Economic Freedom Vital for Resilience in a Pandemic

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In non-emergency times, the role of economic freedom, defined as a lack of interference or coercion by others in an individual’s economic decisions, has been scientifically proven to yield economic growth and prosperity for the greatest number of people. Economic freedom also contributes to higher levels of various measures of human well-being.

When people are freer to pursue their economic activities without undue restrictions, economic freedom and its individual constitutive elements, such as personal choice, voluntary exchange, access to markets, and protection of persons and their property from aggression, lead not only to more economic efficiency, more innovation, and more added value, but also to greater happiness, gender equality, and more protected political rights. As such, economic freedom in any given country shapes the institutional environment necessary for its prosperity and economic growth.

But do these positive relationships also hold in a time of emergency, such as a pandemic? What impact does economic freedom have on how economies cope with and recover from such extreme shocks?
Bjørnskov (2016, 21) finds that economic freedom “protects countries against crises and allows them to recover faster than more regulated economies.” Further, an empirical case study by Vincent Geloso and Jamie Bologna Pavlik (2020) finds that a higher level of economic freedom leads to a greater ability to adjust to shocks by reducing frictions in the reallocation of resources and the reorganization of economic activity. Using the Historical Index of Economic Liberty (HIEL) for OECD countries from 1850 to 2007 developed by Leandro Prados de la Escosura (2016), Geloso and Bologna Pavlik conclude that higher levels of economic freedom dampened the effects of the 1918 flue pandemic.

Do these findings also apply to the COVID-19 pandemic?

Even though COVID-19 has been with us only for a year and the recovery is expected to be a long-term process, several studies have already been published on the role of economic freedom in shaping a country’s ability to cope with a crisis and recover from it afterward.
A study by Kenneth R. Szulczyk and Muhammad A. Cheema (2020) uses The Heritage Foundation’s Index of Economic Freedom (2020) and the Fraser Institute’s Economic Freedom of the World (2019) to show that countries with higher levels of economic freedom not only experience lower COVID-19 fatality rates but are also more resilient and capable of handling a health crisis than countries with lower levels of economic freedom. Another study by Ray-Ming Chen (2020) that also uses The Heritage Foundation’s Index of Economic Freedom (2020) concludes that there is no significant relationship between economic freedom and COVID-19 deaths.

Importantly, Szulczyk and Cheema (2020, 18) have found that a country’s resilience in the face of a pandemic does not originate in the real GDP growth rate and availability of more healthcare resources such as hospital beds. Instead, such resilience is broad-based and rooted in people’s interactions with the institutional framework. Since economically freer countries are more innovative and entrepreneurial than those with lower levels, the authors suggest that increasing economic freedom could lower the fatality rate during a pandemic.

In times of great national uncertainty, the government is called upon to act, and the present pandemic is no exception. However, policymakers should keep in mind that they are not only expected to impose and enforce proportionate legal measures to contain the spread of the COVID-19 virus and protect lives, but also to maintain or even strengthen an institutional environment with secure property rights and high degrees of economic freedom that will enable the country to better cope with the crisis and recover from it more quickly afterward. After all, economic freedom and property rights strengthen the conditions and incentives for dynamic innovation in healthcare and encourage the economy not only to adapt quickly to an emerging public health crisis, but also to be better prepared for the next one. Economic freedom should therefore be just as high a priority during a pandemic as it is, or ought to be, in better times.

Article is syndicated by Network

The article was published at Nova ekonomija on February 15, 2021

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