Economic Freedom of the World: 2005 Annual Report

With war in the Middle East and the prospect of terrorist attacks at sites ranging from major airports to the local shopping mall, it may be appropriate to remind ourselves that much of the world is experiencing an extended period of peace. Indeed, developed countries have not fought each other since the Second World War. This peace is unusual because powerful nations are historically the most conflict prone. Since before the time of Thucydides, states have used wealth to acquire more territory and to dominate the affairs of their neighbors. Understanding the reasons that the powerful countries of today are less prone to dispute than their predecessors is critical to maintaining the peace and to extending its benefits more broadly. Policies predicated on inaccurate associations between democracy and peace, for example, seem destined to create as many problems as they solve. Classical liberal theory provides two streams of explanation for peace, one focusing on the forms and practices of government, the other on free markets and private property. The former, seen most particularly in the writings of Immanual Kant, has received extensive attention from students of international politics in the last decade. Kant was wrong when he claimed that republics are less warlike than other forms of government. Instead, researchers have found that democracies are less likely to fight each other, while being no less ready to use force generally. This “democratic peace” has been further proscribed by the discovery that developing democracies are just as war-prone as developing dictatorships. Available explanations involving the pacific effects of democratic norms, institutions, or transparent rule must struggle to explain why prosperity is a requirement for peace. Liberal political economy offers no such contradiction. Scholars like Montesquieu, Adam Smith, Richard Cobden, Norman Angell, and Richard Rosecrance have long speculated that free markets have the potential to free states from the looming prospect of recurrent warfare. Capitalism encourages cooperation among states by creating conditions that make war unappealing or unnecessary. Free markets create another venue to competition among countries, often containing minor conflicts below the level of military force. The transformation of commerce made possible by economic freedom also leads to a transformation in international affairs. Conquest becomes expensive and unprofitable. Wealth in modern economies is much harder to “steal” through force than was the case among agricultural and early industrial societies. This “capitalist peace” has been slow to reach fruition but the tools and evidence are now in place to establish a firmer connection between economic freedom and reductions in conflict. I use the Index of Economic Freedom developed by Gwartney and Lawson and multivariate statistical analysis to show that free markets appear to encourage peace. I also evaluate several other factors often thought to influence whether states fight. Economic freedom is one of the rare factors that generally discourages conflict among nations. Democracy is desirable for many reasons but policies that encourage, or even seek to impose, representative government are unlikely to contribute directly to international peace. As the results reported here make clear, free markets, and not democracy, have a general impact on the propensity of states to resort to military violence. At best, democracy may reduce conflict only among advanced industrialized economies. Developing countries do not benefit from a democratic peace. Especially in regions dominated by autocratic governments, the introduction of democracy can have little immediate impact on international cooperation. Similarly, substantial research shows that democratic government is stable only when combined with relatively high levels of economic development. In isolation, policies designed to make poor countries democratic can guarantee neither political stability nor international peace. Since prosperity is necessary for stable democracy and sufficient to produce peace, the best foreign policy is one that enhances and extends capitalism. Chapter 2: Economic Freedom and Peace