Thursday, April 19, 2007

Former Communist Countries Benefit From Economic Freedom

In my macro class, we read a book called "The Economics of Macroissues." In the first chapter they show how countries with common law systems (as opposed to civil law systems) that tend to respect property rights have higher rates of economic growth. The difference does not have to be big. Over time, even an extra half of one percentage point in economic growth can add up. If your economy grows 2.5% a year for 100 years, it will increase 11.81 times. That means if your country's per capita income was $1,000 to begin with, 100 years later it will be $11,810. But if your economy grows 3% a year, after 100 years your per capita income would be $19,219. More than $7,000 higher than the other country and about 62% higher.

A recent study by the Dallas Federal Reserve Bank shows that the country's that had the most economic freedom among the former communist nations or Soviet republics have had the highest growth rates. You can read this study here. I think this result is important because someone could always claim that the countries around the world with higher growth rates had them not because of more economic freedom but for some other reason. But this study has alot of countries that began with alot in common, having been former communist states. Yet again, more economic freedom means more growth.

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