The freedom and prosperity debate at the end of the twentieth century

The essays in this book address development economics questions that have been often asked over the centuries: Does freedom lead to prosperity or does the causation go the other way? Or, to use the words of Vanessa Rubio-Márquez in her essay, is prosperity the seed or the fruit of freedom? Or is there perhaps a virtuous cycle in which more freedom leads to a more prosperous society in which the citizenry demands yet more freedoms, and freedom and prosperity mutually reinforce each other?

The answers to the above questions have real-world implications because if more freedom leads to more prosperity, it behooves governments to adopt freedom policies if they care about the welfare of their citizens.

At the end of the twentieth century, the debate appeared to have been settled. Two authoritarian models had been tried during that century in Europe and they had both failed spectacularly: fascism and communism. And the whole world saw it.

Mussolini and then Hitler had introduced state-directed public works and other economic policies to increase economic growth and employment during the Great Depression. But their unchecked absolute power ultimately led to the Second World War, horrendous crimes against humanity, millions of deaths, and the violent end of their regimes. The allure of fascism was gone after that, and no new fascist regimes were formed in Europe following the Second World War.

The Communist Party of the Soviet Union assumed power through the 1917 revolution and later imposed Communism by force in the Eastern European countries it had occupied after the Second World War. Communist parties in several countries on other continents also assumed power after the Second World War, most notably in China, North Korea, North Vietnam, and Cuba.

The Soviet Union achieved many impressive successes: it transformed Russia from an agrarian country to an industrial one; eradicated illiteracy and created a successful higher education system; and established a health system that was an improvement over the tsarist one. The Soviet Union also achieved stunning successes in science: it launched into space the first satellite, the first man, and the first woman; became a leading nuclear power for both civilian and military purposes; and developed a world-class aeronautic and military technology industry.

But these successes came at a grievous price in human suffering. Millions of people were murdered in Stalin’s purges and thousands in the Soviet Union’s military interventions in Hungary in 1956, Czechoslovakia in 1968, and Afghanistan in 1979.

And these successes were also limited: industrialization is not the same as development. The Soviet Union’s industrialization emphasized heavy industries and de-emphasized consumer products, leaving its citizens disappointed in their aspirations of a more comfortable life.

The story was similar in the other European Communist countries: many initial successes in industrialization, education, and health came at the price of great suffering under authoritarian regimes that imprisoned and killed political opponents and allowed no freedom of religion or expression.

After a few decades, economic growth in the Soviet Union and the Communist European countries plateaued. The plans of these authoritarian regimes to have their countries catching up to the level of development of the free Western European countries proved to be unattainable dreams. There were multiple causes for this economic failure, but one stands out: these oppressive regimes and their centrally planned economies in which the state owned all the means of production were not conducive to efficient investment, did not incentivize people to innovate, and did not create wealth or lead to increased productivity.

The Soviet Union failed economically before it also failed politically and militarily. The inability of these Communist regimes to offer increased prosperity to their peoples, especially when compared to the living standards in the United States and Western Europe, was plain for all to see. Even those in the repressive apparatus stopped supporting these regimes and all European Communist regimes collapsed.

The fall of the European Communist regimes started with Poland in 1989 and ended with the dissolution of the Soviet Union in 1991. When people in these countries were subsequently allowed to vote freely, they did not vote a Communist party into power in any of these countries. Most of the former Communist European countries have since made the profound democratic and free-market reforms required to become candidates for membership of the European Union, and many have been accepted.

Not only Communist authoritarianism but authoritarianism in general has been discredited in the former European Soviet bloc countries, except for Russia and Belarus. All the other European post-Communist countries have chosen democracy and free markets, albeit with varying levels of success.

Seen from the vantage point of the end of the twentieth century, even the People’s Republic of China (PRC) seemed to be moving away from its Communist governance model. The Chinese Communist Party (CCP) led by Mao had assumed power in 1949 and Mao maintained absolute power in a cult-of-personality regime until his death in 1976. He practically closed China to most of the rest of the world and led it according to strict Marxist-Leninist principles: there was no private ownership of the means of production, the economy was centrally planned, and there was no political, religious, or personal freedom for citizens. Between 1952 and 1978, China started industrializing and expanding education and healthcare, and real annual GDP growth was about 6 percent. But Mao’s personal dictatorship caused political turmoil, economic mismanagement, and harsh oppression of political dissent, whether real or imagined. During this period tens of millions of people died in prisons and labor camps, through executions, and from starvation directly linked to Mao’s policies.

