It is a relatively uncontroversial result, confirmed by numerous econometric studies, that economic freedom has a positive effect on income (GDP per capita). An econometric study to be published in the European Journal of Political Economy“Revisiting the Relationship Between Economic Freedom and Development to Account for the Statistical Deception of Autocratic Regimes,” argues that the relationship is biased downward by dictatorial regimes because their GDP the numbers are overestimated. Such regimes restrict economic freedom and have an interest in hiding the consequences from their subjects. Moreover, the constraints that a dictatorial regime faces are greatly reduced by the absence of a free press and periodic elections that can remove it.
The paper’s authors are Vincent Geloso, assistant professor of economics at George Mason University, and two doctoral students. candidates at Middle Tennessee State University, Sean Alvarez and Macy Scheck. Vincent Geloso is a young professor and a rising star who has published economic studies of great interest in many fields.
The authors measure economic freedom primarily using the Fraser Institute’s World Economic Freedom Index. As for estimating the gap between official GDP figures and real figures, they adjust the former using the nighttime light intensity observed by satellites (following research by economist Luis Martinez). The idea is simple: there should be a correlation between the average wealth of a country (represented by GDP per capita) and its night lighting; the poorer a country, the darker it is expected to be at night. The images of the extreme cases of North Korea and South Korea are a good example. Geloso et al. use data from more than 110 countries over two decades. By comparing the coefficients representing the impact of economic freedom on GDP and growth in equations using both reported and adjusted GDP, they obtain an estimate of how the lies of dictatorial regimes falsely boost prosperity declared. Quoting the conclusion of the accepted version of their article:
For income levels between 1992 and 2013, we find that the true effect of economic freedom is between 1.1 and 1.62 times larger than estimates based on manipulated GDP figures. …we find evidence that the link between income growth and changes in economic freedom is slightly underestimated.
Our results are consistent with findings that dictatorships are generally unable to maintain high levels of economic development and are not significantly more effective in ensuring faster economic growth.
These very plausible results raise, in my opinion, two related questions. First, falsifying GDP numbers while keeping them barely credible is not as easy as it seems. When figures are provided to international organizations such as the World Bank, the false figures must be consistent and appear to follow the demanding and internationally recognized methodology of national accounts. Second, why doesn’t the World Bank check national accounts data more carefully? I suppose the answer is that, like the International Monetary Fund and other intergovernmental organizations, the World Bank depends on its member governments and their politicians. In other words, I hypothesize that intergovernmental organizations are too political and that their economist bureaucracies are not independent enough.
