The positive impact of economic freedom on income (GDP per capita) has been confirmed by many econometric studies and is a relatively uncontroversial result. European Journal of Political EconomyIn “Revisiting the relationship between economic freedom and development to explain statistical deception by dictatorships,” dictatorships: GDP These figures are overestimated. Such regimes have an interest in restricting economic freedoms and hiding the results from their citizens. Moreover, the constraints faced by dictatorships are greatly mitigated by the lack of a free press and regular elections that could remove the government from power.
The authors of the paper are Vincent Geloso, an assistant professor of economics at George Mason University, and Sean Alvarez and Macy Scheck, doctoral students at Middle Tennessee State University. Vincent Geloso is a young professor and a rising star who has published some very interesting economic research in many areas.
The authors primarily measure economic freedom using the Fraser Institute’s Index of Economic Freedom of the World. To estimate the difference between officially reported GDP figures and the actual figures, they adjust the former using night-time light intensity measured by satellites (following the work of economist Luis Martinez). The idea is straightforward: there should be a correlation between a country’s average wealth (approximated by GDP per capita) and night-time light. The poorer a country is, the darker it is expected to be at night. The extreme photos of North and South Korea are a good example. Geloso et al. use data from over 110 countries over a 20-year period. By comparing the coefficients representing the effect of economic freedom on GDP and growth in equations using both reported and adjusted GDP, they estimate how authoritarian regimes’ lies falsely boost reported prosperity. To quote from the conclusions of the accepted version of their paper:
For income levels from 1992 to 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. … There are signs that the association between income growth and changes in economic freedom may be somewhat underestimated.
Our results are consistent with findings that autocracies are generally unable to sustain high levels of economic development and are no better at ensuring faster economic growth.
These very plausible results raise, I think, two related questions. First, falsifying GDP figures and still having a minimum level of credibility is not as easy as it seems. When providing numbers to an international organization such as the World Bank, the falsified numbers need to appear consistent and to respect the rigorous, internationally recognized methodology of national accounts. Second, why doesn’t the World Bank audit its national accounts data more carefully? I suspect the answer is that, like the International Monetary Fund and other intergovernmental organizations, the World Bank depends on member governments and their politicians. In other words, my hypothesis is that intergovernmental organizations are too political, and therefore bureaucracies of economists are not independent enough.
