace and severity of detrimental populist policies to preempt his main political opposition (State Department, Freedom House). Mugabe accelerated his populist policies when the Movement for Democratic Change (MDC) solidified out of various disparate dissenting groups in 1999 and was instrumental in defeating a 2000 referendum. Mugabe’s populism culminated in the seizure of white owned farms in 2000 that accelerated the collapse of the Zimbabwean economy. The story of the modern nation of Zimbabwe begins in 1888 when Cecil Rhodes (a British-born, South African businessman and mining magnate) obtained mineral rights from local chiefs in what would eventually become Zimbabwe. The British Company was charted in 1889 and the settlers of the area chose to form “Rhodesia” upon the charter’s abrogation in 1923. In 1965 Ian Smith, a white colonialist born and raised in Rhodesia, ran for election on an independence platform, swept all 50 available seats, and declared independence from the United Kingdom. The UK did not grant Rhodesia independence like it did to other ex-colonies during the 1960s because of the white ruling class’ refusal, personified and championed by Smith, to adopt a system of majority rule. The Rhodesian cabinet, led by Smith, unilaterally declared independence from the UK and its intention to rule as a white minority. This prompted the UN to issue its first ever sanctions one year later in 1966. The Smith government entered negotiations with local black leaders in Geneva 10 years later due to a combination of internal guerilla fighting, the UN embargo, and the independence of neighboring Mozambique and Angola. These negotiations produced the Lancaster House Accords, named for the building in London where an agreement was reached on an immediate cease-fire, new elections, majority rule, transitional rule, and the new name of “Zimbabwe”. Robert Mugabe won a free and fair election in 1980 and initially honored the good faith embodied in the Lancaster House Accords. His government did not engage in any retribution against whites despite its inheritance of 1,000,000 refugees and 20,000 casualties from a guerilla war dating back to 1972 (State Department). Zimbabwe’s EFW rating of 4.7 in 1980 (chain-linked) put it in the company of Trinidad & Tobago, Senegal, and Mauritius. The EFW tracks the varied but consistent increase in economic freedom that occurred between Zimbabwean independence in 1980 and approximately 1995 and the steady decline that occurred thereafter. Mugabe inherited a state of emergency and Zimbabwe experienced various periods of peace and guerilla war during the 1980s. Mugabe’s ZANU-PF won slightly larger majorities in the 1985 and 1990 elections and the economy grew intermittently during the 1980s (State Department). Zimbabwe’s EFW score improvement from 4.7 to 6.1 between 1980 and 1995 reflects this institutional and infrastructural momentum and the policy changes guaranteed by provisions of the Lancaster Accords. Land was the main issue during the negotiations that led to the accords. Margaret Thatcher’s government was largely interested in protecting the property rights of the white farming minority and was therefore wary of Mugabe’s claim that “none of the white exploiters will be allowed to keep an acre” (McGreal). The Accords included a provision requiring that the Zimbabwean Constitution include a 10 year moratorium on compulsory land sales. The English delegation convinced Mugabe to sign the Accords with the 10 year expiration provision after much negotiation and with verbal promises to fund the Zimbabwean’s government bilateral land purchases (McGreal). The improved

96 “legal structures and property rights” EFW score of 3.1 to 5.5 from 1985 to 1995 reflects the 10 year guarantee of property rights of the landed white farmers. The only harbinger in this EFW data of things to come during this relevant period was the plunging “sound money” score, dropping 21% from 6.2 to 4.9. Mugabe capitalized on the expiration of the Lancaster House Accords in 1990 to begin the policies that have led the country to its present state. Mugabe failed in his effort to convince the ZANU-PF Central Committee to support the creation of a one-party state in 1990 (State Department). Mugabe then embarked on a campaign to amend the constitution and succeeded in 1991 to amend it to allow any land (not merely underutilized land, as was the case before the amendment) to be acquired by the government for resettlement, and to lower the amount and timeliness requirements of payment for seized land (State Department, www.poponline.org). Most importantly, these first amendments denied court access to victims of compulsory land purchase by the government (State Department). This episode reveals Mugabe’s practice of using his government to “legally” seize and redistribute land when his political support weakens. The events of 1999 and 2000 set the stage for Zimbabwe’s rapid decline. Various dissenting groups overcame ethnic and sectarian divisions to unify into the Movement for Democratic Change (MDC) in 1999. The MDC was so successful in their advocacy that they defeated a 2000 referendum on a draft constitution that would have allowed Mugabe two additional terms in office, granted government officials immunity from prosecution, and authorized government seizures of white land (Schaefer: Crisis, State Department). The MDC captured 57 of the 120 possible seats in the 2000 elections for the National Assembly (State Department). Mugabe’s response to this apparent waning of his political support was to play his biggest populist hand; he would take most of the productive farmland from the predominantly white farmers and distribute it to the people by enacting the Fast Track Land Programme (OECD). Four years after the inception of the program in 2000 Zimbabwe’s “legal systems and property rights” EFW score had fallen 43.6% from 5.5 in 1995 to 3.1 in 2004 and most of the country’s most viable assets and its largest employer had been eliminated. Land distribution was and is the main political and economic issue in Zimbabwe. Whites owned approximately 4,500 large commercial farms on approximately 11 million hectares of the best irrigated and most arable land in 1980. Conversely, 1.2 million black Zimbabweans (approximately half of the population) lived on 16.3 million hectares of the least desirable land (OECD). Mugabe began land reforms upon coming to power in 1981 but only resettled 3.5 million hectares with 73,000 families between 1981 and 2000 (OECD). The government purchased land for resettlement during these two decades at market prices, or, in some cases, prices in excess of the market price (OECD). The political threat to Mugabe’s regime following the 1999 formation of the MDC and their electoral victories in 2000 lead Mugabe to drastically increase the pace and scope of land resettlement in an attempt to peal away support from MDC. The government’s stated goal with 2000’s Fast Track Land Progamme was to repatriate 150,000 families on 5 million hectares (OECD). The informal land grab was equally ambitious. Mugabe’s ZANU-PF coordinated and condoned “war veterans” evicting white owners of large commercial farms. These “war veterans” that received most of the land were often the young political activists of the ZANU-PF or established political allies and

97 very rarely veterans of the armed independence struggles of the 1970s. They often registered multiple family members for different plots to bypass the “one man, one farm” rule that accompanied this initiative and created large contiguous plots (Schaefer: Crisis, OECD). Economic collapse followed swiftly on the heels of these reforms. The economies of scale that bolstered the productivity of large farms were destroyed when the farms were divided into smaller plots and given to individuals with little or no farming experience (Schaefer). GDP has fallen 30% percent between the beginning of the land reforms in 2000 and 2006 and fewer than 500 of the original 4,500 white owned commercial farms still operate (Freedom House). The erosion of political freedom was soon to follow the erosion of economic freedom. Mugabe won the presidential election of 2002 against the MDC’s Morgan Tsvangirai by a 56% to 42% margin (State Department). 50 people died in the political violence accompanying the election and the US and EU both imposed a travel and arms embargo and froze the assets of some prominent Zimbabweans (State Department, Schaefer: Crisis). The Commonwealth of Nations, the collection of ex-British colonies that has developed into a valuable trading entity, suspended Zimbabwe from their council meetings and chose to continue that suspension after a yearly review in 2003. Mugabe subsequently withdrew Zimbabwe from the organization (State Department). A land redistribution policy motivated by perceived political threats and populist patronage further aggravated the economic situation in 2005. The parliamentary elections of 2005 occurred without violence although free speech was not tolerated, food was used to bribe voters at the polls, and key voting data was not released (State Department). Mugabe’s ZANU-PF won 78 of the 120 available seats, the MDC won 41 seats, and one independent candidate took the remaining seat (World Bank). Mugabe took advantage of his legislative gains to pass various constitutional amendments. These amendments abolished all freehold property titles by nationalizing all land, denied legal recourse to owners of expropriated land, brought all schools under state control, allowed the government to seize the travel documents of people deemed a threat to national interests, and reintroduced an upper legislative house, the Senate (Freedom House). The MDC officially decided to boycott the 2005 Senate elections despite their decent showing in the previous parliamentary elections. 50 MDC candidates ran in defiance of their own party’s mandate, with 7 of them winning seats in the 66 member house (Freedom House). Mugabe used his newfound legislative super-majorities to initiate “Operation Murambatsvina”, an urban version of his 2000 Fast-Track Land Programme. Illegal structures, business activities, and areas where criminal activities took place were literally bulldozed, displacing at least 300,000 people (OECD) and affecting at least 700,000 (Schaefer: Crisis). Once again, the goal of this land program was similar to that of the land reforms of 2000 in that it was meant to scatter and disenfranchise a source of political dissent, this time the urban poor as opposed to the landed agricultural interests (Schaefer: Crisis).

98 Table 3.27: Zimbabwe Zimbabwe 1980 1985 1990 1995 2000 2004 GDP_per_capita_PPP_2000$ 2485 2551 637 604 587 458.6 GDP_per_capita_PPP_2000$_Gro - wth% NA 2.66 75.01 -5.11 -2.86 -21.94 P4_POLITY2 4 1 -6 -6 -5 -7 FreedomHouse_Political_Rights 3 4 6 5 6 7 FreedomHouse_Civil_Liberties 4 6 4 5 5 6 HeritageEF_Score NA NA NA 4.09 4.04 4.54 EFW_Size_Govt 4.9 3.48 4.07 5 4.52 3.52 EFW_Legal_System_Protec_Prop _Rights 2.97 3.05 3.99 5.53 5.02 3.12 EFW_Access_To_Sound_Money 6.3 6.24 5.61 4.92 2.79 0 EFW_Freedom_Trade_Internat 4.95 4.69 5.6 6.41 3.71 3.09 EFW_Regulation 4.28 5.49 4.78 5.27 5.36 4.11 Fraser_EFW_INDEX_Total Score 4.68 4.59 4.81 5.43 4.28 2.77 0.64 Human_Devel_Index(HDI)_Value 0.576 2 0.639 0.591 0.525 0.491

Summary of Case Studies

From the preceding case studies a number of factors can be identified as potentially important in the process of institutional reform, either individually or in combination with other events or circumstances. A partial, but probably not complete list includes:13

1. Economic crises 2. Political/military crises (including civil war) 3. Changing ideas/political trends 4. Collapse of the Soviet Union 5. International politics/spheres of influence 6. Size/geography 7. International development assistance/lending 8. Neighbors/cultural influences 9. Ethnic fractionalization 10. Autocracy/unconstrained authority

13 Table 3.28 summarizes the explanatory factors by country.

99 Table 3.28: Case Summaries 1 2 3 4 5 6 7 8 9 10 Baltics 9 9 9 9 9 9 Chile 9 9 9 9 9 Congo 9 9 9 9 9 9 9 El Salvador 9 9 9 9 9 9 9 9 Ghana 9 9 9 9 9 9 Hungary 9 9 9 9 9 9 9 Iceland 9 9 9 9 Ireland 9 9 9 Israel 9 9 9 9 9 Jamaica 9 9 9 9 Kuwait 9 9 9 9 9 Myanmar 9 9 9 9 New Zeal. 9 9 9 Nicaragua 9 9 9 9 9 9 9 Peru 9 9 9 9 Poland 9 9 9 9 9 9 Tanzania 9 9 9 9 Uganda 9 9 9 9 9 9 UK 9 9 9 9 9 9 Venezuela 9 9 9 9 9 Zambia 9 9 9 9 Zimbabwe 9 9 9 9

Table 3.28 summarizes the countries by which characteristics were influential in their institutional transition as explained in the case studies. The numbers at the head of each column correspond with the numbered factors identified at the beginning of this section. As becomes apparent, economic and political crises were the most common factors influencing institutional reforms, followed closely by changing ideas and trends, international relationships, and size or geographic factors. The others all occur with less, but still significant, frequency.

Economic Crises

Perhaps the most common thread running through all of the cases explored here is the role or presence of economic crisis. All of the countries explored here experienced some form of economic crisis directly connected to their episodes of institutional reform. However the nature of those economic crises varied greatly, somewhat limiting the information attainable from the variable alone. It is possible to identify at least three broad categories (other subcategories are also apparent) of economic crises among this group of countries. First, the rich country prolonged downturn: these type of crises occurred in the United Kingdom, Ireland, Iceland and New Zealand (as well as possibly

100 leading to economic reforms in the US at a similar period as the UK). In these countries standards of living remained very high relative to global averages, but based on their own recent historical experiences each country experienced a pronounced departure from the norm in terms of economic performance. While much of the world would have viewed the economic performance of the UK in the late 1970s with envy, at home it led to the “winter of discontent” and a radical departure from three decades of economic orthodoxy. Second, long-term decline under socialism led to the economic crises weighing on the countries of the former Soviet bloc such as Poland, Hungary and the Baltics. In their cases they had enjoyed modest economic success and higher standards of living than much of the world, but lagged significantly behind the OECD countries in terms of economic performance and well-being. Their economic crises, while pronounced at the time of reform, were long in gestation and not new. Third, economic crises in poor countries. These countries have never experienced the benefits of economic prosperity and growth and thus what amounts to an economic crisis with significant political ramifications in a developed country such as Ireland is not really meaningful in their context. Their histories are characterized by low standards of living and relative economic stagnation. Thus while the countries discussed here that are poor did experience economic crises they are of substantively different character than those crises in the more developed countries—much of the difference can probably be thought of qualitatively as a difference in expectations among the population. People in poorer countries are simply more accustomed to economic downturns and setbacks than are people in wealthier countries. So a situation which might lead many individuals to call for a major reconsideration of how economic policy is ‘managed’ in a developed country may cause very little change in public attitudes in poorer countries—and thus result in less pressure for institutional change. In addition to the different qualitative aspects of the economic crises discussed here there are two other problems with viewing economic crisis as a strong explanatory variable on its own. While the two dozen countries here all experienced economic crises, many more countries experienced economic crises during this time period and did not undertake significant institutional reforms. Thus, it clearly is not a sufficient condition for institutional reform in isolation. Another potential problem with looking to the concept of economic crisis as an indicator or explanatory factory of institutional reform is its commonness. As Rosenberg and Birdzell point out, questions regarding economic development often approach the topic from the wrong perspective—that is by asking: why are some countries poor? As they explain, poverty and the absence of economic growth are the global and historic norm, thus development studies should ask the converse question: why are some countries rich? (Rosenberg and Birdzell 1987). Applying that lesson to the question of institutional reform is important. While it may not be sufficient to point out most major institutional reforms have occurred amidst economic crisis it also appears to be the case that no major reforms occurred during times of economic progress relative to the local norm. Thus if economic crisis is not a sufficient condition for institutional reform we cannot reject the hypothesis that it is a necessary condition for such reforms.

101 Political/Military Crises (including civil war)

Many of the reforms explored in this chapter occurred in conjunction with major disruptions of the political status quo, or major political reforms, or in the wake of foreign or domestic military conflict. One possible way these crises are important is that they can certainly lead to the types of economic crises discussed above as possible important contributors to economic reform. Secondly, such crises have the potential to greatly disrupt the power equilibrium in a society. Interest groups that have enjoyed an advantage in domestic decision making and have used such an advantage to engage in rent seeking behavior may find themselves at a disadvantage during such disruptions, thus opening the way for other competing interest groups to reshape the institutional structure in their favor. Third, major civil or military disruptions may shake the social/cultural preconceptions of the populace to the point where they are more open to alternative institutional arrangements and, indeed, may even demand them. The Central American countries discussed here experienced military disruptions in terms of civil wars or spill-over wars from their neighbors that dramatically altered their internal power balance and resulted in reforms. Myanmar and Zimbabwe experienced prolonged political or military disruptions leading into their economic collapses. On the other hand, military victory helped the reforming government to remain in power in the UK.

Changing Ideas/Trends

The countries discussed here that experienced increases in economic freedom were the standouts, but they were not alone, thus they were probably influenced by trends around the world. Simultaneously, factors locally that made their reforms so much more significant than global averages are likely to reinforce the global trends. Disentangling such complex relationships would require numerous approaches including a broader understanding of the sociology of knowledge, how ideas translate across national boundaries and cultures and how success influences decision makers in other countries (see, for example, Berger and Luckmann 1966). Two ideas that were widely developed and gaining influence in the time period discussed in this chapter were the increasing skepticism about the long-run viability of socialism and economic planning as discussed by Hayek (1944, 1945, 1974) and Mises (1922) and the importance of monetary policy in macroeconomic performance associated with Friedman (Friedman and Schwartz 1963, Friedman 1956). The role of these ideas in influencing institutional reforms can be pinpointed in some cases to specific decision makers. Estonian Prime Minister Mart Laar was directly influenced by Milton Friedman, and British Prime Minister Margaret Thatcher famously produced a copy of Hayek’s Constitution of Liberty at a Conservative party conference and declared it the guiding thought behind her platform. Chile’s reforms, as noted, were significantly influenced by the “Chicago boys,” who had studied monetarist economics at the University of Chicago and subsequently gained influential positions in the Pinochet regime. And countries such as New Zealand adopted inflation targeting, a practical application of Friedman’s notion of a monetary rule. And the worldwide improvement in the area of Sound Money in the economic freedom index has been significant, suggesting that worldwide the monetarist idea

102 advanced by Friedman has taken root, not just in theory, but in practice. Other countries seem to have been influenced by the thinkers that guided Thatcher and Laar, as well as so many others, but whether directly or indirectly is a mystery. What seems clear is that a large role was played by a sea change in economic thinking that took root in the late 1970s under the influence of the Chicago School.

Collapse of the Soviet Union

The collapse of the Soviet Union looms large over the time period of these case studies. The Soviet collapse can be seen as having at least two broad influences on the historical record of institutional reform that followed—one in the political sphere and one in the ideological or intellectual sphere. First, most obviously, the collapse of the Soviet Union and the Soviet bloc created the political opportunity for institutional reform in many countries where it did not exist previously (indeed, some of the countries did not even exist previously). Thus, this event allowed the Baltics, Poland and Hungary to undergo radical economic reforms that would have been unthinkable under Soviet domination. Of course, many former Soviet republics have not undergone the same type of rapid liberalization. Examples such as Belarus and the Central Asian republics, as well as Russia itself, remind us that the Soviet collapse was not a guarantor of economic liberalization. The second way the Soviet collapse greatly influenced institutional reform was by transforming the idea space or social discourse surrounding economic institutions and policy. As long as the Soviet system remained it provided a powerful symbol of socialism that was clung to by many governments around the world. Its demise forced previously unwilling minds to face directly the arguments of Hayek, Friedman and others that had more easily influenced the likes of Thatcher and Laar. Several of the African countries discussed here such as Zambia were among a wave of poor countries to abandon their faith in Socialism after the Soviet collapse. In Central America the Soviet collapse and the end of the Cold War led to the defeat of the ideas (and financial and military support) that had driven a decade of civil war and turmoil from which emerged economic liberalism in Nicaragua, Honduras and El Salvador, as discussed above. And Israel represents a special place in the influence of the Soviet collapse as it was one of the developing countries losing its faith in socialism that was solidified by the demise of the Soviet system, but also because it was greatly influenced by a massive influx of Jewish refugees from the former Soviet Union. These refugees brought with them a transformation of Israeli society and strong opinions about life in a socialist state that further influenced Israeli movement toward liberalization.

