Economic Development and Economic Freedom: What Can They Offer Each Other?

This article discusses whether the economic freedom idea and economic development have anything to offer each other. As an initial point of departure, it discusses the 2002 North American Economic Freedom Index report prepared by the National Center for Policy Research (US) and the Fraser Institute (Canada), which rates U.S. states and Canadian provinces in terms of their support of economic freedom.

Politics plays a huge role in shaping our thinking and beliefs about economic development. In this sense, economic development is really "political economy." As we look at the current failure of politics (public policy) around the world to improve the dismal state of our national and global economies, it is fitting to revisit some of the political and economic ideas and concepts shaping our economic development thinking. Whether you are a liberal, moderate or conservative, everyone needs to understand the "political biases" in their thinking about economic development.

Last week I wrote an article about the Heritage Foundation's Global Economic Freedom Index. I wrote the article because of the growing feeling that military conflict and terrorism, including the serious threat of a very complex war with Iraq, around the world are seriously impairing everyone's economic freedom. Simply, we are not as free to pursue our economic interests at this time.

The economic freedom concept has its roots in conservative economic and political thought. It is controversial in the eyes of progressives and liberals, who argue that economic freedom favors the rich and does little to improve the lot of the poor. While no such thing as a perfectly "free" market exists, the economic freedom idea builds on the belief that the economy works best for the most people when it is subjected to minimal interference and influence by government on all levels. Less government regulation, fewer taxes, and less constraint on private property use are considered to be favorable conditions for economic growth. In my judgment, this is far easier said than done.

It's impossible to keep government out of the economy. Why? Because the economy has two basic components: one private and one public. Government is the steward of the public economy we have. Moreover, our public and private economies are closely intertwined. Try separating the two. You can't. Also, can we trust private individuals to always act in an ethical and legal manner? Last year's corporate financial reporting fiasco is one indication that we cannot.

What is economic freedom? According to the the NCPR and FI report, "individuals have economic freedom when: 1) property they acquire without the use of force, fraud, or theft is protected from physical invasions by others; and 2) they are free to use,exchange or give their property as long as their actions do not violate the identical rights of others. Thus, an index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions."

Is economic freedom a relevant issue for state and local economic development? I believe it is, but it may take some getting used to, and maybe some re-working if it is have value to economic developers. Economic freedom is not a concept given much direct attention by economic developers, and yet many of the issues that relate to government's role in the economy are given considerable attention. For example, business taxation is an ongoing concern in most states--both those with conservative and liberal political regimes. Private property rights is a big issue, especially for conservative Western states. For this reason, growth management and urban sprawl management have seemingly struggled in politically conservative states.

Which U.S. states received the highest economic freedom according to the NCPR and FI report? The top ten are:

1. Delaware
2. Colorado
3. Nevada
4. Indiana
5. Georgia
6. Massachusetts
7. New Hampshire
8. Tennessee
9. Arizona
10. Connecticut

Where did Ohio rank? It was ranked 31st of the 50 states.

Where do the 9 Canadian provinces rank? Dead last following the 50 U.S. states. (Note: It is important to recognize that different governmental systems, culture, and history account for this differential performance.)

Want to read more about the North American Economic Freedom Index. Go here.

On a closing note, do economic development programs help or hinder economic freedom? The Cato Institute and other neo-conservative policy think tanks have adamantly argued against economic development incentives, calling them nothing more than wasteful "corporate welfare." I suspect that many of the policy wonks advocating economic freedom would find considerable flaws in many state and local economic development policies. For one, many from the conservative camp would take issue with industry targeting and industry cluster development policies and strategies, arguing that these policies lead to government favoritism of certain industries over others. And yet, many conservative policy analysts find nothing wrong with government policies that encourage and assist defense-related and agricultural industries.

We live in a age of measurement. Economic development is working to improve the yardsticks it uses to measure the performance of local and state economies and how economic development programs shape area economic performance. The Economic Freedom Index assesses the extent to which government policies impair the freedom of private individuals. It may be worthwhile for the economic development community to sit down and talk with the economic freedom folks and see if they can build a crosswalk between the two camps. Maybe they can help each other as each works to improve prosperity and economic vitality. Maybe working together they can come to some better answers about the role of government in the economy.

What can we conclude from this discussion? Economic development and economic freedom share some common interests and goals, but they follow quite different paths to get to these goals. Economic freedom favors a very low-profile role of government in the economy. The Economic Freedom Index favors states that "get out of the way" of individuals and businesses. Economic development, depending upon the flavor you choose, encourages varying levels of involvement by government.

Do the two have anything to offer each other? I think they do in so far as both economic development and economic freedom aim to define how public policy should affect the economy, especially how public sector resources are used to stimulate private wealth creation and preservation. In the short term, economic freedom and economic development probably have more to offer each other in conservative states favoring less government intervention in private economic affairs. Because both are concerned about wealth creation and increasing prosperity, they should get better acquainted with each other.