One of history’s darkest chapters was then followed by one its most astounding success stories. Under Deng Xiaoping, local markets were allowed to emerge, and then reforms were put in place to open China to the world. The role of the CCP in economic planning was reduced, elements of free markets and private ownership were introduced, and term limits and other limitations on politicians’ power were put into place. The result: between 1980 and 2020, real annual GDP growth was almost 10 percent. In the positive environment created by the free-market reforms, the PRC was becoming a major global industrial power and was also achieving successes in science and technology.

As shown in a study by the PRC and the World Bank, between 1980 and 2020, the number of people in China with incomes below US$1.90 per day—the World Bank’s defining line for global extreme poverty—has fallen by almost 800 million.

At the end of the twentieth century the verdict seemed to be very clear: authoritarianism had been definitively discredited in Europe—no country was following its path on that continent. The same seemed to be true even outside Europe: Communist China, the largest authoritarian country in the world, appeared to be moving toward free markets and more political freedom.

The spirit of the times was captured in 1992 by Francis Fukuyama in his highly influential book The End of History and the Last Man: liberal democracy had triumphed in its ideological struggle with Communism and had “emerged as the final form of human government.”¹Francis Fukuyama, The End of History and the Last Man (New York: Free Press, 1992). 

The freedom and prosperity debate today—the China development model

But the debate is not over. The CCP is now offering its current development strategy as a model for developing countries anywhere in the world.

The example of China was followed by several Asian economies, most notably Vietnam. Vietnam’s leaders too have attempted to develop a quasi-market economy, opened to international trade while maintaining a strict one-party system of political governance. Vietnam’s poverty-reduction story is compelling, with progress in social indicators like education and children’s health rivaling those of upper-middle-income countries.

A number of countries in Central Asia, South Asia, and Africa that had followed the Soviet model to some extent—for example Ethiopia, Ghana, Guinea, Kazakhstan, Senegal, Sri Lanka, and Tanzania—looked at parts of the China model as worthy of consideration. China encouraged such potential followers through the One Belt One Road (OBOR) initiative, which finances projects in resource-rich economies. At its peak before the COVID-19 pandemic, OBOR investment proposals totaled US$150 billion—more than the combined official development assistance provided by advanced democracies.

The China development path had a dual appeal: First, financial resources seemed available outside the Washington consensus network of international development institutions and their conditionalities. Second, it promised a faster way to prosperity.

Xi Jinping became the leader of the CCP in 2013 and has since reversed many of the reforms inspired by Deng Xiaoping. In the political sphere, collective leadership at the top of the CCP has been replaced by Xi’s absolute power and a personality cult resembling that of Mao; high-tech government surveillance of citizens is becoming ubiquitous; and the CCP has waged a brutal and widespread oppression of China’s Uighur minority.

In the economic sphere, the Xi era has seen an increase in the control of the CCP in the economy and a preference for state-owned enterprises over private ones. International economic relations have suffered because of sharp practices sanctioned by the Chinese authorities, such as forced transfer of intellectual property and preferential treatment for Chinese companies over foreign ones doing business in the PRC. The country has also attracted international criticism for the extensive damage it is causing to the environment as a price for its economic growth.

Xi Jinping has been clear that he opposes a development model based on political freedom and free markets, and that he favors the PRC’s authoritarian model based on the leadership role of the CCP. In a February 7, 2023 speech, President Xi rejected the idea that “modernization means Westernization.” He touted China’s “new modernization model” that is “different from the West” and that “expands path choices for developing countries.” He made clear that the leadership role of the CCP is key and that the CCP will decide the “ultimate success or failure” of China’s effort to develop.

President Biden is keenly aware of the reopening of the debate and considers this an important matter. In his February 2021 address to the Munich Security Conference he noted:

President Biden sees this as the defining issue of our time: “It is clear, absolutely clear . . . this is a battle between the utility of democracies in the 21st century and autocracies,” Biden said. “That’s what’s at stake here. We’ve got to prove democracy works.”