International Politics/Spheres of Influence

Related to the discussion above about the demise of the Soviet Union, international politics seems to have played a role in the institutional reforms studied here. For various reasons—economic advantage or strategic military necessity—countries choose to align themselves with more powerful or influential partners. Part of this alignment can take the form of reforms designed to adopt similar institutions.

103 The Baltic states and other former Soviet satellites have been eager to tie themselves into the Western European or American spheres of influences in hopes of avoiding future entanglements with Russia. These hopes have likely significantly influenced liberalization in the Baltics as well as Poland. Israel has similarly sought to closely align itself with the United States for military purposes and the cooperation of both countries’ conservative governments may have sped institutional reform. Kuwait has clearly been influenced by its experience with the Iraq invasion and its American led liberation and has worked to develop more Western institutions in its wake. On the side of moving away from liberalism, Venezuela represents a stark example of an effort to establish an explicitly anti-American sphere of influence in South America. Venezuelan leader Hugo Chavez has advocated the spread of socialism as a counter balance to American influence—similar to the movement in Africa following World War II when many newly independent African countries sought strategic alignment with the Soviet Union against their former Western colonial masters.

Size/Geography

Many of the leading reformers in this group are small countries. The Baltics, Jamaica, Ireland, Iceland, Israel are countries with small areas, limited natural resources and geographic orientations toward international exchange and openness. This suggests that potentially being smaller and more open to external influences and interactions could make a country more likely to engage in economic liberalization. As with many of the factors discussed here, however, there are counter examples: not all small countries entered into significant economic reforms, and their size or geographic characteristics do not shed any obvious light on the timing of their reforms.

International Development Assistance/Lending

The role of international development funds in economic growth has come under increasing question. The original Keynesian notion of international dollars directly jumpstarting the process of growth has been drawn into question due to decades long experiments that have resulted in few success stories as well as greater theoretical and empirical understanding of the role of institutions as foundational to economic growth. While the direct impact of aid on development is now viewed questionably, the case studies explored here suggest that at least in a few cases the desire for aid has had an influence in getting some countries to adopt more liberal economic institutions in exchange for aid. Ghana, Jamaica, Tanzania, Uganda, and Zambia all appear to be countries that adopted institutional reforms at the behest of international lending agencies. While not leading to institutional improvements across the board, this conditional lending seems to have led to more stable monetary policy, greater privatization and more trade openness. It has not seemed to have had as much success in other areas such as property rights and judicial impartiality. While these countries have enjoyed institutional reform as a result of conditional lending two caveats need to be considered. First, most countries receiving development assistance have not achieved these levels of success (or any success). Second, while impressive relative to their initial conditions, the institutional regimes created in these countries are still significantly less

104 free and well-developed than other countries in this chapter such as Ireland, New Zealand and Chile. A counter example seems to be Congo where earlier foreign assistance contributed to its institutional regression and did not create liberal progress.

Neighbors/Cultural Influences

Similar to the discussion of spheres of influence, cultural influences and geographic proximity seem to have played a role in some of the reforms studied here. Hungary is an example of a country that has moved toward closer institutional integration with its neighbors. Ireland had close cultural and economic ties to the United Kingdom and the United States that may have helped influence its transition. The United Kingdom strengthened a clear institutional distinction between itself and continental Europe and more closely aligned with the United States, which was probably partly culturally and historically driven. On the other hand Myanmar has moved against the tide of economic liberalization that its neighbors in Southeast Asia have been experiencing.

Ethic Fractionalization

A growing literature has asked what role ethnic and religious make-up plays in economic and political decision making (Alesina et al 2003). Myanmar and Congo represent cases reviewed here where ethnic fractionalization seems to have exacerbated internal conflict and led to economic reforms that decreased economic freedom. Hungary, Iceland and Ireland on the other hand represent relatively homogenous populations that have experienced economic liberalization. The question that remains unanswered is how important fractionalization is to the construction of trust and social cooperation that will allow voluntary civil society to replace rent-seeking institutions.

Autocracy/Unconstrained Authority

Constraints on executive power and constitutional government have been viewed as important features in protecting economic freedom. But several examples in these case studies point to possible exceptions. Chile under the Pinochet regime experienced rapid economic liberalization under an authoritarian government. Ghana and Peru are also examples of increases in economic freedom coming from relatively authoritarian regimes. Venezuela, Zimbabwe and Myanmar are examples of movement in the opposite direction undertaken by autocratic governments.

105 Chapter 3 Conclusion

The two and a half decades between 1980 and 2004 witnessed profound changes in economic and political institutions among numerous countries worldwide. Some of those changes were part of broader global trends toward greater liberalization, while others seemed to play out as more isolated, localized phenomenon based on specific national circumstances. And several countries bucked the world-wide trend toward liberalism and moved dramatically toward greater centralization and command-and-control resulting in significant decreases in human well-being. But, for the most part, the countries studied here, with the four notable exceptions, were part of a broad worldwide movement toward greater reliance on laissez faire policy—indeed, for the period 1980 to 2004 only four countries experienced a lower economic freedom score in 2004 than in 1989; they are the four studied in this chapter: Zimbabwe, Venezuela, Republic of Congo and Myanmar. As Figure 3.1 indicates, the global average for economic freedom rose from just over 5.0 in 1980 to about 6.5 in 2004.

7.0

6.0

5.0

4.0

3.0

5 1980 1985 1990 199 2000 2004

Figure 3.1: Global Economic Freedom Average: 1980 to 2004

106 Looking at the components of the economic freedom index reveals a similar world-wide trend with only the regulation component not increasing consistently since 1980.

8.00 7.50

7.00

6.50 1980 6.00 1990 5.50 2000

5.00

4.50 4.00 1 . Size of Govern men t 2. Lega l Sys tem & 3. So und M one y 4. Fre edom to Trade 5. Re gulat ion P rope rty Ri ghts wit h fore igne rs

Figure 3.2: EFW Area Scores: 1980, 1990 and 2000

These trends indicate that the phenomenon of economic reform was not limited to the countries studied in this chapter, as we know already. Thus the challenge is increased by the need to not only understand the factors that influenced individual countries during this time period, but also what factors were working on a global level to increase economic freedom almost uniformly around the world. This begs the question if the role of economic crises discussed above is dependent on the policy attitudes prevalent going into the crisis. In the time period studied here— 1980 to 2004—the world moved significantly away from the faith in planning and centralization common during the first thirty years after World War II. The widespread economic troubles of the 1970s shook the confidence of governments, citizens and intellectuals in economic planning and, thus, responses to continued crises tended to be colored by a new appreciation for markets. The opposite case happened in the 1930s and the 1960s when economic reforms, particularly in the face of crises, moved toward greater planning and centralization. The recent worldwide economic crisis suggests the pendulum has swung again with governments, commentators and intellectuals asking: Did the free-market reforms of the 1980s and 1990s fail to deliver the goods and lead to the current crisis? Given the prevalence of that attitude, we see crisis driven reform, notably in the United States, moving significantly away from markets and toward intervention. It seems very plausible that the type of reform sparked by economic crisis may be, at least in part, dependent on movement away from the preceding paradigm, be it markets or intervention. The current study is limited to the time period 1980 to 2004. But we see a significant amount of economic turmoil in many of the countries discussed in this chapter

107 as a result of the economic crisis that began in 2008. Iceland’s banking crisis and Ireland’s real estate collapse are prime examples of this. How those countries will respond in the mid-term will be a telling continuation of this story and give us a greater understanding of the role of crises in shaping institutional reform. As the world seems to be entering into a new period of greater acceptance of government intervention into the economy, given recent political and economic development, the period studied here may represent a unique historical case study on the factors that lead to liberalization—if current trends take hold and reverse many of those institutional changes future historical analysis may allow us to understand better how such reforms are undone as well. While the cases studied in this chapter do not reveal any clear or concise ‘secret ingredient’ for economic reform there are several broad themes that emerge from the historical analysis that are worth greater exploration. While no one factor seems to have occurred with enough regularity or magnitude to affect major institutional reform in isolation, they may represent factors that in combination create the necessary environment to achieve a tipping-point in institutional reform. Several factors or themes arose in the historical narratives of several different countries suggesting that they are not just historical flukes, but more systematically potential drivers of institutional reforms, or the necessary if not sufficient conditions in which reforms can occur. These episodes suggest avenues for future research and analysis. And as the economic transitions continue to occur they help us identify indicators to study in future cases as well as potential mechanisms to predict where reforms are most likely to occur in the future. Chapter Four empirically investigates a broad variety of factors that have been identified in the current chapter. The empirical analysis presented in Chapter 4 will explore the impact on economic institutions of: 1. geography; 2. openness to trade; 3. population and cultural characteristics; 4. political factors and civil liberties; and 5. recent economic performance. While empirical analysis will provide important support for any of the factors explored in this chapter, empirical analysis alone is unlikely to prove a definitive arbiter of the question at hand. Given the unique interactions and historical circumstances surrounding each episode of reform, and the relative lack of large numbers of observations, statistical analysis will provide important, but limited direction. Additional approaches, such as more in-depth case-studies, the sociology of knowledge and international relations, will also be required to further develop our understanding. We want to know not only what variables have statistically significant impact but which ones weigh strongly on historical outcomes even absent statistical significance—when need to understand which factors have what McCloskey refers to as ‘oomph’ (McCloskey 2000).

108 CHAPTER 4

DETERMINANTS OF INSTITUTIONAL CHANGE

Introduction

Based on the historical case studies presented in Chapter 3 at least five broad areas can be identified that may impact the evolution or adoption of economic institutions: geography, trade openness, political institutions, fractionalization and economic performance. Chapter 4 will empirically investigate the relationship between institutional reform and the five areas outlined below. First, geography. Acemoglu et al. use natural factors (mortality from disease) as an instrument for institutions in their 2001 paper (discussed in Chapter 1) for countries that were former European colonies. Colonies with high mortality were likely to be characterized by institutions designed to maximize resource extractions, whereas colonies with lower mortality were characterized by institutions more conducive to investment and property rights. But geographic or other natural factors may have an impact on institutions beyond those that were imposed by colonial powers. Diamond (1998) argued that natural features made China more easily centralized than Europe, which has many internal geographic boundaries that have prevented centralization. Looking at geographic factors such as ratios of coastlines to total area and overall geographic size may provide information about how restrictive institutions are in countries. Countries where exit is expensive and where centralization of a large area under one political power is easy are more likely to have less- free economic institutions. Natural endowments, it has been argued, may also play an important role in shaping the incentives rulers have to adopt efficient institutions. Second: openness. Increased exposure to foreign institutions and increased pressure from foreign investors may be likely to create the critical mass needed to implement domestic institutional reforms. Looking at the ratio of total imports and exports to overall GDP and comparing that to economic institutions may provide some evidence on how trade openness impacts institutional reform. Third: population characteristics. Ethnic fragmentation may lead to increased distrust in society and the incentive to try to use government power to redistribute wealth away from less powerful minorities, thus lowering economic freedom. Several researchers have also identified religion as a possible characteristic of the population that influences institutional quality. Fourth: Governance. More autocratic governments provide fewer alternatives to their citizens in terms of political feedback and thus are likely to be less economically free. Measurements from Polity IV, Freedom House, as well as a variation on the democratic capital variable developed in Persson and Tabellini's (2006) working paper could be used to test the relationship between economic institutions and political freedom. While often related to political institutions, civil liberties provide a distinct aspect of individual freedom that may impact economic institutions. The ability to disseminate information critical of official policies and to assemble groups to promote reform may be important precursors of institutional change.

109 Fifth, how does economic performance impact institutional reform? Some countries, such as Ireland, seem to have adopted positive economic reform as the result of economic crisis. However, many other countries experience dismal economic growth rates year after year and still fail to adopt positive economic reforms. Recent economic performance will be considered as a possible explanation for the adoption of institutional reform.

Economic Freedom and Economic Performance

Economic literature at least since Smith (1776) has postulated that what we now would consider “free markets” experience greater economic growth than alternative forms of organization. Theoretical arguments for why economic freedom is important for growth were developed by a number of economists during the twentieth century (see for example, Mises (1949), Hayek (1945), Friedman and Schwartz (1963)), but empirical progress in support of that line of scholarship was limited by the lack of solid empirical tools to measure economic freedom or institutions. Thus, most claims about the relationship between institutions supportive of economic freedom and economic growth remained anecdotal or based on historical analysis (e.g. North 1981). Greater empirical work since the mid-1990s has allowed more rigorous examination of the hypothesis that freer markets lead to higher rates of economic growth (Acemoglu and Robinson 2006; Gwartney and Lawson 2006). Results presented here are in agreement with those findings.

Figure 4.1: Per Capita Income and Economic Freedom by Quartile

110 Figure 4.1 shows quartiles of economic freedom relative to average income (per capita GDP). The least-free quartile of countries in terms of economic freedom has an average income in 2004 of roughly $3,000, whereas the freest quartile of countries has an average income over $24,000, with clear increases in income as economic freedom quartiles increase. A similar picture is painted by comparing economic freedom quartiles with average growth rates between 1990 and 2004, as Figure 4.2 demonstrates. Average annual growth rates were negative for the least-free quartile of countries and slightly over 2 percent per year for the most-free countries, with countries in the middle coming in with an average of 1.5 percent per year growth. The correlation of economic freedom with growth rates rather than just levels of income is an important point. The argument that institutional quality may be a result of higher incomes rather than a cause of higher incomes (the reverse causality question) has been a common critique of many papers in the institutions-growth literature. Being associated with higher growth rates as well as higher income levels lends some more confidence in the idea of institutions as a causal variable. Ceteris paribus, one would expect countries with lower income levels to grow more rapidly because they are able to emulate technology and business operations that have been successful in the higher income countries. Thus, the positive relationship between economic freedom and economic growth is quite revealing.

Figure 4.2: Average Growth Rates and Economic Freedom by Quartile

111 Figure 4.3 uses the simple quartile analysis to demonstrate the influence of economic freedom across time. The left panel of Figure 4.3 presents the economic freedom quartiles and average income levels for all countries measured in 1980. The positive relationship between economic freedom and income is somewhat clear, but less pronounced than in Figure 4.1. The right panel of Figure 4.3 shows the same countries grouped in their 1980 quartiles based on economic freedom, but this time with their 2004 incomes reported on the vertical axis. Here the relationship is much more pronounced with incomes of the top two quartiles having grown far more rapidly than the bottom two—although it should be noted this does not take into account policy and institutional changes in countries during the time frame covered.

Figure 4.3: Economic Freedom in 1980 and Income in 1980 and 2004

Multiple regression analysis, summarized in Figure 4.4, confirms the positive correlation between economic freedom and economic growth. Here the dependent variable is the growth of average per capita GDP from 1980 to 2000. Model 1 provides the simple correlation with the level of income in 1980, which as expected is negative. Model 2 tests the relationship between initial period economic freedom and growth controlling for initial levels of income and suggests a significant relationship at the 95 percent level. Model 3 tests the relationship between growth of economic freedom from 1980 to 1990 and growth of income controlling for initial levels of income and initial levels of economic freedom. Here again initial levels of economic freedom are significant, but so is growth of the economic freedom score from 1980 to 1990, which is positive and highly significant. Model 4 adds the change of economic freedom from 1990 to 2000 to the previous model. As might be expected changes in economic freedom from 1990 to 2000 are positively correlated with changes in income, but not as highly significant as changes in economic freedom from 1980 to 1990, which suggests the importance of the long-term impact of institutional quality on economic performance.

112 These results are presented to illustrate that the data set used here confirms the common findings presented in the literature that economic freedom is strongly correlated with economic performance. Indeed improvements in economic freedom scores lead to greater levels of economic performance. But these findings beg the question of determinants of economic institutions. The remainder of this chapter will be dedicated to addressing the question: Given that economic freedom matters significantly for economic performance, what factors influence levels of economic freedom?

Table 4.1: Economic Freedom and Growth of Per Capita GDP

Dependent Variable: Growth of Per Capita GDP 1990 to 2000 Independent Model 1 Model 2 Model 3 Model 4 Variables GDP Per Capita -1.72E-06 -0.00003 -0.0001 -0.0001 1980 (0.000) (0.000) (0.000) (0.0000)

EFW 1980 0.2895** 0.5423*** 0.7269*** (0.130) (0.143) (0.173)

EFW Growth 3.6341*** 4.6939*** 1980-1990 (1.015) (1.161)

EFW Growth 1.3883* 1990-2000 (0.7651)

Constant 1.5459*** 0.0961 -1.243* -2.433** (0.153) (0.654) (0.732) (0.976)

Adjusted R2 -0.0081 0.0298 0.1349 0.1553

*** significant at 1 percent ** significant at 5 percent * significant at 10 percent

Economic Freedom, Geography and Size

When looking for factors to help explain economic institutions geography is a natural option. As discussed in the literature review in Chapter 1, numerous authors have examined or empirically explored the idea that geography is important for economic performance. For example, Gallop and Sachs (1998) focused on

113 potential relationships between poverty and the portion of the population located in the tropics and along coasts. Diamond (1997) emphasized the role of geographic factors in determining the possibility set for historical development; and Hall and Jones (1999) focused on the relationship between latitude and institutions. The relationship between latitude and institutions has also long been discussed in the historical literature as an important relationship that may explain economic performance over time. Possible explanations for latitude’s importance have ranged from the impact of heat on working conditions and human energy, climate’s impact on agricultural productivity, and the idea that variation in temperatures at higher latitudes requires greater ingenuity and adaptability. Since Hall and Jones (199) it has become common to use latitude as an instrument for institutional quality in the empirical growth literature. The strong correlation between economic performance and latitude makes it impossible to ignore this factor as a potential determinant of economic performance. Nonetheless, a clear explanation of the impact of latitude on economic performance is lacking. The two most common explanations for the importance of latitude discussed in the economics literature are: 1) that latitude is a good measure of whether a country is tropical. This is the view closely associated with Jeffrey Sachs that the tropical disease environment directly impedes economic development; and 2) that latitude is closely linked with how desirable a location was for colonial powers to develop long-term settlements. This is the idea closely associated with the work of Acemoglu and his colleagues. Regardless of the ultimate explanation of why latitude is so closely related to economic performance and economic freedom, its strong correlation makes it imperative that latitude be included in the empirical analysis of the determinants of institutional quality. So for the analyses conducted here latitude will consistently be included as a control variable to ensure that the importance of other measures is not unintentionally exaggerated. To begin exploring the relationship between geography and economic institutions several quartile graphs were created. But unlike the quartiles used in the economic freedom-performance analysis, here countries are broken down into quartiles based on geographic or other factors and the economic freedom of each group is plotted on the vertical axes. Figure 4.5 shows the relationship between economic freedom and geographic size as measured in square kilometers of land area. The countries were broken down into four quartiles going from smallest geographic area to the largest. As figure 4.5 indicates the simple relationship between area and economic freedom is negative. The average economic freedom score for the smallest-by-area quartile is roughly 6.8 while the average economic freedom score for the largest-by-area quartile is just over 6.0. The relationship shows clear steps to lower economic freedom with each quartile. The second smallest quartile has an average economic freedom score of 6.5 while the second largest quartile has a score of 6.3.

