June 2000 Fraser Forum: A Recipe for Constructive Engagement
The activities of companies like Talisman Energy in the Sudan, and the reaction to them by the Canadian government, has brought to prominent attention the difficult question of investment in strife-torn countries. The problem has all of the characteristics of a genuine conundrum, as the discussions in this issue of Fraser Forum make pretty clear. It is also clear that there are no easy solutions - only a series of partially useful things that can be done.
The work of Robert Barro and Ernest Preeg (highlighted elswhere in this edition of Forum) indicates that a necessary precursor to the emergence of democracy is for a country to attain a certain level of economic development. The extensive empirical research conducted by Robert Barro suggests that encouraging policies that will lead to economic growth will also eventually lead to the emergence of democratic institutions.
For the past 15 years, The Fraser Institute has been working on a project to develop measures of the extent to which citizens enjoy a framework of policies that provides them with what we have been calling "economic freedom." We have been creating the measures of economic freedom to enable research to be conducted that will determine the relationship between economic freedom and other desirable characteristics of nations, including political and civil freedoms. The current version of this research (available at www.freetheworld.com) is an index that uses 23 factors to rank the level of economic freedom in 123 countries which together comprise about 90 percent of the world's population.
The hallmark of this economic freedom index is that it is based on measurable data, or upon third-party surveys, which means that the construction of the index is scientifically replicable. That is, any group of individuals chosen at random having the technical capacity to do so would arrive at the same set of index numbers and rankings as The Fraser Institute researchers did. Because the index is data based, it can be projected back into history; as a consequence, the Institute has been able to do research using the index back to 1970.
It is very informative to observe the correlations between economic freedom and a wide variety of characteristics of countries. We have found, for example, that those countries with higher levels of economic freedom also enjoy faster economic growth, and subsequently also have higher income levels. High-freedom countries also eventually enjoy high levels of civil and political freedoms, low levels of corruption, higher life expectancies, lower rates of infant mortality, and a ranking on the United Nations human development index that exceeds that of those countries with lower levels of economic freedom.
Generally, the analysis which a wide range of scholars have done using the economic freedom of the world index corroborates Barro's and Preeg's research. The handy thing about the economic freedom of the world index, however, is that it is composed of a very specific set of government policies. The 23 factors which go into the index, therefore, become a recipe for achieving the outcomes which can be traced to the achievement of higher levels of economic freedom. In effect, the economic freedom index is a how-to manual for countries experiencing internal strife and external hostilities. It shows these countries how to alter their policies in order to achieve better results.
The freedom index also provides a checklist for concerned parties like the Canadian government and Talisman Energy in their dealings with strife-torn jurisdictions. For the Canadian government, the policies built into the economic freedom index provide a template to be used in encouraging a constructive program of policy reform, while not specifically addressing the subject of the hostilities, and may therefore be a more acceptable line of discourse to countries like Sudan. For private sector companies operating within difficult jurisdictions, the policy content of the economic freedom index provides examples based on the experience of other countries that can be offered to troubled jurisdictions without specifically criticizing the existing policy regime.
The empirical fact that fast-growing and affluent countries are those that have chosen smaller governments, lower rates of taxation, freer trade, fewer transfers and subsidies, more open exchange markets, fewer restrictions on capital transactions with foreigners, and more security of private property rights, constitutes a powerful incentive for policy reform. These policy choices are among the options which are included in the freedom index and form the elements of the growth recipe.
Also, a country's standing within the index could, and probably should, be used as a barometer in assessing the country's readiness to receive Canadian government aid and, in particular, whether that aid should go to the foreign government involved, or to NGOs within the country. This would add an external incentive for the target country to adopt the growth recipe.
Anybody who has studied the issue of the appropriate policy to be used in connection with countries undergoing civil war understands that there are no good solutions— there are only ways of coping. The economic freedom of the world index offers the hope of a guide post to help those who, in the process of coping, may understandably find it difficult to keep the ultimate goal of policy reform in focus.
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