In December 2021, President Biden hosted a Summit for Democracy, attended by over 100 countries. Notably, the PRC was not invited. In his opening remarks he noted that the world’s complex challenges are exacerbated by autocrats that “seek to advance their own power, export and advance their influence around the world, and justify their repressive policies and practices as a more efficient way to address today’s challenges.” But, he added, “History and common sense tell us that liberty, opportunity, and justice thrive in a democracy, not in an autocracy.”

Quantitative evaluation of the Chinese development model

How can we evaluate the performance of the PRC in increasing the freedom and prosperity of their people relative to other countries?

One way is to use the Atlantic Council’s Freedom and Prosperity Indexes of 164 countries. The Freedom Index takes a broad view of freedom, measured through sub-indexes of economic, political, and legal freedom. This approach allows a separate exploration of the effect of each of these freedoms on prosperity. The Legal Freedom sub-index measures the strength of key institutions on which the other two freedoms depend; it ascertains, for example, if the government and judiciary are effective and free of corruption.

The Prosperity Index also takes a comprehensive view. It measures not just the GDP per capita of a country, but also its performance on several other criteria such as health, education, the environment, inequality, and the treatment of minorities.

We thought it edifying to compare the performance of the PRC against that of Taiwan and South Korea, two other highly successful Asian countries that were at a development level comparable to that of the PRC at the end of the Second World War, and against that of the developed countries belonging to the Organ-isation for Economic Co-operation and Development (OECD). The OECD average only includes data for the 1995 member countries: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Mexico, Portugal, Spain, Turkey, Sweden, Switzerland, USA, UK.

At the end of the Second World War, China, South Korea, and Taiwan were all poor. In 1962, the gross national income (GNI) per capita for the PRC, South Korea, and Taiwan was $70, $120, and $163 respectively. But their political and economic paths were different. From the end of the Second World War to the early 1990s they were all autocracies: the PRC was a dictatorship of the CCP, while Taiwan and South Korea were military dictatorships. But in the early 1990s, both Taiwan and South Korea became democracies, while the PRC did not change.

Figure 1 has a narrow focus and explores just the relative performance of the GNI per capita for these three countries. It shows that the PRC, South Korea, and Taiwan had a similarly low starting point in 1962. The two countries that had free markets at the beginning of this period and maintained it, and also chose democracy in the early 1990s, grew much faster than the PRC. By the early 1990s, South Korea and Taiwan had escaped the “middle-income trap”: they had crossed the World Bank’s threshold between middle-income and high-income countries. The PRC remained below this threshold in 2020.

Figure 2 explores the PRC’s relative performance over time in the Atlantic Council’s Freedom Index—which measures economic, political, and legal freedom—from 1995 to 2022. In 1995, the PRC’s freedom score was less than half that of the OECD average. Over this period, the OECD freedom score remained stable and the PRC score decreased by more than 2 percent. The ratio between the two remained just as large at the end of the period. But South Korea increased its freedom score by 9 percent over this period and improved its relative ratio from 1.16 to 1.07. Taiwan’s freedom score increased by 28 percent and its relative ratio improved from 1.33 to 1.03.

Figure 3 explores the PRC’s relative performance in the Prosperity Index. The PRC started behind the OECD in 1995, increased its score by 16 percent, and closed the ratio-gap somewhat, from 1.71 to 1.58. South Korea started very close to the OECD score and exceeded it by the end of the period, increasing its score by 10 percent. Taiwan already outperformed the OECD on prosperity in 1995 and increased its score by another 1 percent over the period. The OECD countries improved by 8 percent.

The discussion above is not meant to minimize the successes of the Chinese Communist Party in leading the development of the People’s Republic of China. Just like the Soviet Union decades earlier, the PRC has been transformed from a poor and backward country to one of the most consequential countries of the world due to its industrialization and progress in many other aspects of its society. Its rapid economic development and accomplishments in education, science, and healthcare are undeniable.

But it is very important to note that this has been achieved in the context of an authoritarian regime that denies basic freedoms to its citizens and deals harshly with dissent. One of the questions this raises is whether the repression and suffering were a price worth paying for the rapid economic growth and if this was the only way to achieve development.