114

Figure 4.4: Economic Freedom and Area by Quartile

The suggestive relationship between geographic size and economic freedom raises the question if other measures of country size are correlated with economic freedom. The most obvious candidate is population size. Alesina and Spolaore (2003) take for granted that population is how size ought to be measured, but they do not provide a clear rationale. Figure 4.5 explores the relationship between population size and economic freedom with a quartile graph. Here the relationship is much less clear. The least populace two quartiles do have higher economic freedom scores (around 6.6) than the two most populace quartiles, but the relationship is not as consistent as with geographic size. The largest-by-population quartile has a higher average economic freedom score (about 6.3) than the second largest-by- population quartile (under 6.2), and the simple correlation is not statistically significant at any meaningful level. Population proves to be not significant in regression analysis in multiple specifications as well and is left out of further analysis as it does not appear to be a meaningful measure of size—at least in terms of trying to explain institutional quality. Population density does turn out to correlate more strongly with economic freedom, but the direction of causation is too difficult to ascertain to be useful here. Causation could run in both directions. More densely populated places increase the gains from trade, and may increase the benefit of adopting exchange-encouraging institutions. That said, population density may more often be the result of economic freedom than a cause—places that provide a strong rule of law, protect property, and have easy taxes are bound to receive the bulk of migrants in an increasingly peripatetic world.

115

Figure 4.5: Economic Freedom and Population by Quartile

Why Might Small Countries Have Better Institutions?

That which is true of competition among individuals is often true of nations. The competitive political process may influence the quality of a nation’s institutions and policies. A smaller country may seem like the ideal place for a rent seeking political elite to exact maximum control over a populace—with limited resources and technology it is likely easier to exert control over a small area than a large one. However, as often happens in economic reasoning, this static view is not likely accurate. Decision-makers in small countries may have a stronger incentive than those in larger ones to adopt institutions and policies more consistent with economic freedom and long-term economic progress. There are several reasons why this might be the case. First, exchange with foreigners will be more important for the residents of small nations. If the residents of small countries are restricted from trading with foreigners, it will be more difficult for domestic businesses to realize fully the potential gains from scale economies. Thus consumers in small countries will be less able to benefit from lower prices resulting from reductions in unit costs that often accompany large scale production. Similarly, domestic entrepreneurs in small countries will often find it cheaper to obtain financing from investors in other countries. Opportunities for business expansion and other entrepreneurial activities will be limited by the domestic capital market if funds cannot also be attracted from abroad. However, foreign investors must have confidence that they will be treated fairly. This means that the country’s legal, regulatory, and tax systems must protect property rights, enforce contracts, and apply to both citizens and foreigners in an even-handed manner. Because the potential gains from trade with foreigners will be more important for the residents of a small country than for one with a larger domestic market, decision makers in small countries may have a stronger incentive

116 to adopt and sustain sound institutions and policies both because the population has a strong incentive to demand it and because the economic base upon which the political class can predate will be larger. Second, compared to large countries, the residents of small nations can generally exercise the exit option at a lower cost. For the typical person, the distance to the border will be shorter, thus increasing the number of potential institutional substitutes. Thus, harmful policies will generally cause a larger share of the population to exit in small countries than in large ones. This puts still more pressure on the political decision-makers of small countries to adopt and maintain sound policies. If they do not, many of the residents will leave and the tax-base will erode. However, the cost and incentive structure does not always favor small countries relative to their large counterparts. If there are substantial economies of scale in the provision of a service generally provided by governments, small countries may be at a disadvantage. For example, the cost of operating a central bank may be approximately the same in a small country as for a large one. Thus, the per-person cost of this service is likely to be greater in small countries. Furthermore, like language, currency is a network good. The service provided to each user will be of greater value when the currency is readily accepted by a large number of people. Therefore, both the per-person cost and the value of the service provided are likely to work to the disadvantage of small countries attempting to provide and manage their own currency regime.

Other Geographic Characteristics

Absolute size is not the only way to measure geographic characteristics. Indeed it may not even be the most accurate method to capture the impact ‘size-like’ characteristics have on institutional quality. Diamond (1997) hypothesized that one of the reasons Europe may have had an early advantage over China in economic development was because China was easily controlled by one authority due to its relatively smooth shape and uninterrupted geography as compared to Europe with its abundance of peninsulas, islands etc. Diamond’s observation was almost an afterthought placed at the end of his lengthy book, however, the empirical analysis that follows suggests it is of major importance explaining institutional quality. Figure 4.6 represents the outline of Europe and China and begs the question Diamond posed about shape and institutions. Length and shape of borders could help integrate Diamond’s insight into an empirical analysis of institutional quality. Countries with the shortest borders have an average economic freedom score over a half a point higher than countries with the longest borders. However, total border will be very closely related to total geographic size and so distinguishing the two characteristics would be difficult when analyzing impact on economic freedom. An alternative approach that would capture the impact of both size and shape would be to create a new calculated variable called here “exitability”. Exitability is defined as the sum of land borders and coastline divided by total geographic area. This variable more closely captures the idea Diamond was discussing. A country with many peninsula’s, bays, etc—in effect an irregularly shaped border—would have a

117 higher ratio of exit options per land area than a country with smooth borders—like Europe relative to China in Figure 4.6. From a theoretical perspective, institutional competition requires available substitutes. Ideally, for competition to be maximized, the location of any individual within a given country ought to be as close as possible to a different system of governance. “Exitability”, gives us an approximation of how easy a country is to leave.

Figure 4.6: Map of Europe and China: Does Shape Matter?

The exitability score is higher if the length of borders and coast line per total area is higher and lower when there are shorter borders and coastline relative to total area. So countries with rather irregular borders have higher exitability while countries with smoother more regular border have lower scores. China, which Diamond used as an example, has a relatively low exitability ratio of 0.003. Another example of a low ratio is Chad with an exitability ratio of 0.004. Both countries have relatively large landmasses away from any borders and have relatively smooth borders—the sweeping half-moon shape of China and the more rectangular shape of Chad. In contrast Denmark has an exitability ratio of 0.17 and Panama is 0.039, both relatively high exitability numbers. These countries are shaped in such a way that more of their area is close to a border or coast—the peninsula and many islands of Denmark and the long narrow isthmus of Panama. One way to consider the importance of ease of exit lies in the ability it provides citizens to give feedback to the governing party. Individuals will, if possible, vote with their feet if that is their only option of impacting the institutional status quo. In this sense we can think of exitability as providing a measure of Tiebout sorting among countries. Tiebout (1956) developed a novel model for describing the provision of local public goods. In his model residents would choose among competing localities for the bundle of publicly provided goods that best fit their preferences. According to the Tiebout model large governments are inefficient because they cannot design a bundle of publicly provided goods that satisfies the variety of preferences among a large populace. Smaller localities in this model are more efficient as they can tailor their provisions to a more homogeneous population. Individuals can express their preferences by moving amongst the segmented localities to find the best match for themselves. This Tiebout sorting process can result in competition (Tiebout

118 competition) among the various jurisdictions to provide the bundle of services that will attract population. Given that consumers have heterogeneous preferences and localities vary in the goods provided (government programs) and costs (taxes, fees etc.) optimal allocation of citizens, government programs and taxes are only likely to arise over an extended period of Tiebout sorting. Optimal allocation arises in Tiebout’s model if information is widely available (perfect information) and it is easy to move between localities (perfect mobility). As either of these assumptions is relaxed the optimality of the Tiebout allocation will diminish. Applying the logic of Tiebout sorting to the international level we can assume individual agents have a preference to sort themselves into national jurisdictions that most closely satisfy their preferences for publicly provided goods and taxes. Here we can think of the institutional environment as one of the publicly provided goods, or more accurately a bundle of publicly provided goods. The ability to engage in Tiebout sorting is clearly impacted by national policies regarding migration; a prohibition against outward migration would be a clear obstacle to Tiebout sorting—as was often noted during the era of the Curtain. So we can identify at least three major obstacles to Tiebout sorting at the national level: information, travel costs and government prohibition. Exitability, as described above, will impact the rigidity of each of these constraints. A country with greater exitability will have more information about other jurisdictions, cheaper access to them by being located more closely to borders, and an increased difficulty of enforcing border controls due to the relative abundance of locations from which to exit. Exitability thus increases the possibility that citizens of a country can engage in Tiebout sorting and seek out national jurisdictions that more closely align with their preferences. This exit option should increase competition among national governments to improve institutional quality in order to retain citizens (revenue). As was widely recognized during the Cold War, population loss is one of the best indicators of poor governance that exists. Thus, one would expect that Countries with border to area ratios that reduce the cost of exit will generally have more economic freedom over the long term. An analogy to the idea of exitability is the idea that will be called “coastalness”. As discussed in Chapter 1 several authors have pointed to the seeming importance of coasts in a country’s economic development (Bauer; Gallop and Sachs). Coastalness is a new calculated variable defined as the length of coastline divided by total area. There is a positive relationship between coastalness and economic freedom; the countries with the least coast relative to land area have the lowest economic freedom while those with the greatest coastalness have the highest economic freedom. With island countries the measure of exitability is equal to the measure coastalness. Whereas countries that are landlocked will have a zero coastalness score yet they still have the possibility of a higher exitability score, like Austria. Particularly before the advent of air travel, sea travel often represented the most economical means of accessing foreign cultures and goods. Thus coastal communities would not only be more likely to have more contact with people from other societies, they would also be more likely to become trading hubs among numerous societies that did not have direct access to sea routes. Thus it has been argued coastal societies were more likely to develop institutions conducive to trade. Smith (1776) surmised the importance of coastalness as follows:

119

“As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon the sea-coast, and along the banks of navigable rivers, that industry of every kind naturally begins to subdivide and improve itself, and it is frequently not till a long time after that those improvements extend themselves to the inland parts of the country.”

Finally another variable has been created to capture the possible impact of size and shape on economic freedom. The hypothesis was that states which were most geographically compact, most circular in shape, were the hardest to leave— mathematically a circle is the shape where most of the area is farthest from a border. If Diamond’s theory of competition holds, places that are more circular would likely be less economically free. Conversely, those nations whose borders were more irregular and less compact, would be more likely to have liberal institutions. This is similar to the discussion just presented regarding exitability, yet exitability is dependent on size so it does not capture shape independently. A size-independent measure of shape has been developed in spatial mathematics (Selkirk 1982). Selkirk’s measure indicates shape or compactness independent of size; the Selkirk circularity ratio is used commonly in studies of geography (see van Eck and Koomen (2008) for a recent example). The ratio is calculated as given in Equation 1:

(1) Circularity = (4*π*Area)/perimeter

Shapes that are perfectly round would have a value of one, while the most elongated shape would have a value of zero. Equation 1 is modified to produce an equation that yields higher values for greater elongation or “area close to a border” and a low value for greater circularity—essentially a measure of non-compactness. This variable, “Shape Factor” is presented in Equation 2:

(2) Shape Factor = 1 – ((4*π*Area)/perimeter)

Shape factor has the desirable characteristic of capturing much of what is included in ‘exitability’, but independent of absolute size, which ‘exitability’ is not. Simple univariate regression analysis shows Shape Factor positive and significantly correlated with economic freedom at a 99% level of confidence. The various geographic characteristics discussed here all have potential explanatory power in the relationship to economic freedom and simple univartiate analysis indicates strong correlations. Multiple regression analysis was conducted to determine which factors were important in the presence of other variables and controls. The basic relationship tested can be specified as follows in Equation 3:

(3) where EF represents economic freedom in country i in year t, X is a the matrix of geographic variables tested and Z is a vector of control variables including year, latitude

120 and other natural factors, and e is the error term. Results are reported throughout this chapter with robust standard errors to account for heteroskedasticity as needed. Table 4.2 reports the results of regressions using the various geographic measures discussed above as possibile factors influencing economic institutions. In Table 4.2 the dependent variable in each regression is the economic freedom of the world score for each country in 2004. The first model includes geographic area as the sole independent variable. As indicated earlier in Figure 4.4, total geographic area is significantly negatively related to economic freedom, but the variation in economic freedom explained by area alone, as indicated by the R-squared statistic, is very low. The second model includes the important geographic control variable latitude. Latitude, as discussed, is positively correlated with economic freedom and highly significant (above the 99 percent level). When latitude is included in the regression geographic area falls out of significance. This suggests that while area is correlated with economic freedom it does not have meaningful explanatory power. So while we would think of smaller area countries being closer to alternative regimes, size alone cannot explain the type of mobility that is expected to lead to greater institutional quality. Exitability is included in the third model along with latitude and area. Exitability is highly significant and positively correlated with economic freedom. Latitude retains its positive significance and area remains insignificant. These results are important for several reasons. First, they support the idea that ease of exit is important in explaining institutional variation among countries, suggesting that something similar to Tiebout competition may be occurring at the national level. Second, since exitability captures some of the idea of size that is included in the area variable it is important to note that exitability is significant despite the inclusion of area in this model. Finally, exitability is significant even though latitude is included. This is an important finding. Latitude has been used as a sort of catch all for institutional quality as well as the impact of geography on institutional quality in much of the empirical literature. Included as a control variable latitude serves as a robustness check on the other variables studied. That exitability is highly significant (above the 99 percent level) suggests that there are important geographic factors at work influencing institutional quality that are not accounted for in the standard ways in the literature. Latitude is something of a dubious variable for explaining economic performance or institutional quality; although it is highly significant the explanation for why it is so is elusive. These results haven’t taken us any closer to understanding why latitude is important, but they do clarify that latitude is not an all encompassing geographic instrument for institutional quality as it has sometimes been used in the literature.

121

Table 4.2: Geography and Economic Freedom

Dependent Variable: Economic Freedom Independent Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Variables Land Area -1.35E-08** -3.65E-08 -1.40E-08 -1.29E-08 -3.50E-08 2.80E-08 (5.02E-07) (4.73E-08) (3.57E-08) (3.56E-08) (3.50E-08) (3.48E-08) Latitude 0.0299*** 0.0289*** 0.0287*** 0.0272*** 0.0272*** (0.0041) (0.0044) (0.0044) (0.0045) (0.0045) Exitability 3.3814*** 2.7913 3.3942* (0.8528) (4.2165) (2.2262) Coastalness 0.5659 0.2555 (4.0053) (3.8922) Shape Factor 1.2113** 1.1413** (0.5337) (0.5451) Constant 6.4165*** 5.6246*** 5.4826*** 4.6343*** 4.6864*** 5.5478*** (0.1002) (0.1581) (0.1467) (0.3214) (0.3838) (0.2315) Adj R2 -0.007 0.2375 0.3173 0.3171 0.3655 0.3287

*** significant at 1 percent ** significant at 5 percent * significant at 10 percent

122 The fourth model included in Table 4.2 includes the variable coastalness along with area, latitude and exitability. Exitability and coastalness both report the expected signs but both are insignificant. Exitability and coastalness are correlated and capture much of the same theoretical explanatory power in terms of ease of exit and availability of substitutes. So it is probably not surprising that they lose significance when included simultaneously. Model 5 includes the shape-factor variable, and it along with latitude and exitability are significant and positively correlated with economic freedom. Finally, coastalness is tested in place of exitability in a model with latitude and shape-factor. In this case while latitude and shape-factor were significant coastalness remained insignificant. This is an important finding. Economists as varied as Smith, Bauer, and Sachs, among others, have argued for the importance of proximity to coasts as an important explanatory factory in economic performance. These results suggest that coastalness, while highly correlated with economic freedom by itself, does not retain explanatory power once other variables are included. This suggests that what is showing up in coastalness when it is compared individually to institutional quality is some measure of ease of exit and not something specifically related to coasts. That is, exitability by any means rather than exitability specifically by seafaring means seems to be what is important in explaining economic evolution. Thus the authors that have speculated on the importance of access to coasts may have been mislead by focusing on interpreting coastalness as specifically sea-related instead of being part of a broader concept of exitability. The findings in Table 4.2 support the often observed, if not adequately explained, correlation between latitude and economic freedom, but they include an important new finding that adds to the robustness of the geographic explanations of institutional quality: that ease of exit is an important explanatory factor in the evolution of institutions. Consistent with a Tiebout sorting model, a population’s ability to vote with their feet likely leads to increased competition among governments to improve their attractiveness to citizens, thus leading to greater economic freedom. Geographic size and access to water do not explain variations in institutional quality once ease of exit has been included. Many economists have argued that natural endowments are important for the determination of long-term economic well-being. If the so-called ‘resource curse’ leads to the adoption of inefficient extractive institutions, natural endowments may be more important for institutional quality than the geographic variables we have been discussing (see Frankel (2010) for a survey of the resource curse). It is important to try to include other geographically related variables as a robustness check of the independent variables presented in Table 4.2. If other factors that are closely related to geography can explain institutional variations it may be that the findings above are as misplaced as the earlier arguments about coastalness were. Table 4.3 presents two tests of robustness for the geographic variables. In the first model various natural hazards are included as geographically-related independent variables. These include earthquakes, flooding, droughts, tsunamis, landslides, hurricanes, avalanches, forest fires, cyclones, windstorms, monsoons, volcanoes, permafrost, locusts and tornados. These

123 Table 4.3: Economic Freedom and Geography with Natural Hazards and Endowments

Dependent Variable: Economic Freedom Independent Variables Model 1 Model 2 Earthquakes -0.1148 Flooding -0.2356 Droughts -0.1241 Tsunamis 0.2564 Landslides -0.3387 Hurricanes 0.3508 Avalanches 0.7608 Forest Fires 0.2835 Cyclones 0.0658 Wind Storms 0.0201 Monsoon -0.0679 Volcanoes 0.2691 Permafrost 0.0450 Locusts -0.5391 Tornados 0.6557 Fossil Fuels 0.1127 Minerals -0.4133* Precious Medals 0.1555 Precious Stones 0.0743 Arable Land -0.0921 Timber 0.0310 Latitude 0.0297*** 0.0330*** Exitability 2.8716** 2.8439*** Constant 5.5990*** 5.7367*** Adjusted R2 0.3396 0.3441

*** significant at 1 percent ** significant at 5 percent * significant at 10 percent

124 factors may be closely related to other geographic characteristics—for example we would expect avalanches to be related to latitude—thus they may be the true underlying causes of institutions rather than those we have just discussed. The regression results dismiss this concern and affirm the robustness of the variables latitude and exitability. None of the natural hazard variables are statistically significant while latitude and exitability remain highly significant. The second model in Table 4.3 includes natural endowments as the control variables rather than natural hazards—these include fossil fuels, minerals, stones, arable land and timber. These factors encompass the factors often included in discussions of the resource curse theory. Here the results again support the importance of latitude and exitability, both of which remain positive and highly significant. All but one of the endowment variables is insignificant. Minerals is negative and significant at the 10 percent level suggesting some negative impact of an abundance of mineral resources on institutional quality. Petroleum reserves and precious metals, the other major standard components of the resource curse are not significant suggesting that exitability can trump the deleterious impact these resources may have on institutional quality.

