Unexpectedly Intriguing!
September 16, 2008

The Fraser Institute has released the 2008 Annual Report on the Economic Freedom of the World! This year's must-read essay by Seth Norton and James Gwartney: Economic Freedom and World Poverty. Some quick excerpts:

On the rates of poverty:

... poverty rates are substantially lower in persistently free economies compared to those with persistently lower levels of economic freedom. This is true regardless of whether poverty is measured by income or quality-of-life indicators.

On the role of increasing economic freedom as a means to reduce poverty:

... both the level of economic freedom and the change in economic freedom exert a strong impact on the poverty rate. Countries with higher initial levels of economic freedom achieved more rapid reductions in poverty....

The fact that both the initial level and the change in EFW rating reduce the incidence of poverty is strong evidence that, contrary to the views of Jeffery Sachs, economic freedom is a powerful weapon with which to combat world poverty.

Why is poverty so prevalent in Africa? (Emphasis ours...)

Once one thinks about the importance of gains from trade, entrepreneurship, and investment, it is easy to see why Africa is poor. The countries of sub-Saharan Africa are approximately the geographic size of the typical US state. Before resources and products can cross these national boundaries, they are subject to both taxes and the inspection of customs officials. This is a costly, time-consuming, and onerous ordeal that exerts a corrupting influence on both business and government. Most important, it is a major deterrent to gains from specialization, economies of scale, entrepreneurship, and investment. If trade restrictions of this type were present among the states, the United States would be a poorer country and poverty would be more wide-spread. The trade restrictions alone are enough to undermine prosperity but, when coupled with legal systems that fail to protect property rights and regulations that restrict entry and drive up the cost of doing business, the results are catastrophic.

Norton and Gwartney conclude their findings by proposing three steps that African nations can take toward reducing poverty by establishing positive economic growth:

  1. Eliminating the trade barriers and business regulations that paralyze the economies of African nations.

  2. A long term focus on improving and reforming the legal systems.

  3. Establishing an interstate highway system.

The authors provide the following conclusion and, in the process, excoriate current aid programs intended to reduce poverty levels in sub-Saharan Africa:

Without such reforms, prior experience indicates that the Millennium Development Goals will not be met. Foreign aid, even in large doses, will not reduce poverty, at least not by much, unless institutions and policies consistent with economic growth are adopted. There is little evidence that the leading proponents of the Millennium Development Goals have any appreciation of this point. Jeffery Sachs has certainly made it clear that he does not.

Good intentions alone will not reduce poverty. As they reflect on their actions, the planners working towards meeting the Millennium Development Goals must focus on economic freedom and growth. If they fail to do so, the results, tragically, of the project are virtually certain to be disappointing.

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