Dictatorship Doesn’t Promote Prosperity

It is a relatively uncontroversial result, confirmed by a number of econometric studies, that economic freedom has a positive effect on incomes (GDP per capita). An econometric study to appear in the European Journal of Political Economy, “Revisiting the Relationship Between Economic Freedom and Development to Account for Statistical Deception by Autocratic Regimes,” argues that the relationship is biased downward by dictatorial regimes because their GDP figures are overestimated. Such regimes restrict economic freedom and have an interest in hiding the consequences from their subjects. Moreover, the constraints a dictatorial regime faces are much reduced by the absence of a free press and of periodical elections that could remove him.

The authors of the paper are Vincent Geloso, an assistant professor of economics at George Mason University, and two Ph.D. candidates at Middle Tennessee State University, Sean Alvarez and Macy Scheck. Vincent Geloso is a young professor and mounting star who has published economic studies of great interest in many areas.

The authors measure economic freedom mainly with the Fraser Institute’s Economic Freedom of the World index. As for estimating the gap between officially reported GDP figures and the true ones, they adjust the former by using the nighttime light intensity observed by satellites (following the research of economist Luis Martinez). The idea is straightforward: there should be a correlation between a country’s average wealth (proxied by GDP per capita) and its night lighting; the poorer a country, the darker you expect it to be at night. Pictures of the extreme cases of North Korea and South Korea are one case in point. Geloso et al. use data of more than 110 countries over two decades. By comparing the coefficients representing the impact of economic freedom on GDP and growth in the equations using both reported GDP and adjusted GDP, they obtain an estimate of how the lies of dictatorial regimes falsely boost reported prosperity. Quoting from 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 estimations based on manipulated GDP numbers. … we do find signs that the association between income growth and changes in economic freedom is being modestly understated.

Our results are consistent with findings that dictatorships are generally unable to sustain high levels of economic development and that they are not noticeably better at securing faster economic growth.

These very plausible results, I suggest, raise two related questions. First, falsifying GDP figures while keeping them minimally credible is not as easy as it seems. When the figures are provided to international organizations such as the World Bank, the false numbers need to be consistent and appear to respect the demanding and internationally recognized methodology of national accounting. Second, why doesn’t the World Bank audit national accounts data more carefully? I suspect the answer is that, like the International Monetary Fund and other intergovernmental organizations, the World Bank is dependent on its member governments and the latter’s politicians. In other words, I hypothesize that intergovernmental organizations are too political and their bureaucracies of economists not independent enough.