Geography and Subcomponents of Economic Freedom

The results discussed above suggest an important relationship between economic freedom and several geographic characteristics, particularly those related to what might be broadly described as exitability. The construction of the economic freedom dataset allows us to investigate these relationships further by looking at the potential impact of geography on various subcomponents of the economic freedom index that represent different institutional or policy categories. These results will now be briefly discussed. The five area subcomponents of the economic freedom index are size of government, legal system and property rights, monetary policy, freedom to trade and regulatory policy. Table 4.4 presents multiple regression results for the subcomponents. Here latitude is included as the standard control variable and exitability is included as the other independent variable. These variables have the most explanatory power for the subcomponents: property rights, free trade, and regulation; and significantly less explanatory power for size of government and monetary policy. Exitability is positive but only significant at the 10 percent level for Area 1: Size of Government. Exitability is actually negative but insignificant for Area 3: Sound Money. The explanatory power as measured by the adjusted R2 statistic is in the low 20s for Area 1 and Area 3 and in the 40s for Areas, 2, 4 and 5. Property rights, trade and regulation are the areas we would expect to be most sensitive to exit options of the public, so these results fit in well with the general explanation of geographic factors and economic freedom we have discussed so far. Size of government may not by itself be viewed as something that would necessarily result in greater exit. If the government is supplying services that a relatively homogeneous population values and it does so in a relatively less burdensome fashion, government size might not be automatically curtailed by exit. Areas such as property rights, regulation and trade restrictions seem likely to be those that would lead to significant exit if that option were available. The data support this hypothesis.

125 Table 4.4: Geography and Subcomponents of Economic Freedom

Dependent Variables (Five Component Areas of EFW) Independent Area 1: Area2: Area 3: Area 4: Area 5: Variables Size of Property Money Trade Regulation Govt

latitude 0.0217*** 0.0692*** 0.0281*** 0.0204*** 0.0254*** (0.0078) (0.0100) (0.0072)^ (0.0053) (0.0044)

exitability 0.5842* 1.0230*** -0.4013 1.2620*** 0.2967** (0.3670) (0.1239) (1.0275)^ (0.3896) (0.1936)

constant 6.8498*** 3.2039*** 8.2241*** 5.5455*** 5.7153*** (0.7254) (0.9404) (0.8392)^ (0.4933) (0.4130)

Adjusted R2 0.2039 0.4029 0.2327 0.4312 0.4821

*** significant at 1 percent ** significant at 5 percent * significant at 10 percent

Non-Geographic Factors Influencing Economic Freedom

The evidence presented suggests that geographic factors may play a significant role in influencing the institutional quality of a country. This portion of the chapter will explore additional, non-geographic factors that may have an important role in the determination of institutions. These include international trade, trade openness, political and civil rights, fractionalization and economic performance. These variables will also be used to test the robustness of the above findings that ease of exit is important in determining institutional quality.

Trade Sector

Economists have long speculated about the importance of trade in shaping economic performance and other characteristics of society. Bastiat (1850) famously stated that if “goods do not cross borders, armies surely will.” On the less optimistic side Marx and others have proposed that increased trade and the pressure of international competitiveness would increase pressure to alter institutional arrangements to weaken the influence of laboring classes and increase the power of capital owners. Recent history has demonstrated strong popular support for this notion as expressed in widespread protests against the World Bank, WTO and other organizations seen as promoting globalization.

126 International trade may have a significant impact on a country by increasing exposure to other cultures and ways of doing things that could infiltrate the receiving society. To the extent that behaviors and norms and other informal institutions can influence formal institutions (Williamson 2009), trade may be one mechanism, or a proxy for the exchange of ideas more generally, whereby outside influence helps shape institutions and ultimately economic performance. Also greater trade may exert direct pressure on institutional quality by creating an incentive for special interest groups to lobby for reforms that either improve their ability to export or restrict competition from imported goods. As exports become a larger source of income for an economy pressures may increase to remove restrictions on business forms and arrangements that may hinder international competitiveness. By increasing the scope and scale of the market increased trade may exert pressure to free domestic production from traditional restrictions that were put into place to maximize rents in a more localized market. By altering the balance of special interests in the economy as well as what Smith referred to as the “extent of the market” international trade will disrupt the equilibrium of special interests that previously existed. In this section we test the impact of the size of the trade sector on institutional quality in a country. In addition to testing the impact of trade on the entire economic freedom of the world index a subset of the index is also tested. A new variable, labeled EF4, is created, which will be calculated as the average of the four components of the economic freedom data not including trade openness (area 4). Specifically, the model can be expressed as:

(4)

where EF4 represents economic freedom in country i in year t measured as the sum of a countries score of the four non-trade related components of the Economic Freedom of the World variable (that is areas 1, 2, 3, and 5), X is the calculated size of the trade sector and Z is a vector of control variables including year, latitude and other factors discussed below, and e is the error term. Table 4.5 presents the regression results for international trade with five different models. The first model includes latitude and exitability as control variables and trade sector as the trade variable. Trade sector is equal to the sum of imports and exports divided by GDP. In this model latitude and exitability remain positive and highly significant and trade sector enters as positive and significant confirming the above stated hypothesis that trade is positively associated with greater economic freedom. However, there may be a problem with including trade sector from one year as an independent variable. The data indicate that the value of this variable can fluctuate fairly significantly from year to year. It is not only dependent on domestic consumption but also international consumption and exchange rates. Thus trade sector in any one year is an erratic variable at best. One way to try to address this shortcoming is to use an average of the trade sector variable over time. Such an average was constructed using the trade sector variable from 1990 to 1999 creating a ten year average trade sector variable. Data on the trade sector before 1988 is not available for enough countries to make longer averages a useful measure. The second model in Table 4.5 includes the ten-year average trade sector variable in place of the one year figure. Here the ten-year average of trade sector is positive and significant at the ten percent level supporting the idea that trade openness can impact institutional quality

127 even after controlling for the geographic factors discussed above. Another caveat must be addressed in using the ten-year average as an independent variable explaining institutional quality, however. Trade sector is highly correlated with Area 4 of the economic freedom dataset which measures restrictions on international trade. So including trade sector as an independent variable for economic freedom risks showing a significant relationship with the entire index when the real correlation is only with Area 4 and not the other areas. To address this question the dependent variable is switched from economic freedom to EF4—the four non- trade areas of the economic freedom index. Model three in Table 4.5 includes EF4 as the dependent variable in place of economic freedom and includes latitude, exitability and trade sector as the independent variables. Trade sector is positive and significant. But with the caveat mentioned early about the one-year trade sector number this may be a spurious result. The fourth model includes the average trade sector from 1990 to 1999 as the trade variable and it is not significant. This suggests that the size of the trade sector is not significant in explaining the quality of institutions beyond those directly related to trade restrictions. This is a significant challenge to the commonly expressed view that trade openness is an important contributor to evolving economic openness and performance. An alternative way to test this idea is to replace the trade sector average as an independent variable with the Area 4 score from the economic freedom index. The final model in Table 4.5 does this. Here EF4 is the dependent variable and latitude, exitability and Area 4 (freedom to trade internationally) are the independent variables. In this model all the independent variables are positive and highly significant. This suggests that both exitability and openness to international trade are important factors explaining other areas of economic freedom and contradicts the findings of the previous model when the average trade sector did not show up as important. Which one is to be believed? Area 4 may be a better measure of trade openness than the average size of the trade sector. The average size of the trade sector in addition to being subject to significant yearly variation is also dependent on non-trade related characteristics such as the size of the economy and the level of economic development. A smaller country is likely to have a greater portion of its economy dedicated to international trade and a poorer country may not be as likely to have developed many export industries or have a very high consumption of imported goods. Area 4 captures a number of variables that are directly related to trade openness; in addition to directly measuring restrictions on the import and export of goods, it captures the difference between the expected trade sector and the realized trade sector, restrictions on foreign ownership and the ability to engage in foreign capital market transactions. While neither measure is perfect, it seems there is some reason to believe that trade openness, as measured by Area 4, is a good indicator that openness to international trade is an important factor explaining institutional quality. That exitability and Area 4 appear significant simultaneously is important showing that ease of exit remains important when accounting for a non-geographic explanation for institutional quality. Trade, in this case, may be leading to greater institutional freedom due to pressure from interest groups to better respond to foreign competition, and exitability may account for domestic pressures that result from the populace being more easily able to exercise the exit option. The results of this section suggest a country’s trade openness may influence economic freedom. This relationship remains significant when various control variables are included. Future analysis could explore the nature of how trade sector impacts institutional quality either through altering interest group competition, cultural factors or some other yet unidentified mechanism.

128

Table 4.5: Economic Freedom and Openness to International Trade

Independent Economic Economic Variables Freedom Freedom EF4 EF4 EF4 Trade Sector 0.0032** 0.0018*** (0.0015) (0.0017) Average Trade 0.0037* 0.0023 Sector 90-99 (0.0021) (0.0023) Area 4 (Freedom 0.5230*** to Trade) (0.06226) Exitability 2.2472** 1.9051* 2.8502*** 2.3703** 2.1340*** (1.0088) (1.0042) (1.0871) (1.0836) (0.7257) Latitude 0.0272*** 0.0297*** 0.0272*** 0.0298*** 0.0131*** (0.0042) (0.0042) (0.0045) (0.0045) (0.0040) Constant 5.2972*** 5.238*** 5.3130*** 5.2334*** 2.3377*** (0.1868) (0.1935) (0.2014) (0.2088) (0.3827) Adjusted R2 0.3425 0.3516 0.2994 0.3125 0.5526

*** significant at 1 percent ** significant at 5 percent * significant at 10 percent

129 Governance

This section briefly explores the influence political arrangements, or governance factors, on the quality of economic institutions. It is a matter of open debate as to whether economic institutions create an environment for greater political freedom or vice versa. Farr, Lord and Wolfenbarger (1998) presented evidence using the economic freedom of the world and Freedom House data to suggest that economic freedom could improve political freedom, but that the effect did not work in the opposite direction. Here a new variable is introduced in addition to the standard measures to try to account for the role of governance in determining economic institutions. The new variable is a variation of the Democratic Capital variable first introduced by Persson and Tabellini (2006). This approach will allow us to take a longer view of the influence of governance issues since the democratic capital variable is a historical stock variable capturing past as well as current institutional quality. Democratic capital is calculated similarly to the capital evolution equations common in modern macroeconomic models. Persson and Tabellini’s democratic capital variable was the Polity 2 score of a country where additions were made to the stock of democratic capital in “democratic years” (years when the Polity 2 variable was greater than zero) and depreciation occurred in autocratic years (years when the Polity 2 score was less than zero). Persson and Tabellini then constructed the accumulated capital using various discount rates. The shortcoming of their approach is that they only make additions to the capital stock in democratic years and only apply the discount rate in autocratic years. This is somewhat less robust than a traditional capital stock calculation where the capital stock is adjusted each year by the gain or loss in capital and a yearly discount rate is applied regardless of whether the stock is growing or decreasing. The potential value of the capital stock approach to an institutional variable is that it captures historical experience as well as the experience at the present. Most institutional variables are lacking in that they only capture a snapshot of the institutions at one moment in time. But people’s behaviors and decisions are going to be based not only on the current institutions, but also their expectations for future institutions and their past experiences. Therefore, the most useful institutional stock variable should account for as much possible information about the evolution of the institutions in question as possible. So for the calculation of democratic capital used here the Persson and Tabellini approach is revised and the Polity 2 score is summed for every year (regardless if it is a democratic or autocratic year) and the discount rate is applied to every year—this way experiences far in the past will be weighed less than similar recent periods whether they are democratic or autocratic. This variable gives the best measurement yet developed of a historical stock of political capital and as such should be more robust as an explanation of the characteristics of political institutions as they are actually perceived. An alternative approach to measuring governance issues is the data provided by Freedom House in their annual measures of Civil and Political Rights. As was discussed in Chapter 2, Freedom House measures Civil and Political freedoms on a scale from 1 to 7, where 7 represents the least freedom and 1 the most freedom. So a positive impact of greater civil or political freedom on economic freedom would show up as a negative coefficient in a regression. Table 4.6 provides the results of regression analysis where the dependent variable is economic freedom and the independent variables are one of four governance variables— democratic capital, polity 2, Freedom House civil or Freedom House political. To try to account for reverse causality same year relationships are not tested. Instead economic freedom in 2004 is the dependent variable while each governance variable is entered as its value in 1980, its change

130 from 1980 to 1990 and its change from 1990 to 2000. This allows me to test for some initial historical base period (1980) and changes in the governance variables at a distant and more recent time period. In each model latitude and exitability are included and then in a second regression the ten year average trade sector variable is included. The results are fairly consistent across the different governance variables. The base year variable is highly significant and correlated in the expected way with economic freedom—that is the Freedom House variables both carry negative signs and the Polity 2 and Democratic Capital variables carry positive signs. The change in each governance variable is also highly significant for the 1980 to 1990 period and the change for the period 1990 to 2000 is significant, but not as highly as the 1980 to 1990 period. The explanatory power of these models as measured by the adjusted R2 statistic is relatively constant around the value of 50. It is slightly higher for the civil rights regressions at 0.5472 and slightly lower for the democratic capital regression, 0.4862. As mentioned earlier, trade sector is not necessarily a desirable measure of openness to trade. To address this the regressions from Table 4.6 were repeated, but this time with EF4 (the average of Areas 1, 2, 3, and 5 from the EFW) as the dependent variable and Area 4 (trade openness) as an independent variable. As presented in Table 4.7, when EF4 is the dependent variable exitability and latitude are consistently significant as expected. When Area 4 is excluded the various governance variables for 1980, the change between 1980 and 1990, and the change between 1990 and 2000 are also significant. But when Area 4 is added as an explanatory variable all of the changes for governance variables drop out of significance. The initial period, 1980 values of the governance variables remain significant, but otherwise governance factors appear significantly less important in this approach. The explanatory power is strong with the adjusted R2 values when Area 4 is included hovering around 0.64. These results call into the question the importance of political and civil freedoms in determining economic institutions. The specification using the full EFW and trade sector suggests that regardless of which governance variable is chosen its value in 1980 plus the change in that value between 1980 and 1990 are highly positively correlated with economic freedom today. The geographic control variables remain significant in each of the models and when the average trade sector variable is included it is significant at the ten percent level. This suggests governance matters in determining economic institutions; both civil and political freedom are positively associated with higher levels of economic freedom. However, this result is challenged by the results of Table 4.7, which includes Area 4, the arguably superior measure of trade openness. Those findings suggest political freedom and civil freedom are not as important. Base period political and civil freedoms are positively associated with economic freedom, but changes in political or civil freedom do not appear to be important in any meaningful way. It seems the debate over the role of political institutions in determining economic institutions will remain unsettled. However, importantly for this discussion, exitability still matters after accounting for variations in political variables, suggesting that exitability is an important and robust determinant of institutional quality. This finding may not be readily obvious theoretically because one could argue that a free political system would allow voters to engage in political pressure to change the economic-institutional environment to their liking without having to revert to some sort of Tiebout sorting of voting with their feet. However, the data contradict this hypothesis; ease of exit appears to be a significant check on institutional quality even when favorable political factors are accounted for, suggesting that the availability of good substitutes is one of the strongest checks on quality of economic institutions.

131

Table 4.6: Economic Freedom and Civil and Political Freedom

Dependent Variable: Economic Freedom of the World Independent Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Variables Civil 80 -0.3399*** -0.3235*** (0.0549) (0.0533) Civil 80-90 -0.2725*** -0.2260*** (0.0759) (0.0714) Civil 90-00 -0.1778** -0.1954** (0.0855) (0.0817) Political 80 -0.2669*** -0.2567*** (0.0462) (0.0431) Political 80-90 -0.2011*** -0.1904*** (0.0563) (0.0518) Political 90-00 -0.1162** -0.1175** (0.0585) (0.0544) Polity 80 0.0799*** 0.0733*** (0.0156) (0.0152) Polity 80-90 0.0607*** 0.0534*** (0.0186) (0.0179) Polity 90-00 0.0504** 0.0378* (0.0216) (0.0209) DemK 80 0.0735*** 0.0676*** (0.0144) (0.0140) DemK 80-90 0.0561*** 0.0501*** (0.0171) (0.0164) DemK 90-00 0.0446** 0.0331* (0.0200) (0.0192) TradeAve90-99 0.0035* 0.0045* 0.0044* 0.0044* (0.0019) (0.0029) (0.0029) (0.0034) Exitability 1.6541* 0.2306* 1.845* 1.3189* 7.4981*** 3.2372* 7.4449*** 3.1923* (0.9972) (0.1898) (1.014) (1.1117) (1.8653) (2.014) (1.8584) (1.9874) Latitude 0.0167*** 0.0209*** 0.0186*** 0.0221*** 0.0202*** 0.0233*** 0.0201*** 0.0232*** (0.0051) (0.0047) (0.0051) (0.0047) (0.0053) (0.0551) (0.0053) (0.0051) Constant 7.0740*** 6.7337*** 6.7634*** 6.3891*** 5.3530*** 5.1448*** 5.3739*** 5.1598*** (0.0855) (0.3106) (0.2698) (0.2764) (0.1853) (0.2214) (0.1826) (0.2194) Adjusted R2 0.4965 0.5472 0.4781 0.5360 0.4735 0.4861 0.4733 0.4862 Significant at 1 percent (***); 5 percent (**); and 10 percent (*)

132 Table 4.7: Economic Freedom and Civil and Political Freedom Reexamined

Dependent Variable: EF4 (Average of Areas 1, 2, 3, and 5 from EFW) Independent Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Variables Civil 80 -0.3472*** -0.2112*** (0.0571) (0.0518) Civil 80-90 -0.2540*** -0.1028 (0.0789) (0.0698) Civil 90-00 -0.1775** -0.0991 (0.0889) (0.0754) Political 80 -0.2723*** -0.1631*** (0.0489) (0.0432) Political 80-90 -0.1923*** -0.0871* (0.0586) (0.0513) Political 90-00 -0.1209** -0.0774 (0.0609) (0.0513) Polity 80 0.0793*** 0.0384*** (0.0164) (0.0145) Polity 80-90 0.0556*** 0.0149 (0.0195) (0.0169) Polity 90-00 0.0463** 0.0130 (0.0226) (0.0190) DemK 80 0.0735*** 0.0370*** (0.0151) (0.0133) DemK 80-90 0.0522*** 0.0167 (0.0179) (0.0154) DemK 90-00 0.0414** 0.0130 (0.0209) (0.0175) Area 4 0.4373*** 0.4453*** 0.5008*** 0.4972*** (0.0645) (0.0651) (0.0716) (0.0709) Exitability 1.9648* 1.8041** 2.152** 1.896** 7.4579*** 3.6718** 7.4163*** 3.7061** (1.3674) (0.8692) (1.056) (0.8833) (1.9511) (1.6780) (1.9426) (1.6693) Latitude 0.0176*** 0.0118*** 0.0196*** 0.0130*** 0.0209*** 0.0120*** 0.0207*** 0.0119*** (0.0053) (0.0045) (0.0053) (0.0045) (0.0056) (0.0048) (0.0056) (0.0047) Constant 7.0028*** 3.7822*** 6.676*** 3.5054*** 5.2721*** 2.4254*** 5.2875*** 2.4404*** (0.3090) (0.5413) (0.2808) (0.5194) (0.1938) (0.4367) (0.1908) (0.4352) Adjusted R2 0.4952 0.6454 0.4754 0.6337 0.4570 0.6402 0.4571 0.6395 Significant at 1 percent (***); 5 percent (**); and 10 percent (*)