Taiwan and South Korea show that neighboring countries—from a comparable level of development sixty years ago—were able to achieve more economic growth than the PRC over that period. Both Taiwan and South Korea ensured relative economic freedom throughout those years, combining this with political freedom for the latter thirty.

A related key question is whether the PRC’s economic success is durable. This question is certainly relevant in light of the recent reversal of the freedom reforms of the 1980s that caused the PRC’s 10 percent growth. The PRC’s growth is currently at 5 percent and trending downward.

Can the innovation and entrepreneurship needed for economic growth blossom in an authoritarian regime? There are very few examples of countries with both advanced economies and authoritarian regimes for extended periods of time. Singapore, with a population of just 5.5 million, is perhaps the most prominent outlier. It blossomed under the leadership of Lee Kuan Yew for thirty-one years as prime minister and for another twenty-one in which he served as a cabinet minister. The two prime ministers that followed him were also effective.

But there is no guarantee that a system without effective checks and balances will continue to produce good leaders. Democracy, despite all its imperfections, has proven itself the form of government that is best at producing good leaders and removing bad leaders, and thereby leading to durable prosperity.

This volume’s reflections on freedom and prosperity

The question of whether people should live in freedom or not deserves careful study given the enormous consequences it has for history and human well-being. The aim of this book is to offer essays on various aspects of the relationship between freedom and prosperity and how they can be achieved.

In his foreword, Juan José Daboub reflects on his experience as a former minister of finance and chief of staff to the president of El Salvador, and as former managing director of the World Bank Group. He recalls El Salvador’s impressive economic gains after it adopted free-market reforms in the late 1990s. The author argues that an imperfect market will always be better than a perfect bureaucrat telling people what to do. To achieve freedom, the role of government should be that of a referee that maximizes competition and minimizes regulation.

Some of the essays examine theoretical questions.

In chapter 1, Ignacio P. Campomanes points out that democracy can (and should) be defended on ethical and moral grounds, as the system that best upholds the dignity of every citizen, but that the case for democracy can be strengthened significantly if we can rigorously show that free societies are also superior to autocracies in producing higher overall prosperity. He posits that, in order to make progress in the empirical assessment of the freedom-prosperity relationship, we need to dig deeper into the constitutive attributes of free societies. In his essay, he assesses the theoretical soundness of the analytical framework proposed by the Atlantic Council’s Freedom and Prosperity Indexes that measure separately economic, political, and legal freedom, and provides preliminary evidence of the empirical relevance of this division.

In chapter 2, Markus Jaeger argues that historically oriented, qualitative studies can help shed light on the often complex and complicated interactions among structural factors (e.g., geography, demographics), institutions (e.g., political freedom, free markets), and policies and their contribution to successful economic development. He points out that free societies and market-based economic systems are important factors underpinning productivity and prosperity, particularly once countries reach middle- and high-income levels.

In chapter 3, Michael Klein explores the various mechanisms that drive development. He discusses how societies need freedom to prosper, while firms and markets need cooperation to reach their full potential. Finding the right balance between freedom and cooperation is not always easy, and the author talks about finding a “good mix” of rules, discretionary power, and freedom.

In chapter 4, Vladimir Fernandes Maciel, Ulisses Monteiro Ruiz de Gamboa, Paulo Rogério Scarano, and Julian Alexienco Portillo examine the relationship between freedom and prosperity around the world by using the Freedom and Prosperity Indexes and a neo-institutionalist analysis approach. They find a symbiosis between freedom and prosperity: a virtuous cycle (higher levels of freedom and prosperity lead to more freedom and prosperity) and a vicious cycle (lower levels of freedom and prosperity lead to less freedom and prosperity), with these cycles tending to reinforce each other.

In chapter 5, Jamie Bologna Pavlik, Benjamin Powell, and Andrew Young provide evidence that economic freedom not only correlates with prosperity, but that it is also an important predictor of prosperity. The authors apply the Mahalanobis Distance Matching method to the Atlantic Council’s Economic Freedom sub-index to analyze the causal statistical relationships between improvements in economic freedom and subsequent prosperity. The researchers find that meaningful increases in economic freedom led to large increases in GDP per capita over a five-year time horizon, supporting Adam Smith’s assertion that increased economic freedom is an essential precondition for greater prosperity.

