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Friday, June 01, 2007

As requested - Economic Freedom and the Peace Index

Pulled together the 2004 Economic Freedom of the World index from Fraser and the scatter shows a negative relationship between the economic freedom index (higher score indicates more freedom) and the Peace Index (lower number indicates more peaceful).

This suggests that countries with more economic freedom tend to be more peaceful, at least as measured by the Peace Index.

Here is yet another regression model. This one is a bit different because of the reduced degrees of freedom (not all countries are ranked by Fraser, the Peace Index, and have lending rates in the IFS series). However, the results still suggest that the Peace Index is not correlated with domestic lending rates. On the other hand, greater economic freedom is correlated with higher lending rates, perhaps because in countries with greater economic freedom there is a greater ability to fail (and to succeed) and therefore lending rates are just a little bit higher?
. reg int06 int02-int05  free04 peace07,r

Linear regression Number of obs = 69
F( 6, 62) = 5702.71
Prob > F = 0.0000
R-squared = 0.9963
Root MSE = 3.7323

| Robust
int06 | Coef. Std. Err. t P>|t| [95% Conf. Interval]
int02 | .3347115 .1829173 1.83 0.072 -.0309348 .7003579
int03 | -1.344697 .3421523 -3.93 0.000 -2.02865 -.6607447
int04 | 1.88618 .4466928 4.22 0.000 .9932535 2.779106
int05 | .3967189 .6224345 0.64 0.526 -.84751 1.640948
free04 | 1.054101 .564185 1.87 0.066 -.0736891 2.18189
peace07 | -.4924083 1.222619 -0.40 0.689 -2.936389 1.951572
_cons | -8.911385 5.936009 -1.50 0.138 -20.7773 2.954527

Stata data file

Yey! Thanks! I would have done it myself but I'm too busy travelling right now.

No big surprise on the outcome though...
Economic freedom indexes like the one you used include purely economic variables like tax rates and inflation rates, which are clearly linked to economic indicators like interest rate. On the other hand, the more ambiguous peace index is likely comprised of variables like frequency of military conflicts, number of nuclear weapons, number of explicit enemies, etc that are not necessarily tied directly to economic indicators.

Economic peace may not be equivalent to utopian peace. Perhaps it would be valuable to create an “Economic Peace Index.” Comprised of militaristic variables that affect the economy (i.e. government military spending, trade volume lost due to sanctions, etc)
Index creation is, in my opinion, an easily manipulated science (see some of my earlier comments on the Happy Planet index).

I think a more interesting question would be whether "peace," however measured, causes or is caused by economic freedom.

One might think that those countries with more economic freedom would demand more peace, perhaps encapsulated in the (somewhat incorrect) statement "countries that trade never go to war."

If you have the freedom to pursue your own economic aims, war, or more generally, less peace, will increase the cost and ability to pursue those economic aims. If this is true, then countries with more economic freedom would be generally more peaceful and this would support the idea of increased liberty reducing the demand for war or, conversely, increasing the demand for peace.

This idea is encapsulated in the Depken Doctrine, which has yet to be pursued to any great extent: "DVD players for everyone." Imagine a world where everyone has at least one operational DVD player - including the infrastructure required for its operation - and that is likely a world where the demand for war will be much lower.

Nevertheless, Paul's suggestion to include something about the militaristic nature of a country (and moreover the necessarily subjective indication of whether that military spending is used for "good" or for "bad") might be a useful component in a hybrid index.
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