Our Word is Our Weapon

William Easterly’s chapter on “Freedom versus Collectivism in Foreign Aid” in Economic Freedom of the World 2006 Annual Report does not diverge greatly from his recent modus operandi, which seems to consist mostly of:

• Implying that Jeff Sachs is a communist, and
• Ignoring the large and growing body of evidence suggesting that aid is good for growth

But fortunately Easterly throws in a couple of new elements this time to keep us interested. For example, he is obviously aware of the criticisms that have been - with some justification - made of previous versions of the EFotW index, noting

there is a large problem of potential reverse causality—richer people might demand more economic freedom. Critics of the measures published in Economic Freedom of the World also might allege that they are constructed by those with strong prior beliefs that economic freedom is associated with prosperity and, hence, the indices might be unconsciously skewed to give higher scores to countries known to be success stories.

He then goes on to say how he intends to debunk these claims:

I show an instrumental variables regression in Table 2.1. Since the institutions of economic freedom originated in Europe and then spread to other temperate regions where Europeans settled (with some exceptions), I use distance from the equator as one instrument for economic freedom. Since different legal traditions (especially the British) favored economic freedom while others did not (obviously the socialist legal tradition), I use legal origin as another set of instruments for freedom. The test statistics on the validity of the instruments are mostly satisfactory, and we still show a very strong association between economic freedom and per-capita income.

This strikes me as a bit daft. Looking at it objectively, distance from the equator is a very poor instrument to use for economic freedom, since there are many examples of temperate countries which are or have been pretty poor on the freedom front, with a particularly rich crop of good examples coming from East Asia.

Of course, if you are trying to show that economic freedom is good for growth, then distance from the equator is actually a rather good instrument to use, since being in a temperate location seems to give a strong and independent boost to your growth prospects irrespective of the level of economic freedom. By contrast, countries close to the equator are more likely to be land-locked and far from rich markets, and have poorer conditions for agriculture and higher disease burdens, and so automatically experience lower growth.

But then again, there’s another good reason for Easterly to ignore the lessons of geography for economic development, namely the identity of the man who arrived at or at least popularised many of them: Jeffrey Sachs.