133 Populace

Next characteristics of a nation’s populace are studied to try to uncover factors that may be important determinants of institutional quality. Arguments about social characteristics and their importance for economic performance go back at least to Weber (1904) who argued that certain cultural aspects prevalent in protestant countries as opposed to catholic countries, let alone non-Christian countries, accounted for the great leap forward in economic progress in the eighteenth and nineteenth centuries. Any number of racial, ethnic or eugenics based arguments were popular well into the twentieth century to explain differences in national performance, and the histories of those ideas are well explored in the recent cultural and social history literatures (see for example Manliness and Civilization (Bederman 1996)). Here we will avoid getting into questions regarding specific groups and instead focus on fractionalization. Fractionalization will be measured on several different dimensions with the aim being to determine if any has important influence on the formation of economic institutions. It has been speculated that trust is a key ingredient for economic performance and may be closely related to the level of homogeneity in the population (Fukuyama 1996). This may have an impact on growth directly by lowering transactions costs and increasing willingness to trade or indirectly through positive institutional reforms that treat all segments of the population more equally under the law. It is this later concept that interests us. Do countries with greater levels of homogeneity adopt greater levels of economic freedom? Ayyagari et al. (2006) investigate four factors that are thought to impact the evolution of well-protected property rights: legal origin (their instrument for institutions), natural endowments, ethnic diversity, and religion. “The patterns of cross- correlations between potential independent variables and their different degree of endogeneity makes it hard to make unqualified statements about competing explanations for economic growth and the quality of government” (Ayyagari et al 2006), but their strongest result was for a negative impact of ethnic fractionalization on property rights protection, suggesting ethnic fractionalization is harmful to economic freedom. Three measures of fractionalization have been developed that help us address this question (Alesina et al 2003). They are ethnic fractionalization, religious fractionalization, and linguistic fractionalization. Greater homogeneity is consistent with lower fractionalization scores. Table 4.8 presents the results for regressions where economic freedom is the dependent variable and the three different measures of fractionalization are individually included as independent variables along with latitude and exitability. By itself ethnic fractionalization is negative and highly significant; it remains so when latitude is added as a control. However, when exitability is added as an additional control ethnic fractionalization remains negative, but looses all meaningful significance. This is a crucial finding. While fractionalization may show up in many studies as negatively related to economic performance or institutions it is insignificant when exitability is included. This suggests that in environments where ethnic fractionalization is likely to inhibit trust or cooperation, or lead to one ethnic group writing laws that discriminate against another group, the ability to exit will be exercised and the negative impact of fractionalization is ameliorated. To the extent that exit is not used to eliminate

134 fractionalization it appears to not matter significantly—in those instances other methods of coping with diversity must have been developed. Next religious fractionalization is included as an independent variable. The regression results presented in Table 4.8 demonstrate no clear impact of religious fractionalization on economic institutions; religious fractionalization is negative but insignificant on its own and positive but insignificant when latitude and exitability are included in the equation. This suggests that religious fractionalization is not a significant deterrent to economic cooperation. Finally linguistic fractionalization is included in the regression. Here the finding is similar to ethnic fractionalization. Linguistic fractionalization is negative and highly significant on its own and with latitude but looses significance once exitability is included in the model. Given the paucity of quality data on fractionalization, conducting lagged tests is not practical to try to tease out causation. The picture we do see emerging from this dataset is that fractionalization may be much less important than has previously been presented in the economics literature once the ability to exit is accounted for.

Table 4.8: Fractionalization and Economic Freedom

Dependent Variable: Economic Freedom Independent Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Variables

Ethnic -1.7676*** -0.5598 Fractionaliz (0.3254) (0.3666) ation Religious -0.0123 0.5028 Fractionaliz (0.4065) (0.3409) ation Linguistic -1.1815*** -0.3620 Fractionaliz (0.3156) (0.3012) ation Exitability 3.0450*** 3.4901*** 3.3058*** (0.8789) (0.8373) (0.8498)

Latitude 0.0247*** 0.0305*** 0.0266*** (0.0052) (0.0044) (0.0048)

Constant 7.1971*** 5.8428*** 6.4233*** 5.1937*** 6.8792*** 5.6727*** (0.1663) (0.0291) (0.2047) (0.2308) (0.1499) (0.2290)

Adjusted R2 0.1822 0.3323 0.008 0.3314 0.0943 0.3279

*** Significant at 1 percent ** Significant at 5 percent * Significant at 10 percent

135 Economic Performance

Finally, the the impact of economic performance on economic institutions is investigated. Much effort has been put into determining the impact of economic institutions on growth in recent decades, but relatively little attention has been paid to what, if any, impact economic performance may have on the adoption of, or changes, in economic institutions. The historical cases explored in Chapter 3 suggest that in many countries economic crises have led to fundamental changes in economic institutions. Again we are somewhat limited in our ability to explore causal relationships given the relatively limited quantity of data on historical economic institutions, but the following section provides some evidence from recent history.

Table 4.9: Economic Freedom and Economic Performance

Independent Variables Economic Freedom Economic Freedom Growth Growth 1980 to 2000 1990 to 2000 Economic Freedom 1980 -0.1691*** -0.0688*** (0.0157) (0.0197) GDP Per Capita 1980 0.00002*** 2.89E-06 (0.000) (4.99E-06) GDP Per Capita Growth -0.0842** -0.1422*** 1980 to 1990 (0.0371) (0.0705) GDP Per Capita Growth 0.3346*** 0.2070*** 1990 to 2000 (0.0541) (0.0705) Constant 0.9542*** 0.5316*** (0.0762) (0.0961) Adjusted R2 0.6157 0.2083

*** Significant at 1 percent ** Significant at 5 percent * Significant at 10 percent

Since economic freedom is so highly correlated with economic growth, as demonstrated earlier in this chapter, it is difficult to get around the question of reverse causality by looking at the level of economic freedom in any one year. To address this problem the dependent variable is changed from level of economic freedom to change in economic freedom over some time period. This may allow a more clear indication of the relationship. Table 4.9 presents results from regression analysis where the change of economic freedom from 1980 to 1990 is the dependent variable in the first model and the

136 change in economic freedom from 1990 to 2000 is the dependent variable in the second model; base year economic freedom and base year per capita GDP are the controls and per capita growth from 1980 to 1990 and 1990 to 2000 are the independent variables. For both models base year economic freedom is negative and significant as expected reflecting the fact that a higher number is less likely to see an increase, and base year income is positive and significant in the model where the dependent variable is change in economic freedom from 1980 to 1990 and it is insignificant in the second model where the dependent variable is change in economic freedom from 1990 to 2000. In both models per capita GDP growth from 1980 to 1990 is negative and highly significant and per capita GDP growth from 1990 to 2000 is positive and significant. This finding suggests strongly that an economic downturn in the first period is closely correlated with positive changes in economic freedom by the year 2000. This may support the idea that an economic crisis is more likely to lead to positive institutional reforms in the long-run than is positive economic performance. The problem of reverse causality cannot be fully discounted, but the lagged results suggest that future investigation into the role economic crises play in determining institutional reform may be fruitful.

Conclusion

There is a growing consensus among economists that political and economic institutions have a significant impact on the performance of economies. Less well- understood is how institutions evolve and what factors influence that evolution. Using data from the Economic Freedom of the World Index the relationship between several broad national characteristics (geography, trade, governance, populace and economic performance) and institutional quality was explored. Causality is hard to ascertain given the lack of adequate instruments, but lags and other approaches allow the identification of characteristics that may be important determinants of institutional quality and therefore worthy of future study. The findings of this chapter suggest countries that are more easily exited are likely to have more economic freedom. Geographic factors are more highly correlated with the subcomponents of economic freedom in the areas of property rights, free trade, and regulatory environment—factors more easily influenced by competitive pressures. Population size is less strongly related to institutional quality than other indicators of size. This chapter contributes to our understanding of these issues by introducing new variables like exitability and shape factor to measure ease of exit. These findings are consistent with the long standing belief among many economists that institutional quality will be affected by competition and the availability of substitutes. The statistically significant relationship between exitability and economic freedom, present in numerous specifications, suggests that the influence of competition and foot-voting may be much stronger than previously believed. Openness to trade seems to have a potential impact on the adoption of economic institutions. This impact is consistent when various controls and other factors are accounted for. Trade openness is well known to increase economic performance directly by allowing countries to take advantage of specialization and economies of scale. Trade

137 openness may also contribute to economic performance indirectly by increasing pressure to adopt more efficient institutional arrangements that facilitate growth in the long run. Acemoglu (2004) as well as others have hypothesized that interest group competition plays the primary role in determining the balance of a country’s institutional choices. By increasing the number of players in the competition or altering their balance of power, trade may disrupt an existing equilibrium and create pressure for greater institutional fairness. These types of governance issues are clearly closely related to economic institutions, but it is difficult to determine the role non-economic institutions have in shaping economic institutions. Some previous work has suggested that economic freedom leads to greater political freedom, which is consistent with Friedman’s classic argument (Friedman 1962). The impact of political freedom on economic freedom is less clear cut, but evidence presented here suggests it may have a role in determining economic institutions. Countries that adopt more free civil and political institutions tend, in the long-run, to achieve higher levels of economic freedom. However, this relationship is not consistent when alternative measures of economic institutions and trade openness are included; this suggests the impact of political institutions on economic freedom is not as robust as the other relationships studied in this chapter. If better data on the consistency of economic freedom within a country across various groups existed—religious, demographic, cultural etc—it might be possible to gain a more robust explanation of how civil rights or political rights, which themselves are often not equally applied, impact economic institutions. Related to the concept of civil rights and equal application of institutional norms is the concept of fractionalization, which has recently played a prominent role in the development literature. Increased fractionalization is thought to weaken a nation’s chances to achieve positive institutional reforms by undermining trust, increasing transactions costs and increasing interest group competition. The evidence, surprisingly, seems to reject this notion. While fractionalization can contributed to unfree institutions in countries where ethnic tensions are high, the ability of people to exit and express their opinion by voting with their feet seems to be a much more important factor in determining how free an economy is, challenging some of the recent literature that suggests that fractionalization is a crucial aspect of economic performance. Finally, historical anecdotes suggest institutional reforms can be brought on by episodes of economic crisis. Data presented here suggest some support for that hypothesis as periods of negative economic performance may be followed by improvements in economic institutions in later periods; again this may how economic crises alter the balance of political power among influential interest groups. Data limitations reduce our ability to address fully several interesting questions raised in this research. Improved measurement of economic institutions such as how institutions are applied within a country, and longer historical records, would allow greater analytical robustness. Developing a measure of institutional capital, similar to the concept of democratic capital, may also allow for more robust tests of not only the causes, but also the impacts of economic institutions given that economic institutions matter not only at a point in time, but also in terms of how they have existed in the past and how people expect them to change or remain in the future.

138 CONCLUSION

For much of the post-World War II period the economic profession largely ignored the question of economic institutions in empirical studies of growth. Inputs into the production function, such as labor and capital, were viewed as the primary determinants of growth, and thus occupied the attention of most economists. A small heterodox group of economists continued during this time to develop work on the importance of institutions, but their work was broadly neglected by the mainstream economics profession until the occurrence of two events. First, the demise of the Soviet Union and its satellite political system led to a renewed interest among economists in the role of economic systems or institutions in economic performance, and second, the awarding of the Nobel Prize to Douglas North in 1993 brought increased academic credibility to the work on institutional economics. From the mid-1990s onward the economics profession has witnessed something of a renaissance in studies concerning economic institutions, growth, and human well-being. As Acemoglu and Johnson (2005) point out, there is a growing consensus among economists that institutions play an important role in long-run economic performance. What is less clear is why some countries adopt institutions that are consistent with long-run economic growth while many others remain constrained by institutions that are harmful to economic growth and prosperity. These questions are beginning to emerge at the forefront of research in empirical macroeconomics and comparative political economy. This dissertation makes a contribution to the research in this area by developing an empirical understanding of some of the various factors that may help determine the quality of economic institutions. A more accurate understanding of the factors that influence institutional quality may help improve efforts to address poor economic performance around the world. Over a half-century after the creation of the World Bank and widespread international efforts to alleviate poverty in poor countries, most of the world’s population continues to live in conditions that are well below the poverty lines of Western nations. As Easterly (2002) points out, development programs have undergone periodic fads, each claiming to be the solution to global poverty and each failing to provide meaningful improvement. A growing body of empirical work in economics over the past decade provides support for the hypothesis that institutions are the foundation for economic growth, without these foundations the prospects for future growth are dim. But recognition that institutions are important may not lead to adoption of better institutions. Many obstacles prevent institutional reforms from taking root. Thus, understanding the process of institutional reform will enhance our understanding of the process of economic growth. One approach to the analysis of institutional change is to study cases of countries that have undergone significant change. Over the course of the twentieth century professional opinion as well as actual governing practice swung widely regarding the types of economic institutions that were viewed as desirable. As Hayek liked to observe, when he was a young economist at the beginning of the twentieth-century only the older generations believed in the importance of free-markets; at mid-century Hayek was largely alone in advocating markets, and by the end of the century the younger generations had come around to supporting markets again. Hayek found this movement back to faith in

139 markets very encouraging (Commanding Heights 2002). The enhanced confidence in market allocation in the late twentieth century was widespread and accompanied by, many would say contributed to, a worldwide policy movement toward greater economic freedom. Since 1980 the average chain-linked economic freedom score of the world has increased just over one point from 5.5 to 6.6. The individual countries driving this increase provide an opportunity to study in more detail the factors that contribute to institutional reforms. Twenty two case studies were presented in Chapter 3 that represent brief histories of the leading reformers since 1980, as well as four countries that defied the worldwide trend toward greater economic freedom. The leading factors in the movement toward greater economic freedom can be broken down into several broad categories. First, crises. Most of the countries included in the case studies experienced either severe economic crises or political/military crises, or both before instituting major reforms. However, economic, political and military crises are not uncommon and they usually do not lead to significant economic reforms, so the role of economic crises in reform is hazy at best. The collapse of the Soviet Union and its international influence was a clear spark for major institutional reform among several of the countries included in Chapter 3. Reacting against the stagnation and frustration brought on by generations of communist control, several countries in Central Europe became leading reformers in the period and have sustained high levels of economic freedom. The collapse of the Soviet system was accompanied by, and perhaps influenced by, an intellectual and popular revival in economic theories concerning the effectiveness of markets. The work of F.A. Hayek and Milton Friedman was particularly influential in this process. Hayek’s work was specifically cited by Margaret Thatcher during her efforts at reform in the United Kingdom and Milton Friedman was influential to the Baltics as well as Latin America through what became known as the Chicago Boys in Chile. So ideas clearly played a role in the reform movement. Ultimately, the varied experiences presented in the case studies defy easy categorization. It is clear the prominence and popularity of free-market ideas and thinkers played a role in reform, as did the collapse of the Soviet political system. The ubiquity of economic, political and military disruptions makes them an important topic of investigation regarding determinants of economic institutions, but ensures that it is equally difficult to discern clear lessons given the variety of outcomes with which they are associated. North (1981) argued that institutions are designed for the utility of the ruler or ruling elite. The ability of rulers to extract rents from this institutional arrangement is limited by their ability to maintain control over the population in their country. A key finding of the empirical work presented here is that the ease of exit from a country is crucial in determining the quality of economic institutions. New variables were developed to measure and test this concept with robust results. Three primary variables were constructed to measure the ease of exit from a country. First, the Selkirk Circularity ratio from spatial mathematics was adjusted to yield a measure dubbed ‘shape factor’; shape factor gives some idea of how elongated or un- compact a country is, and thus provides an idea of how close any point within the country is to a border. ‘Exitability’ was created to measure the ratio of total borders to area, and ‘coastalness’ was created to measure the ratio of coastlines to total area. Utilizing these

140 variables the data is supportive of the notion that ease of exit is a key ingredient in determining institutional quality. Countries which are shaped in such a way as to increase the proximity of the populace to exit options demonstrate a clear tendency toward greater economic freedom. Exitability is a measure of how easy it is for citizens to search out new institutional regimes and, in effect, vote with their feet for the regime that best suits their interests. Given the overwhelming evidence for the positive relationship between economic freedom and higher income that has been demonstrated numerous times in the literature (and was reviewed in Chapter 1) it is no surprise that this type of Tiebout sorting leads to people choosing greater economic freedom, and thus countries where exit is more likely have a stronger incentive to adopt such institutions to retain a taxable population base. It has also been commonly observed that smaller countries tend to have freer institutions. This idea is logically appealing for reasons similar to those just listed, but the data suggest that size alone does not fully capture the true relationship, rather shape or exitability is what is important. A geographic variable that is already frequently cited in the literature as being closely related to institutional quality is latitude. While this relationship is unquestionably robust in the data its explanation is still lacking in the literature. However, latitude provides a useful control variable for institutional quality, and when used it confirms the robustness of exitability as an explanatory factor. Among the variables measuring ease of exit, coastalness somewhat surprisingly turned out to be insignificant once controlling for other factors. This contradicts some important research on the importance of coasts in economic development, or at least if it was important historically its importance seems to have waned in more recent times. Reflecting on the case studies from Chapter 3 and the empirical evidence presented in Chapter 4 there does appear to be some overlap in the findings. Quite a few of the big improvers in economic freedom from Chapter 3 were characterized by greater exitability; prominent examples are Chile and Hungary as well as several smaller countries like Ireland, El Salvador and Ghana. It is possible that greater competitive pressures in those countries, due to ease of exit, helped increase their economic freedom scores during the time studied. And, of course as was pointed out in Chapter 3, several of the big improvers were countries that underwent significant improvements in political regimes like Hungary, Poland and Nicaragua. This relationship between greater political freedom and greater economic freedom was also supported empirically in Chapter 4 and suggests another avenue through which competitive pressures may have improved institutional quality. Numerous non-geographic factors may also contribute to the determination of the institutional environment, and some of those factors have been explored as well. Openness to international trade is commonly cited as a potential cause of institutional reform. Data presented here suggests that measures of the trade sector of an economy have some explanatory power for institutional quality, but that the greatest explanatory power lies with the regulatory policies impacting trade. Area 4 of the Economic Freedom of the World was a consistently strong explanatory variable for the other areas of economic freedom. Including trade openness as a control variable also further affirmed the importance of exitability as it remained a significant explanatory variable even after accounting for trade openness.

