NCPA - National Center for Policy Analysis

Increasing Economic Freedom Promotes Equality

July 1, 1998

Research has shown a positive relationship between economic freedom and growth. As one would expect, the better property rights are protected, the more of their incomes individuals get to keep, and the fewer restrictions placed on entrepreneurial activity, the more growth-producing economic activity takes place.

Some economists have also theorized that the more economic growth there is, the more unequal is the distribution of incomes -- suggesting a conflict between growth and equality. Researchers traditionally assume greater equality is achieved through growth-reducing taxes and regulations, and the redistribution of income after it is produced.

However, economist Niclas Berggren looked at the problem differently, by asking: What is the relationship between economic freedom and equality? Berggren used the Fraser Institute's Index of Economic Freedom, which is based on the relative degree of personal choice, protection of private property and freedom of exchange in countries around the world. Comparing the index to recent data on income distribution in 102 countries, he found:

  • The more a country increased its economic freedom between 1975 and 1985, the higher the level of income equality around 1985, with trade liberalization and financial deregulation having the most effect.
  • In the short run, some increases in economic freedom -- for example, lowering tax rates -- increased inequality; but over a 10-year period, increasing economic freedom resulted in a greater degree of equality.
  • And grouping countries by income per capita, he found this was not only true for developed, higher-income countries, but was especially true for low-income, less-developed countries.
  • The higher level of equality came primarily through faster growth in the gross incomes of poor people than in the incomes of rich people, on average.

The policy implication, concludes Berggren, is that to achieve economic growth and equality, one should steadily increase economic freedom over a number of years.

 

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