Bryan Caplan  

Lawson's Economic Freedom Bet

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In the face of Jeff Sachs' challenge, Bob Lawson proposes a bet on economic freedom:
"Dear Tyler,

I read with obvious interest your post (and the paper itself) about the endogeneity of institutions. Leaving aside my issues with the IV literature, I decided to take the bait regarding Jeff Sachs' challenge to, "Go back to 1960 and choose any measure of institutional quality you want. Then see how well it predicts cross-national growth since then."

Ok, I will.

The Economic Freedom of the World (EFW) index was first published in the mid 1990s, and the first year of data is 1970. So I'll have to start in 1970 instead of 1960.

Here is a regression with growth from 1970-2010 on the lhs, and EFW and GDP per capita in 1970 on the rhs.


A one-unit higher EFW score in 1970 correlates to 0.84 percentage points in higher annual growth over the next 40 years. A one unit EFW score improvement during the first decade, 1970 to 1980, correlates to a 1.00 percentage point higher annual growth rate over the 40 years.

I don't know if that satisfies Jeff Sachs' challenge, but it works for me.

Lawson's bet:

Looking forward, I've constructed a back-of-the-envelope indicator that combines each country's EFW rating in 2000 and with its change from 2000-2010. The top 20 (combined highest level & most positive change) versus the bottom 20 (combine lowest level & most negative change) countries are:

Top 20 - Bottom 20 Hong Kong - Haiti Romania - Cameroon Rwanda - Senegal Singapore - Guinea-Bissau Bulgaria - Mali Cyprus - Bolivia Unit. Arab Em. - Algeria Chile - Guyana Mauritius - Gabon Lithuania - Ecuador Slovak Rep - Burundi Albania - Cote d'Ivoire Jordan - Chad Switzerland - Togo Bahamas - Congo, Rep. Of Malta - Central Afr. Rep. Taiwan - Argentina Korea, South - Myanmar Finland - Zimbabwe Estonia - Venezuela

I'm willing to bet anyone $100 (up to 10 people) that the Top 20 group will outgrow the Bottom 20 group by at least 1 full percentage point per year (on average) over the the next 20 year period (2015-2035).

Who will accept the challenge?

Comments and Sharing

COMMENTS (7 to date)
Andrew_FL writes:

What happens in the admittedly unlikely event a country moves from one group to the other? Or the slightly more likely event that many of the countries shift significantly in ranking? Is the bet off?

Thomas Boyle writes:

Correlation without causation.

To have an indication of which is the chicken, which the egg, you need countries that have moved from high to low freedom, and back, and then show that growth rates changed appropriately and with a lag.

I'm guessing there isn't much in the data that looks like that.

Scott Sumner writes:

Thomas, Lawson's evidence was offered as a criticism of Sachs's claim. Your "correlation without causation" argument has no bearing on that criticism.

Unfortunately I won't be around in 2035 to pay off the bet, otherwise I might take it. I expect the basket cases to grow faster over the next 20 years, due to the catch-up effect.

BTW, is this total or per capita growth?

David R. Henderson writes:

@Scott Sumner,
Good points. On Facebook yesterday, I offered to scoop up some of the $100 bets if Bob Lawson gets oversubscribed. But I also wanted to change the bet. I’m not sure I’ll be around to pay or collect in 2035 and so I want to make it 2025. Also, I want total growth, not per capita growth.
Anyone interested?

Chris writes:

Scott, you don't think you're going to live into your 80s? Can we bet on that?

Scott Sumner writes:

Chris, Given I won't be here if I win, that hardly seems fair. :)

Ano nymous writes:

I'll bet you everything I've got that I won't try half as hard if I'm not free to choose what I want to do. Even after a few "wasted" courses on post-colonial and feminist thought, that still put's most BAs a mile or two ahead of where they'd be if unfree.

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