141 Governance, namely political and civil rights, was also explored for its role in shaping economic institutions. The debate over the relationship between political freedom and economic freedom is not new, but it continues without satisfactory answers. Evidence was presented that suggests movement toward greater political or civil freedom can lead to improvements in economic freedom. Particularly, improvements in the 1980s in political and civil freedoms correlated strongly with high economic freedom scores in 2004. However, when alternative measures of economic freedom, namely EF4, and trade openness were included in specifications the importance of changes in political institutions was eliminated. This suggests there is still much work to do before we can fully understand how political and civil freedoms interact with economic freedom. A revised version of a new variable was used to test this relationship as well. Democratic capital was introduced in a working paper by Persson and Tabellini in 2006. An improved version of the variable was calculated and offers promise as a tool in addressing issues related to political freedom. Somewhat surprisingly, ethnic fractionalization, or fractionalization measured by other characteristics like religion and language, proved unimportant in explaining institutional quality. This contradicts some literature that suggests that fractionalization is important for institutional quality and economic performance. However, once exitability is accounted for, fractionalization seems not to matter; this suggests ease of exit may allow citizens to self sort in a way to minimize the negative institutional effects of fractionalization. Again the force of competitive pressures seems to be more important in determining institutional quality. The role of recent economic performance was also addressed. While there are concerns about reverse causality when looking at institutions and growth over short time periods, the evidence suggests that poor economic performance may contribute to an increased likelihood of reforms that lead to greater economic freedom. That exitability remains robust after accounting for latitude, political and civil freedom, trade openness and fractionalization is important. This suggests that exitability may be a major explanatory factor in the quality of economic institutions. It may also prove useful as an instrument for institutional quality in the empirical growth literature along with latitude. And it should contribute to improved empirical investigations into economic performance and institutional quality. In summary, the findings of this research indicate that exitability, trade openness, and competitive political institutions are important determinants of economic freedom. These three factors highlight the competitive process as it relates to institutional quality. Exitability makes it easier for people to alter the economic institutions under which they live by moving to another location. Democratic political institutions make it easier to alter economic institutions through voting. Both of these factors confront political leaders with an incentive to provide economic institutions more consistent with economic freedom and prosperity and, at the same time, reduce their ability to oppress their own citizens. Moreover, trade openness increases the incentive of political leaders to protect property rights and provide equal treatment under the law to both domestic citizens and foreigners. Failure to do so will result in fewer gains from trade for both. Thus, trade openness also enhances the incentive of political leaders to adopt and maintain economic institutions more consistent with economic freedom. As exitability, trade openness and political freedom increase, competition among people and countries increases for better

142 institutions. Many important questions remain unanswered regarding the determination of economic institutions. But evidence presented here suggests a major factor is characteristics that allow people to express more effectively their support for self determination. A significant amount of work remains to be done to advance our understanding of how institutions contribute to growth and how they are formed and evolved. As Acemoglu and Johnson (2005) demonstrate, not all institutions are equally important for economic growth. And there is no clear consensus among economists as to which institution or institutions are the most important, or even which measurements of institutional quality are the best or most accurate. However, there is strong evidence both historically and empirically to support a broad conclusion that institutions and policies that support private property, stable monetary policy and less burdensome regulations lead to better economic performance. Virtually every country that lacks this type of economic freedom, broadly defined, has remained poor. Refining notions of economic institutions and how they are measured is one important current barrier for more precise testing of how institutions impact growth and other important questions. Currently the EFW index contains five major areas: 1) Size of Government, 2) legal structure and security of property rights, 3) access to sound money, 4) exchange with foreigners, and 5) regulation of credit, labor, and business. As Gwartney and Lawson (2006) point out it is important that the index be as objective as possible and to prevent the subjective views of the authors from impacting the outcomes as much as possible. The lack of objective data on vague concepts like “property rights” and “the rule of law” are challenges to stronger institutional measures. Recent changes to the EFW introduced in 2007 include data from the World Banks Doing Business Report, which makes some improvements in this area. Other major challenges to quality institutional measures include figuring out how to account for variations in tort law—an area where the United States may be particularly vulnerable to seeing its economic freedom score decreased. Also the consistency of how institutions are applied within a country is an important question. If economic freedoms are not consistently applied between all groups the benefits of such institutions are likely to be less pronounced. An extreme example would be women being denied the same access to courts or property rights as men. Another possibility for improvements in our understanding of institutions is the development of broader measures of freedom. The Fraser Institute, which led the development of the EFW, has begun as series of meetings to explore the concept of creating an index on human freedom which would span the realms of political, civil and economic freedoms to more accurately gauge how free people are to choose, to borrow Friedman’s famous phrase. The role of corruption is also an outstanding issue in the theoretical and empirical work on institutional quality. Corruption could result in uneven enforcement of rules and thus make it difficult to discern the true impact of institutions. Some research even suggests corruption may be a partial remedy for low economic freedom (see for example the working paper by Carden and Verdon 2009). Underlying formal institutions is the significant question of informal institutions and their role in both the formation of economic institutions and economic performance. Some recent work (Williamson 2009) suggests that if institutions rule it may be informal

143 institutions that rule rather than formal institutions. Of course, informal institutions provide an even greater measurement challenge than formal institutions. But Williamson’s work raises an important question and suggests that economic research in this area may also need to be informed more by cultural concepts and historical experiences. These factors are particularly important as many development aid agencies have begun trying to “impose” institutions as a condition of development assistance (Easterly 2006). One possibility for improving the measurement of formal institutions would be to develop greater historical data to construct a variable similar to the democratic capital variable that takes an historical account of economic institutions. While we know theoretically that economic freedom over a long period of time is a paramount factor in economic development, economic freedom as currently measured is static and represents a single point in time. But agents’ decisions are made based on historical experience as well as expectations of future changes in institutions. Developing a capital stock measure of economic freedom might allow us to more accurately capture the true perception of institutions among decision makers. Finally, in a dissertation that stresses the importance of historical experience in economic affairs it should be noted that the pendulum of world opinion about economic freedom may be swinging back in the pre-1980 direction toward greater intervention and planning. The time period covered in both the case studies and the empirical analysis presented here was primarily limited to 1980 through 2004. In response to the economic crises that began to be revealed in 2008, many governments around the world have begun questioning the laissez faire orthodoxy of the previous three decades. The significant downturn in economic indicators in the previous two years has erased some of the gains in economic performance reported here and led to greater public and intellectual skepticism about the free-market orthodoxy of the post-Cold War period. If these trends continue, the era from roughly 1980 to 2001 or 2008 (depending on when you date the shift) may be viewed as an interruption in the movement toward greater centralization and planning that began with the Great Depression. On the other hand, if the global economy recovers quickly the reversal may be short lived.

144 REFERENCES

Acemoglu, Daron. 2002. Why Not a Political Coase Theorem? Social Conflict, Commitment and Politics. NBER Working Paper 9377.

Acemoglu, Daron. 2003. The Form of Property Rights: Oligarchic vs Democratic Societies. NBER Working Paper 10037.

Acemoglu, Daron. 2005. Constitutions, Politics, and Economics: A Review Essay of Persson and Tabellini's The Economic Effects of Constitutions. Journal of Economic Literature. XLIII(4): 1025-1048.

Acemoglu, Daron. 2006. Modeling Inefficient Institutions. NBER Working Paper 11940.

Acemoglu, Daron and Simon Johnson. 2005. Unbundling Institutions. Journal of Political Economy. 113(5).

Acemoglu, Daron and Simon Johnson. 2006. Disease and Development: The Effect of Life Expectancy on Economic Growth. Unpublished Manuscript. Acemoglu's webpage. Current Version: May 2006.

Acemoglu, Daron and James A Robinson. 2001. Theory of Political Transitions. American Economic Review. 91(4): 938-963.

Acemoglu, Daron and James A Robinson. 2006. De Facto Political Power and Institutional Persistence. American Economic Review Papers and Proceedings. 96(2): 325-330.

Acemoglu, Daron, Simon Johnson, and James Robinson. 2001. The Colonial Origins of Comparative Development: An Empirical investigation. American Economic Review. 91(5): 1369-1401.

Acemoglu, Daron, Simon Johnson, and James A. Robinson. 2002. Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution. Quarterly Journal of Economics 117(4): 1231-1294.

Acemoglu, Daron, Simon Johnson, and James Robinson. 2003. Disease and Development in Historical Perspective. Journal of the European Economic Association Papers and Proceedings. April. Vol. 1: 397-405.

Acemoglu, Daron, Simon Johnson, and James A. Robinson. 2003. An African Success Story: Botswana. In In Search of Prosperity: Analytical Narrative on Economic Growth, ed. Dani Rodrik. Princeton: Princeton University Press.

145 Acemoglu, Daron, Simon Johnson, and James Robinson. 2004. Institutions as the Fundamental Cause of Long-Run Growth. NBER Working Paper 10481. Cambridge, MA. Forthcoming in Handbook of Economic Growth, ed. Philippe Aghion and Steve Durlauf.

Acemoglu, Daron, Simon Johnson, James A. Robinson, Pierre Yared. 2005. From Education to Democracy. NBER Working Paper 11204.

Acemoglu, Daron, Simon Johnson, James A. Robinson, Pierre Yared. 2005. Income and Democracy. NBER Working Paper 11205.

Ahahroni, Yair. 1998. The Changing Political . Annals of the American Academy of Political and Social Science, Vol. 555, Jan.

Alcalá Francisco and Antonio Ciccone, 2002. Trade and Productivity. Economics Working Papers 580, Department of Economics and Business, Universitat Pompeu Fabra. . Alesina, A., Spolaore, E. 2003. The Size of Nations. Cambridge: MIT Press.

Alesina, Alberto, Arnaud Devleeschauwer, William Easterly, Sergio Kurlat and Romain Wacziarg, 2003. Fractionalization. Journal of Economic Growth. 8(2): 155- 94, June.

Aluminum Association. 2002. Jamaica Plans to Replace Bauxite Levy. http://www.aluminum.org/Template.cfm?Section=2002&template=/ContentMana gement/ContentDisplay.cfm&ContentID=2389 (06 July 2007).

Asia Pulse. 2007. Analysis – Cambodia, Laos, Burma Prone to Fail, Says World Bank. Asia Pulse.

Atlas Narodov Mira. 1964. Moscow: Miklukho-Maklai Ethnological Institute of the Department of Geodesy and Cartography of the State Geological Committee of the Soviet Union.

Ayittey, G. 1993. Africa Betrayed. New York: Palgrave.

Ayodele, Thompson, Cudjoe, Franklin, Nolutshungu, Temba A., and Sunwabe, Charles K. 2005. African Perspectives on Aid: Foreign Assistance Will Not Pull Africa Out of Poverty.” The Cato Institute Economic Development Bulletin. No.2, September 14, 2005. http://www.cato.org/pubs/edb/edb2.pdf.

Ayyagari, Meghana, Asli Demirguc-Kunt, Vojislav Maksimovic. 2006. What Determines Protection of Property Rights? An Analysis of Direct and Indirect Effects. World Bank Policy Research Working Paper # 3940.

146 Bandow, Doug. 1999. The Death of Foreign Aid. The Korea Herald. Republished online by The Cato Institute, http://www.cato.org/dailys/10-21-99.html. October 21, 1999.

Bank of Israel. 2007. Recent Economic Developments 117, October 2006 – march 2007, available online at: http://www.bankisrael.gov.il/develeng/develeng117/develeng.pdf

Barany, George. 1990. Epilogue, 1985-1990. A History of Hungary. Eds. Peter Sugar et al. Bloomington and Indianapolis: Indiana University Press, 1990. 401-404.

Barlow, David and Roxana Radulescu. 2005. The Sequencing of Reform in Transition Economies. Journal of Comparative Economics. 33: 835-850.

Barro. R. J. 1991. Economic Growth in a Cross Section of Countries. Quarterly Journal of Economics. 106(2): 407-443.

Bastiat, F. 1850. The Law. Online: http://bastiat.org/en/the_law.html

Bauer, P.T. 1991. The Development Frontier. Cambridge: Harvard University Press.

BBC News. 2001. Poland’s Economic Challenge, 24 September. Online: bbc.co.uk

BBC New. 2007. Country Profile: Uganda: http://news.bbc.co.uk/1/hi/world/africa/country_profiles/1069166.stm. (11 July 2007)

BBC News. 2004. "UK Coal sees loss crumble to £1 m". BBC. 4 March. Online: http://news.bbc.co.uk/2/hi/business/3531819.stm.

BBC News. 2007. Country Profile: Zambia. May 4. Online: http://news.bbc.co.uk/2/hi/africa/country_profiles/1069294.stm

Beaulier, Scott. 2007. Rhetoric vs. Reality. Ed. Chris Coyne. Arlington, VA.: Mercatus Center.

Bederman, G. 1996. Manliness and Civilization: A Cultural History of Gender and Race in the United States. University of Chicago Press.

Benhabib, J. and M. Spiegel. 1994. Role of Human Capital in Economic Development: Evidence from Aggregate Cross-Country Data. Journal of Monetary Economics 34(3): 143-173.

Berend, Ivan T. 1990. Contemporary Hungary, 1956-1984. A History of Hungary. Eds. Peter Sugar, et al. Bloomington and Indianapolis: Indiana University Press, 384-400.

147 Berger, Peter and Thomas Luckmann. 1966. The Social Construction of Reality. New York: Anchor.

Berggren, Niclas. 2003. The Benefits of Economic Freedom: A Survey. The Independent Review. VIII(2): 193-211.

Berry, Richard Ross. 2007. Economy (Hungary), in Europa World online. London, Routledge. http://www.europaworld.com/entry/hu.ec.

Bertelsmann Stiftung. 2006. Bertelsmann Transformation Index 2006: Myanmar. Retrieved July 2, 2007 from, Bertelsmann Stifung web site: http://www.bertelsmann- transformation-index.de/fileadmin/pdf/en/2006/AsiaAndOceania/Myanmar.pdf

Bessaha, Abdelrahmi, Bokilo, Francis, Karangwa, Joseph, Lu, Yinqiu, Mongardini, Joannes, Moussa, Yaya, Carcillo, Stephanie, Nguenang, Jean-Pierre, and Oliva, Maria. 2007. Republic of Congo: Selected Issues, IMF Country Report No. 07/206. International Monetary Fund. June.

Bhebhe, Nothando. 2006. Mugabe Succession Battle Rages On. Institute for War and Peace Reporting, Africa Reports. September 5.

Bigsten, Arne & Steve Kayizzi-Mugerwa. 2001. Is Uganda an Emerging Economy? A Report for the OECD Project Emerging Africa. The Nordic African Institute, Uppsala, .

Black, Harold A. 1996. Review: Banking Reform in Central Europe and the Former Soviet Union, by Jacek Rostowski. The Journal of Finance. 51(4): 1568-1569.

Blankenau, W. 2005. Public Schooling, College Subsidies and Growth. Journal of Economic Dynamics and Control 29: 487-507.

Bounds, Andrew and Diego Sanchez-Ancochea. 2007. Economy (El Salvador) in Europa World online. London, Routledge. Retrieved 26 March 2007 from http://www.europaworld.com/entry/sv.ec.

Boyson, Sir Rhodes, Martino, Antonio. 1999. What We Can Learn from Margaret Thatcher, Heritage Lecture #650.

Brookes, Peter. 2007. Into Africa: China’s Grab for Influence and Oil. Heritage Lectures No. 1006. Delivered February 9, 2007.

Buc, Hernàn Büchi. 1958. How Chile Successfully Transformed Its Economy. Backgrounder. The Heritage Foundation. No. 1958: 18 Sept.

Canache, Damarys & Michael Kulisheck. 1998. Reinventing Legitimacy: Democracy and Political Change in Venezuela. Greenwood Press, Westpoint, CT.

148 Carden, Art and Lisa Verdon. 2009. Corruption Creates Growth When Markets Aren’t Free. Draft provided by authors. [email protected].

Cato Institute. 2006. Former Estonian Prime Minister Mart Laar Wins Friedman Prize for Liberty. www.cato.org/speical/friedman/winner.html. 20 April.

Cederman, Lars-Erik, and Luc Girardin. 2005. “Beyond Fractionalization: Mapping Ethnicity onto Ethno-Nationalist Insurgencies” Center for Comparative and International Studies, Swiss Federal Institute of Technology, Zurich.

Clark, John F. 1997. Edited by Gardinier, David E. Political Reform in Francophone Africa. Chapter 5: Congo: Transition and the Struggle to Consolidate. Westview Press. Boulder, CO.

Coase, Ronald H. 1937. The Nature of the Firm. Economica 4(November): 386-405.

Coase, Ronald H. 1960. The Problem of Social Cost. Journal of Law and Economics 3(October): 1-44.

Comeau, Ludovic Jr. 2003. Democracy and Growth: A Relationship Revisited. Eastern Economic Journal. 29(1): 1-21.

Commanding Heights: The Battle for the World Economy. 2002. PBS. Available online: http://www.pbs.org/wgbh/commandingheights/ (cited: August 2006).

Considine, J., and O’Leary, E. 1999. The Growth Performance of Northern Ireland and the , 1960 to 1995. In N. Collins (ed.) Political Issues in Ireland Today. New York: Manchester University Press.

Cooke, Edgar. 2004. The 2004 Moffatt Prize in Economics. Democracy and Development in Ghana: A Look at Eight Years of NDC Rule.

Constitution of Zimbabwe. 2007. Amended February 1, 2007. http://www.kubatana.net/docs/legisl/constitution_zim_070201.pdf

Council on Hemispheric Affairs (COHA). 2006. Jamaica: Debt, Economic Performance and Labour Productivity. 2006 Report.

Crafts, Nicholas. 1988. Supply-Side Policy and British Relative Economic Decline, London School of Economics; Vickers, J and yarrow, G, Privatization: An Economic Analysis. Cambridge, Mass. MIT.

Crystal, J. 1989. Coalitions in oil monarchies: Kuwait and Qatar, Comparative politics.

Daniels, Anthony. 2005. Peter Bauer and the Thirld World. Cato Journal. Vol. 25, No. 3 (Fall 2005). http://www.cato.org/pubs/journal/cj25n3/cj25n3-8.pdf

149 Danuta Hubner. 2004. Impact of the Membership in the European Union on Economic Growth in Poland, April.

Day, Alan J., 2005. Political and Economic Dictionary of Eastern Europe

DeHann, Jakob, Susanna Lundstrom, and Jan-Egbert Sturm. 2006. Market-Oriented Institutions and Policies and Economic Growth: A Critical Survey. Journal of Economic Surveys. 20(2): 157-191.

De Soto, Hernando. 1989. The Other Path: The Invisible Revolution in the Third World. HarperCollins.

De Soto, Hernando. 2000. The Mystery of Capital: Why Capitalims Triumphs in the West and Fails Everywhere Else. Basic Books.

De Vanssay, Xavier, Vincent Hildebrand and Zane A. Spindler. 2005. Constitutional Foundations of Economic Freedom: A Time-Series Cross-Section Analysis. Constitutional Political Economy. 16: 327-346.