In chapter 6, Luis Ravina Bohórquez discusses the role of elites in a country’s prosperity and development. He defines elites to include politicians, government officials, and other people with influence in civil and economic circles. He argues that the elites have a responsibility to foster strong institutions and government policies, including those that prevent nepotism and corruption. Bohórquez highlights the role elites played in Kenya in promoting investment in good education and how education helped the country’s development.

In chapter 7, Elakiya Ananthakrishnan looks at the impact of the informal economy on countries’ overall prosperity. She also reviews the main reasons leading citizens to conduct business outside of regulated markets, especially the avoidance of taxes and social security contributions. Other reasons include escaping government bureaucracy or regulatory burdens, and bypassing corruption, all of which relate to inefficient public institutions and weak rule of law.

In chapter 8, Julio Amador Díaz López looks at innovation and misinformation as they relate to economic development. He argues that the Western system—characterized by risk taking, a diverse population, and less restrictive policies—is better suited for promoting innovation than the authoritarian model, which is more restrictive and risk averse. Protecting rule of law, free markets, and diversity of people and ideas remain essential to harnessing new technologies—the key to prosperity in our time.
Other essays offer reflections focused on certain countries and regions.

In chapter 9, Khémaies Jhinaoui examines the ongoing struggle for freedom and prosperity in the Middle East and North Africa region. The author argues that the lack of realism and the inexperience of the region’s regimes hindered social progress following the Arab Spring. The author suggests three lessons: that the quest for freedom does not have to be radical; that gradual reform is more effective; and that foreign influence shapes the pace and intensity of the struggle for freedom and prosperity in the region.

In chapter 10, Mohamed M. Farid examines Egypt’s development over the last fifteen years and the effects of extensive government intervention in the economy. Farid argues that to increase prosperity, Egypt must reduce the role of the state in the economy, implement free-market reforms, and focus public investments in human capital.

In chapter 11, Sergio M. Alcocer and Jeziret S. González examine the decrease in press freedom in Mexico and how this might result in less prosperity. The authors review current Mexican policies to protect journalists and they recommend improvements. They argue that prosperity cannot be achieved without freedom of the press.

In chapter 12, Vanessa Rubio-Márquez investigates the use of the Freedom and Prosperity Indexes in real-life policy debates and policy making. The author finds the Indexes useful in identifying the factors which make a country free and prosperous, and in providing benchmarks for comparisons with other countries. But she also calls for alertness to signs of freedom retrenchment and institutional deterioration not yet captured by the Indexes.

In chapter 13, Prashant Narang and Parth J. Shah examine India’s current economic situation and its rankings on the Freedom and Prosperity Indexes. To identify areas where India can improve, the authors compare its performance to the global averages, to that of countries in the same income category, and to the South Asia regional averages. They also identify improvement opportunities for India.

In chapter 14, Clara Volintiru, Camelia Crişan, and George Ștefan assert that achieving long-term prosperity and stability in Eastern and Central Europe requires strategic engagement by Western allies. The authors argue that economic resilience is crucial to Eastern Europe’s security strategy and propose three overlapping lines of effort: increasing European integration; transitioning to a new economic model; and engaging all societal actors in the pursuit of sustainable and shared prosperity.

In chapter 15, Danladi Verheijen explores the government’s role in assuring economic and legal freedoms in Nigeria. The author suggests that the Nigerian government should be less involved in the economy and more involved in providing security.

In chapter 16, Dan Negrea, Joseph Lemoine, and Yomna Gaafar investigate freedom and prosperity trends in a group of Eastern European countries since the early 1990s. Using the scoring and rankings of the Freedom and Prosperity Indexes, the authors find that countries that instituted more political, economic, and legal freedoms since the 1990s enjoy greater prosperity today.

We hope that the essays in this book will be a useful tool for those promoting improvements in freedom and prosperity around the world.

Dan Negrea is the senior director of the Freedom and Prosperity Center at the Atlantic Council.

Brad Lips is the CEO of Atlas Network.

Kris Mauren is the co-founder and president of Acton Institute.

Related Experts: Dan Negrea

Image: People in Placa (square) da Matriz - By Maremagnum