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Analysis

Regulatory freedom brings prosperity

by Steve Hanke in Baltimore

Wed 8 Nov 2017

Regulatory freedom brings prosperity Enlarge Chart loading Image

Productivity and economic growth continue to disappoint in most countries. Although analysts show a great deal of concern for the so-called 'productivity puzzle', little attention is paid to the real solution: freer markets and increased competition. Unfortunately, in most economies, policy is moving in the opposite direction.

The World Bank has rigorously measured the ease of doing business in many countries for more than 10 years, producing an abundance of empirical evidence revealing different aspects of countries' regulatory environments. The Bank publishes its results identifying levels of economic freedom each year in a report entitled 'Doing Business', which details 10 indicators that capture important dimensions of an economy's regulatory environment.

These are each measured by using standardised procedures that ensure comparability and replicability across the 190 countries studied. For each indicator, the scores range from a low of 0, designating failure, to a high of 100 for those countries that excel.

The overall ease of doing business (DB) score for a country is simply its average across the 10 indicators. Using the DB scores, we can determine whether there is a relationship between a freer regulatory environment (a high DB score) and prosperity as measured by GDP per capita. Chart 2 shows there is a strong positive relationship between DB scores and prosperity. The DB score for the US is 82.45, and its GDP per capita is $57,220. Meanwhile Zimbabwe's DB score is only 47.1, and its GDP per capita is $1,081. All the remaining 188 countries are plotted on the chart. There are only five countries that are outliers with outsized GDP per capita relative to their DB scores: Qatar, Luxembourg, Switzerland, Norway and the microstate of San Marino.

In addition to the positive relationship between regulatory freedom and prosperity, more deregulation yields increasing returns. Each incremental increase in the DB score yields greater gains in GDP per capita. With each improvement in regulatory freedom, there is a disproportionate improvement in prosperity. This explains why post-communist countries that embraced large-scale economic liberalisation, such as Poland, have done noticeably better than those that introduced only gradual changes.

Steve Hanke is a Professor of Applied Economics at The Johns Hopkins University, Baltimore.