Djankov, Simeon, Rafael Las Porta, Florencio Lopez-de-Silanes, and Andre Shleifer. 2002. The Regulation of Entry. Quarterly Journal of Economics. 117(February): 1-37.

Djankov, Simeon, Rafael Las Porta, Florencio Lopez-de-Silanes, and Andre Shleifer. 2003. Courts. Quarterly Journal of Economics. 118(May): 453-517.

Diamond, Jared. 1998. Guns, Germs, and Steel: The Fates of Human Societies. W.W. Norton.

Doucouliagos, Chris and Mehmet Ali Ulubasoglu. 2005. Economic Freedom and Economic Growth: Does Specification Make A Difference? European Journal of Political Economy.

Dreher, Axel. 2005. Does Globalization Affect Growth? Evidence from a new index of Globalization. Applied Economics

Dunai, Marton. 2005. Hungary’s Road to Euro Success Strains Budget. Wall Street Journal. 2 Nov.

Dunn, Matthew and Jean O’Mahony. 2007. Economy (Estonia), in Europa World online. London, Routledge. Retrieved 16 April 2007 from: http://www.europaworld.com/entry/ee.ec.

Easterly, William. 2002. The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics. Cambridge: MIT Press.

150 Easterly, William. 2006. Freedom Vs. Collectivism in Foreign Aid. In Economic Freedom of the World 2006. Vancouver: Fraser Institute.

Easterly, William. 2006. The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good. New York: Penquin.

Easterly, William, Levine, Ross. 2003. Tropics, Germs, and Crops: How Endowments Influence Development. Journal of Monetary Economics. 50(1):3-39.

Easterly, William, and Ross Levine. 1997. “Africa’s Growth Tragedy: Policies and Ethnic Divisions,” Quarterly Journal of Economics 112 (November): 1203-1250.

Easton, S. T. and M. A. Walker. 1997. Income, Growth, and Economic Freedom. American Economic Review. 87(2): 328-332.

Economist. 1988. Surveying Republic of Ireland. 16 January: 3-26.

Economist. 2001. Welcome to the Old Kuwait, March 1, 2001

Economist. 2005. Can the Kiwi Economy Fly? 30 November 2005.

Economist. 2006. Hungarian Dances. 21 Sept. 2006

Economist. 2006. The Copper Phoenix. May 18, 2006.

Economist. 2006. Euro Dreams. 02 Mar. 2006. Economist. 2006. Bye-bye poverty. September 28, 2006.

Economist. 2007. El Salvador’s Crime Wave. 29 Jan. 2007.

Economist.2007. Fujimori Sells. May 25, 1996. Retrieved on June 29, 2007, from EBSCO Host Academic Database.

Economist. 2007. Hugo Chavez Moves Into Banking, May 10th 2007 http://www.economist.com/displayStory.cfm?story_id=9149736 (17 July 2007).

Economist. 2007. Hot Seats. Making bad countries run good causes is actually a promising notion. May 17, 2007.

Economist. 2007. Unseating Mugabe. Our online editor finds the opposition in disarray. April 27, 2007.

Economist. 2007. Our Mutual Friend. A clever trick for valuing the diminishing Zimbabwe dollar. April 12, 2007.

151 Economist Intelligence Unit. 2000. Country Profile 2000 Ireland. London: Economist Intelligence Unit.

Edwards, Chris. 2005. Catching Up to Global Tax Reforms. Tax & Budget Bulletin. Cato Institute Vol. 2.

Eiras, Ana. 2005. Economic Freedom, Not Debt Relief, Is the Real Cure for Poverty. The Heritage Foundation Web Memo No. 766. June 16, 2005

Eltis, Walker. 1983. Policy for the Nationalized Industries: The British Problem, in “The Reassessing the Role of Government in the Mixed Economy”..

Engerman, Stanley L. 2003. Comment on: Tropics, germs and crops: How endowments influence economic development. Journal of Monetary Economics. 50: 41-47.

Engerman, Stanley L., Sokoloff, Kenneth L. 2000. History Lessons: Institutions, Factor Endowments, and Paths of Development in the New World. Journal of Economic Perspectives, Vol. 14, No. 3. Summer 2000.

Essix, Donna. 2007. Disparities in Law and Power http://www.rism.org/isg/dlp/ganja/background/BriefHistory.html .

European Union. 2004. European Commission. European Economic Area. http://ec.europa.eu/comm/external_relations/eea/index.htm.

Everingham, M. 2001. Latin American Politics and Society “Agricultural Property Rights and Political Change in Nicaragua.” Retrieved from JSTOR Database. P 66

Failed State Index. 2007. Foreign Policy Magazine. July/August 2007.

Farr, Lord and Wolfenbarger. 1998. Economic Freedom, Political Freedom and Economic Well-Being: A Causality Anlysis. Cato Journal 18(2): 247-262.

Fearon, James D. 2003. Ethnic and Cultural Diversity by Country. Journal of Economic Growth. 8: 198-222.

Federal Reserve Bank of Dallas. 2005. Annual Report. Dallas.

Floud, Roderick. 1994. The Economic History of Britain Since 1970.

Fontaine, Juan Andres. 2002. Americas: To Gain From Free Market Reforms, You Have to Do Them. Wall Street Journal. 8 Nov. 2002

Frankel, Jeffrey A. 2010. The Natural Resource Curse: A Survey. NBER Working Paper 15836, National Bureau of Economic Research, Inc.

152 Frankel. J, and David Romer, 1996. Trade and Growth: An Empirical Investigation. NBER Working Paper 5476, National Bureau of Economic Research, Inc.

Freedom House. 2006. Freedom in the World. Online: http://www.freedomhouse.org/template.cfm?page=15 (cited March 2007).

Freedom House. 2007. Freedom in the World Survey. 2007.

Friedman, M. 1962. Capitalism and Freedom. Chicago: University of Chicago Press.

Friedman, M and R. D. Friedman. 1980. Free to Choose: A Personal Statement. Chicago: University of Chicago Press.

Fukuyama F. 1996. Trust: The Social Virtues and the Creation of Prosperity. The Free Press.

Gallup, John and Jeffrey Sachs. 1998. Location, location: Geography and Economic Development. Harvard International Review. 21(1): 56-61.

Gamble, Andrew. 1989. Privatization, Thatcherism, and the British State. Journal of Law and Society, 16(1).

Gerson, Michael. 2007. Zimbabwe’s Unending Agony. The Washington Post. June 15, A21.

Girnius, Kestutis. 2007. Economy (Lithuania), in Europa World online. London, Routledge. Retrieved 16 April 2007 from http://www.europaworld.com/entry/lt.ec.

Gissurarson, Hannes H. 2004. State of the Union: Miracle on Iceland. Wall Street Journal. 29 Jan. 2004.

Gonda, Violet. 2007. Zimbabwe Faces Economic Collapse by Year End. SW Radio Africa (London). http://allafrica.com/stories/200706141063.html

Grimes, Joseph, and Barbara Grimes. 1996. Ethnologue: Languages of the World, 13th ed. Dallas: Summer Institute of Linguistics.

Gwartney, James and Robert Lawson. 2003. The concept and Measurement of Economic Freedom. European Journal of Political Economy. 19: 405-430.

Gwartney, James and Robert Lawson. 2005. Economic Freedom of the World 2005. Fraser Institute.

Gwartney, James and Robert Lawson. 2006. Measurement of Legal Structure and Regulation. Papers Presented at APEE meeting, Las Vegas, NV.

153 Gwartney, James and Robert Lawson. 2006. Economic Freedom of the World. Vancouver: Fraser Institute.

Gwartney, James D., Randall G. Holcombe and Robert A. Lawson. 2004. Economic Freedom, Institutional Quality, and Cross-Country Differences in Income and Growth. Cato Journal. 24(3): 205-233.

Gwartney, James D., Randall G. Holcombe and Robert A. Lawson. 2006. Institutions and the Impact of Investment on Growth. Kyklos. 2: 255-273.

Haggerty, Richard A. 1990.. Venezuela: A Country Study. Washington: GPO for the Library of Congress. http://countrystudies.us/venezuela/23.htm.

Hall, Robert E., and Charles I. Jones. 1999. Why Do Some Countries Produce So Much More Output Per Worker Than Others? Quarterly Journal of Economics. 114(1): 83-116.

Hanushek, E.A. and D.D. Kimko. 2000. Schooling, Labor Force Quality, and the Growth of Nations. American Economic Review. 90(5): 1184-1208.

Hauwe, Ludwig Van den. 1999. Public Choice, Constitutional Political Economy, and Law and Economics. Encyclopedia of Law and Economics, ed. Boudewijn Bouckaert and Gerrit De Geest. Edward Elgar: Chelthenham, UK, 603-659.

Havas, Attila. 2002. Does Innovation Policy Matter in a Transition Country? The Case of Hungary. Journal of International Relations and Development 5(4): 380-402.

Hayek, F.A. 1945. The Use of Knowledge in Society. American Economic Review. 35(4): 519-530.

Hayek, F.A. 1960. The Constitution of Liberty. Chicago: University of Chicago Press.

Hellinger, Daniel C. 1991. Venezuela: Tarnished Democracy. Westview Press, Boulder, CO.

Helmke, Gretchen and Steven Levitsky. 2004. Informal Institutions and Comparative Politics: A Research Agenda. Perspectives on Politics 2(4): 725-740.

Heritage Foundation. 2007. 2007 Index of Economic Freedom. Online: http://www.heritage.org/index/ (cited: August 2007).

History of the Monarchs, Queen Victoria (r.1837 – 1901), available at http://www.royal.gov.uk/output/Page118.asp#

Holmes, Martin.1985. The First Thatcher Government, 1979 – 1983: Contemporary Conservatism and Economic Change.

154 Horton, John J. 2007. History (Iceland) in Europa World online. London, Routledge. http://www.europaworld.com/entry/is.hi.

Iceland’s Laffer Curve. 2007. Wall Street Journal. 12 Mar. 2007

Iceland. 2007. Central Bank of Iceland. History. Online: http://www.sedlabanki.is/?PageID=192.

Infoplease.com. 2008. Poland: The Economy, available at http://www.infoplease.com/

International Monetary Fund. 2005. World Economic Outlook 2005: Building Institutions. Chapter 3: Building Institutions. Washington, DC.

International Herald Tribune. 2005. Waltz of Nicaragua’s Thugs. October 16, 2005. Retrieved from Lexis Nexus Database.

Israel. 2007. Ministry of Finance, Prospectus, The Economy, available at: http://www.mof.gov.il/prospectus1/form_18kc.htm

Israel. Prospectus State of Israel – available online at: http://www.mof.gov.il/prospectus1/form_18kb.htm

Jacobsen, J. 1994. Chasing Progress in the Irish Republic. New York: Cambridge University Press.

Jackson, Kenneth E. and J.W. Rowe. 2007. Economy (New Zealand), in Europa World online. London, Routledge. http://www.europaworld.com/entry/nz.ec.

Jeong, Ho-Won. 2006. Ghana: lurching toward economic rationality. World Affairs, Fall Edition. Kalinda, Beatrice and Floro, Maria. 1992. Zambia in the 1980s: A Review of National and Urban Level Economic Reforms. Working Paper. The World Bank.

Kandell, Jonathan. 1989. Property Rights: Conservatives’ Victory In El Salvador Signals End to Land Reform--- Cristiani, New President, Plans to Revise the Policy; Return of the Oligarchy?--- An Army for the Coffee Baron. Wall Street Journal. 22 Mar. 1989.

Kasenkamp, Andres. 2007. History (Latvia), in Europa World online. London, Routledge. Retrieved 16 April 2007 from http://www.europaworld.com/entry/lv.hi

Kasenkamp, Andres. 2007. History (Estonia), in Europa World online. London, Routledge. Retrieved 16 April 2007 from http://www.europaworld.com/entry/ee.hi.

Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. Governance matters. Policy Research Working Paper Series 2196, The World Bank.

155

Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 2002. Governance matters II - updated indicators for 2000-01. Policy Research Working Paper Series 2772, The World Bank.

Kazmin, A. 2006. IMF warns Burma on high inflation. Financial Times.

Kenny, Tom. 2000. Zambia: Deregulation and the denial of human rights. Submission to the United Nations Committee on Economic, Social, and Cultural Rights. March 2000.

Kirzner, Israel M. and Frederic Sautet. 2006. The Nature and Role of Entrepreneurship in Markets: Implications for Policy. Policy Primer No. 4. Mercatus Center, George Mason University.

Kleine-Ahlbrandt, Stephanie and Small, Andrew. 2007. “China Jumps In.” The International Herald Tribune. February 1.

Knack, Stephen & Keefer, Philip. 1997. Does Social Capital Have an Economic Payoff? A Cross-Country Investigation. The Quarterly Journal of Economics, MIT Press, 112(4): 1251-88.

Krueger, Thomas and Bo ote, Anthony. 2007. Republic of Congo: Staff-Monitored Program. IMF Country Report No. 07/242. July 2007.

Kryn, Jeremy. 2003. European Union Enlargement, the Common Agricultural Policy and Polish Agriculture, Jeremy Kryn, June 15, 2003, Center for International Private Enterprise, Washington, DC

Kuwait: 2002. Economic Data / Economic review – Report of National Bank of Kuwait for 2002

La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. 1997. Legal Determinants of External Finance. Journal of Finance. 52(July): 1131-1150. La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. 1998. Law and Finance. Journal of Political Economy. 106(4): 1113-1155.

Laar, Mart. 2003. How Estonia Did It. 2003 Index of Economic Freedom. Heritage Books: Washington DC. Chapter 3.

Lane, P. 2000. Disinflation, Switching Nominal Anchors and Twin Crises: The Irish Experience.” Journal of Policy Reform 3: 301-26.

Lawson, Fred. 1985. Class and State in Kuwait, Merip Reports, May 1985

156 Lee, Matthew. 2007. Security Fears Restrict US Diplomats. The Washington Post. July 6, 2007.

Levine, R. and D. Renelt. 1992. A Sensitivity Analysis of Cross-Country Growth Regressions. American Economic Review 82(4): 942-963.

Lezcek Balcerowicz. 2000. Poland’s Transformation. IMF Finance and Development, September 2000, Vol. 37, Number 3

Library of Congress. 1987. Country Studies. Ghana Economy - Patterns of Development http://www.photius.com/countries/ghana/index.html (24 June 2007).

Library of the Congress. 1987. Country studies – Poland. http://www.photius.com/countries/poland/index.html (19

Library of Congress. 1987. Country Studies. Jamaica Economy - Patterns of Development http://www.photius.com/countries/jamaica/index.html (19 June 2007)..

Library of Congress. 1987. Country Case Studies – Kuwait http://www.photius.com/countries/Kuwait/index.html

Lieth, Clark & Ludvig Soderling. 2003. Ghana - Long Term Growth, Atrophy and Stunted Recovery. The Nordic Africa Institute. Uppsala, Sweden.

Lucas, Robert. 1988. On the Mechanics of Economic Development. Journal of Monetary Economics 22: 3–42.

Mackaay, Ejan. 1999. History of Law and Economics. Encyclopedia of Law and Economics, ed. Boudewijn Bouckaert and Gerrit De Geest. Edward Elgar: Chelthenham, UK, 65-117.

Mackaay, Ejan. 1999. Schools: General. Encyclopedia of Law and Economics, ed. Boudewijn Bouckaert and Gerrit De Geest. Edward Elgar: Chelthenham, UK, 402- 415.

Machiavelli, Niccolò. 1513 [2004]. The Prince. London: Penguin. ISBN 978-0-140449- 15-0.

Mankiw, N. G., D. Romer, and D N. Weil. 1992. A Contribution to the Empirics of Economic Growth. Quarterly Journal of Economics 107(2): 407-437.

Marx, K. and F. Engels. 1848. Communist Manifesto. Available online: http://www.anu.edu.au/polsci/marx/classics/manifesto.html.

157 Marshall, Monty G. and Keith Jaggers. 2003. Polity IV Country Report 2003: Myanmar (Burma). Retrieved July 2, 2007 from Polity IV Country Reports 2003 web site: http://www.cidcm.umd.edu/polity/country_reports/report.htm.

Marshall, Monty G. and Keith Jaggers. 2006. Polity IV Country Report 2003: El Salvador. Polity IV. Center for International Development and Conflict Management, University of Maryland-College Park.

Marshall, Monty G. and Keith Jaggers. 2006. Polity IV Country Report 2003: Estonia. Polity IV. Center for International Development and Conflict Management, University of Maryland-College Park.

Marshall, Monty G. and Keith Jaggers. 2006. Polity IV Country Report 2003: Chile. Polity IV. Center for International Development and Conflict Management, University of Maryland-College Park.

Marshall, Monty G. and Keith Jaggers. 2006. Polity IV Country Report 2003: Ghana. Polity IV. Center for International Development and Conflict Management, University of Maryland-College Park.

Marshall, Monty G. and Keith Jaggers. 2006. Polity IV Country Report 2003: Jamaica. Polity IV. Center for International Development and Conflict Management, University of Maryland-College Park.

Marshall, Monty G. and Keith Jaggers. 2007. Polity IV. Center for International Development and Conflict Management, University of Maryland-College Park. 2006.

McCloskey, Deirdre. 2000. How to Be Human—Though An Economist. AnnArbor: Michigan University Press.

McDonald-Gibson, C. 2007. As Myanmar’s new capital emerges, analysts question its true cost. Agence France Presse.

McGreal, Chris. 2002. The Trail from Lancaster House. The Guardian. January 16.

McMahon, Fred. 2006. Project Overview: Promoting Economic Freedom in the Arab World. Vancouver: Fraser Institute.

McTigue, Maurice. 2007. Email Correspondence. 5 Apr.

Meldrum, Andrew. 2007. US predicts regime change in Zimbabwe as hyperinflation destroys the economy. The Guardian. June 22.

Miquel, E., S. Satyanath and S. Sergenti. 2004. Economic Shocks and Civil Conflict: An Instrumental Variables Approach. Journal of Political Economy 112(4): 725-753.

158 Mises, Ludwig von. 1926. Liberalism: In the Classical Tradition. Online: http://mises.org/liberal.asp

Mitchell, Daniel. 2007. Iceland Joins the Flat Tax Club. Tax and Budget Bulletin. Cato Institute. No. 43: Feb. 2007.

Moin A. Siddiqi. 1999. Kuwait: Special Report, February 1999.

Montalvo, Jose G., and Marta Reynal-Querol. 2005. “Ethnic Diversity and Economic Development,” Journal of Development Economics. 7 (2005): 293-323.

Montesquieu, Charles de Secondat, baron de 1750. In Defence of "The Spirit of the Laws.

Morrison, Steven and Matthew Dunn. 2007. Economy (Latvia), in Europa World online. London, Routledge. University of St. Thomas. http://www.europaworld.com/entry/lv.ec

Muganda, Anna. 2004. Tanzania’s Economic Reforms – and Lessons Learned. A case study from “Reducing Poverty, Sustaining Growth – What Works, What Doesn’t, and Why.”

Mukand, Sharun W., and Dani Rodrik. 2005. In Search of the Holy Grail: Policy Convergence Experimentation, and Economic Growth. American Economic Review. 95(1): 374-383.

Mwansa, John M., Kunda, Douglas, Luome, George, Musona, Percy, Simukoko, Steen, Göran, Steen, and Betley, Mary. 2005. Zambia Public Financial Management Performance Report and Performance Indicators. PEMFA Programme Evaluation. Republic of Zambia. December 2005. Mwila, Ronald. 2007. Zambian Government considers levying mining windfall profits tax. www.Mineweb.co.za. .

Mydans, Seth. 2006. Communist Vietnam Lunges for Capitalism's Brass Ring. New York Times. April 27.

Naim, Moises. 2003. Hugo Chavez and the Limits of Democracy. The New York Times, March 5, 2003. http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=1241

National Bank of Kuwait. 2004. Kuwait economic outlook. Jan. 2004

National Public Radio. 2005. Talk of the Nation. Debt Relief in Tanzania. June 14, 2005. http://www.npr.org/templates/story/story.php?storyId=4702980

North, Douglass C. 1981. Structure and Change in Economic History. Norton.

159 North, Douglass C. 1990. Institutions, Institutional Change and Economic Performance, Cambridge University Press.

North, Douglass. 1991. Institutions. Journal of Economic Perspectives- 5(1): 97

North, Douglass C and Robert Thomas. 1973. The Rise of the Western World: A New Economic History. Cambridge.

O’Brien, Philip J. 2007. Economy (Chile), in Europa World online. London, Routledge. . Retrieved 30 April 2007 from http://www.europaworld.com/entry.cl.ec.

O’Grady, Mary Anastasia. 2003. For Salvador’s Flores, Yankee Baiting No Mas. Wall Street Journal. 26 Sept. 2003.

Olson, M. 1982. The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities. Yale University Press.

Olson, M. 1965. The Logic of Collective Action: Public Goods and the Theory of Groups. Harvard.

Organization for Economic Cooperation and Development. 2004. African Economic Outlook 2003/2004. Zimbabwe Country Study.

Organization for Economic Cooperation and Development. 2006. Policy Brief: Economic Survey of Ireland, 2006. Paris: OECD, 2006.

Organization for Economic Cooperation and Development.2007. African Economic Outlook 2007. Congo Republic Country Study.

Organization for Economic Cooperation and Development. 2007. African Economic Outlook 2007. Tanzania Country Study.

Organization for Economic Cooperation and Development. 2007. African Economic Outlook 2007. Uganda Country Study. http://www.oecd.org/dataoecd/13/38/2497647.pdf

Organization for Economic Cooperation and Development. 2007. African Economic Outlook 2007. Zambia Country Study.

Ovaska, Tomi and Ryo Takashima. 2006. Economic Policy and the Level of Self- Perceived Well-Being: An International Comparison. The Journal of Socio- Economics. 35: 308-325.

Pardo, Pablo. 2007. Translated by Tobias Pfutze. El Mundo, Madrid. May 26th, 2007. Page 8-9.

160 Parente, S. L. and E. C. Prescott. 1994. Barriers to Technology Adoption and Development. Journal of Political Economy 102(2): 298-321.

Paris Club. 1996. Republic of the Congo Debt Treatment. July 16, 1996

People’s Daily Online. 2007. World Bank official advises Zambia to re-negotiate mining agreements. March 29, 2007.

Perry, Joellen. 2006. Blue Danube: Turmoil in Hungary Spotlights Troubles in Eastern Europe; Prime Minister Admits ‘Lies’ As He Tackles Budget Gap; Region Slow to Adopt Euro; A Nurse’s Currency Worries. Wall Street Journal. 21 Sept. 2006.

Persson, Torsten and Guido Tabellini. 2006. Democratic Capital: The Nexus of Political and Economic Change. NBER Working Paper 12175.

Peter, Laszlo. 2007. History (Hungary), in Europa World online. London, Routledge. http://www.europaworld.com/entry/hu.hi.

Pfeifer, K. 2002. Middle East Report, No. 223 (Summer 2002), pp. 10-13, 12

Photius.com. 2004. Economy Growth and Structure. http://www.photius.com/countries/uganda/economy/uganda_economy_growth_an d_structure~2486.html

Piñera, Jose. 2000. A Chilean Model for Russia. Foreign Affairs. Sept./Oct. 2000

Piñera, Jose and Aaron Lukas. 1999. The Americas: Chile Takes a Bold Step Toward Freer Trade. Wall Street Journal. 15 Jan. 1999.

Pirie, Madsen. 2005. Privatization, The Cincise Encyclopedia of Economics, available online at www. econlib.org.

Political Risk Services. 2006. Hungary: Country Report. Political Risk Yearbook.

Posner, Daniel N. 2004. “Measuring Ethnic Fractionalization in Africa,” America Journal of Political Science 48: 849-863.

Powell, Benjamin. 2003. Economic Freedom and Growth: The Case of the Celtic Tiger. Cato Journal Vol. 22: 431-448.

Pritchett, L. 1996. Where Has All the Education Gone? How to Explain the Surprising Finding that More Education Did Not Lead to Faster Economic Growth. World Bank Policy Research Department, March.

Pritchett, L. 1997. Divergence, Big Time. Journal of Economic Perspectives 11(3): 3- 17.

161 Pritchett, L. 1997. The Tyranny of Concepts. World Bank working paper.

Pritchett, L. and D. Filmer. 1999. What Education Production Functions Really Show: A Positive Theory of Education Expenditures. Economics of Education Review 18: 223-239.

Radio Free Europe. 2005. Poland: Solidarity – The Trade Union That Change the World, Aug. 2005 redorbit.com. 2006. Zambia Urges Diversifying Mining Industry. February 13, 2006.

Reynolds, Alan. 2002. Marginal Tax Rates. The Concise Encyclopedia of Economics.

Richardson, Craig J. 2006. Learning from Failure: Property Rights, Land Reforms, and the Hidden Architecture of Capitalism. American Enterprise Institute.

Rodrick, Dani, Arvind Subramanian, and Francesco Trebbi. 2004. Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development. Journal of Economic Growth. 9: 131-165.

Romer, Paul M. 1986. Increasing Returns and Long-run Growth. Journal of Political Economy. 94(5): 1002-1037

Romer, Paul M. 1990. Endogenous Technological Change. Journal of Political Economy 98(3): S71-S102.

Rosenberg, Nathan and L.E. Birdzell Jr. 1986. How the West Grew Rich: The Economic Transformation of the Industrial World. Basic Books.

Sachs, Jeffrey D. 2003. Institutions Don't Rule: Direct Effects of Geography on Per Capital Income. NBER Working Paper 9490.

Sala-I-Martin, Xavier, Gernot Doppelhoger and Ronald I. Miller. 2004. Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach. American Economic Review. September: 813-835.

Salam, Steven & Toyin Falola. 2002. Culture and Customs of Ghana. The Greenwood Press. Westport, Connecticut

Samuelson, P. 1946. Economics: An Introductory Analysis. Cambridge: MIT.

Sautet, Frederic. 2006. Why Have Kiwis Not Become Tigers? Reforms, Entrepreneurship and Economic Performance in New Zealand. New Zealand Business Roundtable. April 2006.

Schumpeter, J. A. 1942. Capitalism, Socialism and Democracy. New York: Harper.

162 Schaefer, Bret D. 2007. The Crisis in Zimbabwe: How the U.S. Should Respond. The Heritage Foundation Web Memo No. 1407. March 23, 2007.

Schaefer, Bret D. and Tupy, Marian L. 2007. Africa’s Zimbabwe Problem: Why do African nations line up in support of such a disreputable nation?” The Heritage Foundation. May 25, 2007.

Shacinda, Shapi. 2007. Mining leaves toxic legacy in Zambian town. The Washington Post. June 21, 2007.

Shalev, Michael. 1998. Who paid the price? 50 Years Israel. Middle East Report, No. 207

Selkirk KE. 1982. Pattern and place an introduction to the mathematics of geography. Cambridge University Press, Cambridge

Seria, Nasreen and Godfrey, Mutizwa. 2007. Zimbabwe Devalues Currency by 98% to Boost Exports. The Zimbabwe Situation. April 26, 2007. http://www.zimbabwesituation.com/apr27_2007.html

Sheahan, John. 1999. Searching for a Better Society: The Peruvian Economy from 1950.

Simutanyi, Neo. 2006. Neo-Liberalism and the Relevance of Marxism to Africa: The Case of Zambia. Paper presented to the 3rd International Conference on ‘The Works of Karl Marx and the Challenges of the 21st Century’. Havana, Cuba. May 3-6, 2006.

Sitta, S.J. 2005. Integrity Environment and Investment Promotion, The Case of Tanzania. Presented to the Conference Alliance for Integrity – Government & Business Roles in Enhancing African Standards of Living. March 7-8, 2005. http://www.oecd.org/dataoecd/11/37/34571058.pdf

Smith, A. 1776. An Inquiry Into the Nature and Causes of the Wealth of Nations. Complete text available online from Library of Economics and Liberty: www.econlib.org.

Snaevarr, Sigurour. 2007. Economy (Iceland) in Europa World online. London, Routledge. http://www.europaworld.com/entry/is.ec.

Solow, R. 1956. A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics.

Solow, R. 1957. Technical Change and the Aggregate Production Function. Review of Economics and Statistics.

163 Southern Rhodesia. 1979. Constitutional Conference Held at Lancaster House, London, September-December 1979. Report. Her Majesty’s Stationery Office. http://www.zwnews.com/Lancasterhouse.doc

Stoever, William A. 1985. A Business Analysis of the Partial Nationalization of Zambia’s Copper Industry, 1969-1981. Journal of International Business Studies, 16(1): 137.

Tarver, Micheal H. 2004. The Rise and Fall of Venezuelan President Carlos Andres Perez Volume 2: The Later Years 1973–2004.

The Guardian. 1999. Thatcher's legacy. 3 May 1999. http://www.guardian.co.uk/politics/1999/may/03/thatcher.uk.

Thomas, H. 2005. Education and Modernization. Educational Review 57(2): 235-245

Time. Shipyard Strike, Time Magazine, Aug. 25, 1980

Transparency International. 2004. Transparency International Annual Report 2004: The Coalition Against Corruption. Transparency International. 2004.

Transparency International. 2006. Corruption Perceptions Index 2006. Transparency International. 06 Nov. 2006.

Trei, Lisa. 1994. Russian Troops Today to Finish Estonia Pullout – But Half Century Presence Leaves Mark on Trade, Environment, and Society. Wall Street Journal. 31 August 1994.

Tupy, Marian. 2005. Lower Taxes, Bitte. Wall Street Journal (Europe). 7 May 2004.

Tupy, Marian. 2005. The Cato Institute. Hypocrisy Ran Deep at the World Summit.

Tupy, Marian. 2006. Still in the Market for Reforms. Cato Institute. 25 October 2006

United Kingdom. 2002. UK Progress Report on Economic Reform: Product and Capital Markets. December 2002

United Nations.2006. Investment Policy Review. Zambia.

United Nations. 2006. The 2006 Human Development Report. Online: http://hdr.undp.org/hdr2006/report.cfm (cited August 2007).

United Nations Office for the Coordination of Humanitarian Affairs. 2007. ZAMBIA: Mineral tax increase holds no benefit for citizens. February 21, 2007.

164 United Republic of Tanzania. 2005. National Strategy for Growth and Reduction of Poverty (NSGRP). Vice President’s Office. June 2005.

United States Central Intelligence Agency. 2007. Central Intelligence Agency. Republic of the Congo. 19 June 2007

United States Central Intelligence Agency. 2007. Central Intelligence Agency. El Salvador. 15 March 2007.

United States Central Intelligence Agency. 2007. Central Intelligence Agency. Iceland. 15 March 2007.

United States Central Intelligence Agency. 2007. Central Intelligence Agency. The World Factbook: Ghana. https://www.cia.gov/library/publications/the-world-factbook.html (25 June 2007).

United States Central Intelligence Agency. 2007. Central Intelligence Agency. The World Factbook: Ireland. 8 February 2007.

United States Central Intelligence Agency. The World Factbook: Jamaica. https://www.cia.gov/library/publications/the-world-factbook.html (20 June 2007).

United States Central Intelligence Agency. 2007. Central Intelligence Agency. Tanzania. 19 June 2007

United States Central Intelligence Agency. 2007. Central Intelligence Agency. Uganda. (16 July 2007)

United States Central Intelligence Agency 2007. Central Intelligence Agency. The World Factbook: Venezuela. https://www.cia.gov/library/publications/the-world- factbook/geos/ve.html (20 July 2007).

United States Central Intelligence Agency. 2007. Central Intelligence Agency. Zimbabwe. 14 June 2007

United States Central Intelligence Agency. 2007. Central Intelligence Agency. Zambia. 19 June 2007

United States Central Intelligence Agency. 2007. The World Factbook: Burma. Retrieved July 2, 2007 from Central Intelligence Agency web site: http://www.cia.gov/library/publications/the-world-factbook/geos/bm.html.

United States Federal Bureau of Investigation and Department of Justice. 2006.. Crime in the US 2005. Sept. 2006.

165 United States Department of State. 2007. Department of State. Bureau of European and Eurasian Affairs. Background Note: Iceland. Dec. 2007.

United States Department of State. 2007. Department of State. Bureau of European and Eurasian Affairs. Background Note: Estonia. Apr. 2007.

United States Department of State. 2007. Department of State. Bureau of European and Eurasian Affairs. Background Note: Latvia. Jan. 2007.

United States Department of State. 2007. Department of State. Bureau of European and Eurasian Affairs. Background Note: Lithuania. Feb. 2007.

United States Department of State. 2007. Department of State. Bureau of Western Hemisphere Affairs. Background Note: Chile. Apr. 2007.

United States Department of State. 2007. Department of State. Bureau of African Affairs. Background Note: Republic of the Congo. June 2007.

United States Department of State. 2007. Department of State. Bureau of European and Eurasian Affairs. Background Note: El Salvador. Jan. 2007.

United States Department of State. 2007. Department of State. ( June 2007). Background Notes: Ghana. http://www.state.gov/r/pa/ei/bgn/2860.htm (26 June 2007).

United States Department of State. 2007. Department of State. Bureau of European and Eurasian Affairs. Background Note: Hungary. Sept. 2007.

United States Department of State. 2007. Department of State. Bureau of European and Eurasian Affairs. Background Note: Ireland. January 2007.

United States Department of State. 2007. Department of State. ( June 2007). Background Notes: Jamaica. http://www.state.gov/r/pa/ei/bgn/2032.htm (19 June 2007).

United States Department of State. 2007. State Department; background Note: Poland

United States Department of State. 2007. Department of State. Bureau of African Affairs. Background Note: Tanzania. March 2007.

United States Department of State. 2007. Department of State. Bureau of African Affairs. Background Note: Uganda. March 2007. (18 July 2007)

United States Department of State. 2007. Department of State. Bureau of African Affairs. Background Note: Zambia. May 2007.

166 United States Department of State. 2007. Department of State. Bureau of African Affairs. Background Note: Zimbabwe. June 2007.

United States Department of State. 2007. Department of State (2007). Background Note: Burma. Retrieved July 2, 2007 from, Bureau of East Asian and Pacific Affairs web site: http://www.state.gov/r/pa/ei/bgn/35910.htm

USTR. 2008. Israel Free Trade Agreement, Office of US Trade Representative, available at: http://www.ustr.gov/Trade_Agreements/Bilateral/Israel/Section_Index.html

Valdés, Juan Gabriel. 1995. Pinochet's Economists: The Chicago School of Economics in Chile, Cambridge, Cambridge University Press

Van Eck, Jan Ritsema and Eric Koomen. 2008. Characterising urban concentration and land-use diversity in simulations of future land use. The Annals of Regional Science, 42(1). 2008.

Washington Post. 1998. Mitch Costs Assessed as 'Staggering'; Rebuilding Will Take Many Years, Much Help. Serge F. Kovaleski, Washington Post Foreign Service

Weber, M. 1904. Protestant Ethic and the Spirit of Capitalism. Penquin Book, 2002.

Wilenius, Paul. 2004. Enemies within: Thatcher and the unions. BBC. http://news.bbc.co.uk/1/hi/uk_politics/3067563.stm.

Wikipedia.org. 2007. The Economy of Uganda. http://en.wikipedia.org/wiki/Economy_of_Uganda (14 July 2007)

Wikipedia.org. 2007. The . http://en.wikipedia.org/wiki/Economy_of_Zambia (14 July 2007)

Williamson, C. 2009. Informal Institutions Rule: Institutional Arrangements and Economic Performance. Public Choice, 139(3): 371-387

Williamson, Oliver. 1985. Reflections on the New Institutional Economics. Journal of Institutional and Theoretical Economics. March 187-195.

Wines, Michael. 2006. How Bad is Inflation in Zimbabwe? The New York Times. May 2, 2006.

World Bank. 2005. World Development Indicators 2005. Washington, DC.

World Bank. 2005. PEFA Secretariat. Public Financial Management Performance Measurement Framework. June 2005.

World Bank. 2006. Zambia Country Brief. April 2006.

167 World Bank. 2006. Uganda Country Brief. April 2006.

World Bank. 2006. Doing Business. Online: http://www.doingbusiness.org/.

World Bank. 2007. Country Brief: Republic of Congo. March 2007.

World Bank. 2007. World Development Indicators 2007. Online: http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMD K:21298138~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html (cited: August 2007).

World Bank. 2007. Country Brief: Tanzania. April 2007

World Bank. 2007. Highly Indebted Poor Countries Initiative and Multilateral Debt Relief Initiative At-A-Glance. Spring 2007

World Socialist Movement. 2006. Zambia’s Tribalist Politics. August 13, 2006.

World Trade Organization. 2001. Press Release. Uganda: December 2001

Yochanan Shmackmurove. 2007. Economic Development in the Middle East, Penn Institute for Economic Research, available at www.ssrn.com

Yousef H. Al-Ebraheem. 1996. Kuwait’s Economic Travails, Middle East Quarterly, September 1996

Zambia Privatization Agency. 2007. http://www.zpa.org.zm/

Zhao, Minyuan, Kathy Fogel, Randall Morck, Bernard Yeung. 2005. Trade Liberalization and Institutional Change. Harvard Institute of Economic Research Discussion Paper # 2098.

Zimbabwe. 2007. Constitution of Zimbabwe Amendment (No. 11) Act, 1990, summary. http://www.popline.org/docs/0974/078224.html.

Zuleeg, Fabian. 2007. Economy (Ireland), in Europa World online. London, Routledge. Retrieved 10 April 2007 from http://www.europaworld.com/entry/ie.ec

168 BIOGRAPHICAL SKETCH

Matthew Brown is a native of Florida and graduated with a bachelor’s degree in economics, with honors, from The Florida State University in 1996. He earned a MA in economics from The American University in 1998 and an MS from The Florida State University in 2006. He has taught economics at Montana State University-Bozeman and Santa Clara University. He is Program Officer for Academic Affairs at the Charles G. Koch Charitable Foundation.

169