Stankov economic freedom and welfare before and after the crisis (2017)

Petar Stankov Economic Freedom and Welfare Before and After the Crisis Petar Stankov University of National and World Economy, Sofia, Bulgaria ISBN 978-3-319-62496-9 e-ISBN 978-3-319-62497-6 https://doi.org/10.1007/978-3-319-62497-6 Library of Congress Control Number: 2017948308 © The Editor(s) (if applicable) and The Author(s) 2017 This work is subject to copyright All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland “Stankov provides a timely and perceptive analysis of the complex interaction between economic freedom and reforms of the widely discussed “Washington Consensus” and growth in incomes, inequality and multiple measures of individual and societal welfare This should be required reading for anyone trying to understand the rise of populist political movements in recent years.” —Randall K Filer, Professor of Economics, Hunter College and the CUNY Graduate Center, President , The CERGE-EI Foundaion “Anyone interested in the political economy of which economic policies achieve the best results will find a most comprehensive analysis covering the globe applying thorough quantitative analysis Stankov concludes some but not all liberalising policies improve welfare but frequently lead to greater inequality This then leads into a novel exploration of how such circumstances generate the populism one sees so widespread today Nothing could be more timely.” —Oleh Havrylyshyn, CASE Senior Fellow “With this volume Stankov offers both a comprehensive catalogue and review of the literature on economic freedom and a collection of new results concerning policy and welfare convergence that is timely and has international appeal Economists and others who are researching and teaching in fields related to the area of economic freedom will find this book indispensable.” —Franklin G Mixon, Jr., Columbus State University, USA To my family who taught me freedom and the perils of using it unwisely Acknowledgements I thank Palgrave Macmillan for their exceptional professionalism in dealing with the book proposal, the first draft and the revised versions of the book I would like to express my sincere gratitude to the three referees whose critical comments contributed to improvement of the first draft I also thank the Economics Department of the University of National and World Economy (UNWE) in Sofia, Bulgaria, and the Economics Department of the American University in Bulgaria (AUBG) for providing excellent teaching and research environments Specifically, I would like to thank Ivaylo Beev, Shteryo Nozharov, Kristina Stefanova, Dimitar Damyanov, and Entsislav Harmandzhiev (all from the UNWE) for their input during a research seminar at the Department, and Aleksandar Vasilev (AUBG) for his customarily sharp comments A big thanks goes to Martin Rode (University of Navarra) for sharing The Wild Bunch! data and to Andreas Heinö (Timbro Institute) for sharing the Timbro Authoritarian Populism data I was very lucky to have rapid responses from both of them at a crucial moment of redrafting Deborah Novakova (CERGE-EI) provided a native English reading of the manuscript Further, CERGE-EI secured additional financial support through its invaluable Career Integration Fellowship Finally, thanks to Geri Stankova for putting up with the rest—you know you rock, girl Thank you all May 2017 Sofia, Bulgaria Petar Stankov Contents Introduction Contemporary Views on Welfare and Reforms Policies and Reforms Policy Convergence Vs.​ Welfare Convergence Welfare and Reforms:​ Evidence Crises, Welfare, and Populism Conclusion Index List of Figures Fig 3.1 Government intervention since 1970 Fig 3.2 Legal system and security of property rights since 1970 Fig 3.3 Monetary policies since 1970 Fig 3.4 Free trade policies since 1970 Fig 3.5 Regulatory policies since 1970 Fig 3.6 Size of government reforms since 1970 Fig 3.7 Property rights reforms since 1970 Fig 3.8 Monetary reforms since 1970 Fig 3.9 Trade reforms since 1970 Fig 3.10 Overall regulatory reforms since 1970 Fig 3.11 Financial, labor, and business reforms: a 10-year angle Fig 4.1 Convergence in government intervention: 1970–2014 Fig 4.2 Convergence in property rights protection: 1970–2014 Fig 4.3 Convergence in monetary policies: 1970–2014 Fig 4.4 Convergence in trade policies: 1970–2014 Fig 4.5 Convergence in regulatory policies: 1970–2014 Fig 4.6 Sigma convergence in policies: 1970–2014 Fig 4.7 Income per capita convergence: 1970–2014 Fig 4.8 Consumption per capita convergence: 1970–2014 Fig 4.9 Life expectancy convergence: 1970–2014 Fig 4.10 Income inequality convergence: 1970–2014 Fig 5.1 Government intervention and welfare: 1970–2014 Fig 5.2 Property rights and welfare: 1970–2014 Fig 5.3 Monetary reforms and welfare: 1970–2014 Fig 5.4 Trade reforms and welfare: 1970–2014 Fig 5.5 Deregulation and welfare: 1970–2014 Fig 6.1 The crisis, economic freedom, and populism: Ireland vs Greece Fig 6.2 The crisis, economic freedom, and populism: Chile vs Venezuela Fig 6.3 The crisis and economic freedom in land-locked countries Fig 6.4 The crisis and economic freedom in large open economies Ireland and Greece are interesting because of their divergent welfare patterns since the Great Recession despite both being members of the Eurozone Figure 6.1a shows that, at least since 1980, Ireland was the faster-growing economy of the two and with a freer economy throughout the time period It also demonstrates that both countries were hit hard by the Great Recession, with Ireland bottoming-out sooner than Greece In 2015, Ireland was already fast approaching 150% of its 2000level of GDP per capita, while Greece was still struggling to regain its 2000-level of per capita GDP Some part of the reason for this welfare divergence can be traced to the divergent patterns of economic freedom after the Crisis We can note that both countries experienced a slight downward movement in their economic freedom just before the Crisis However, Ireland was quick to reverse this immediately after, while Greece has continued to fall downward in the Economic Freedom rankings ever since As more economic freedom imposes more flexibility in how product-, labor-, and financial markets operate, then we can safely conclude that freedom reforms brought more resilience to the Irish economy to respond to the perils of the Great Recession One of those perils is unemployment The patterns relating to unemployment and economic freedom in both countries since the 1990s are depicted in Fig 6.1b As both economies grew steadily before 2008, unemployment fell to historically low levels, in the case of Greece, or stayed approximately constant at natural levels, in the case of Ireland Around 2008, the tides turned for both countries They experienced a steep rise in unemployment, with Greece reaching a staggering 26% in 2013 At the same time, Ireland also saw its unemployment rise to levels not seen since the 1990s The difference between the two countries is their divergent patterns of economic freedom While Ireland responded to the Crisis with more freedom, which coincided with a declining growth of unemployment, Greece took the opposite stance This saw a continued rise in unemployment in Greece, while it started declining in Ireland Naturally, we can blame the depth of the Crisis for the divergent unemployment patterns, but a significant part of the divergence is perhaps attributable to the differences in economic freedom The depth of the Great Recession had a very different impact on how the political environment developed in those two countries as well Specifically, the patterns of populist support in Ireland and Greece were dramatically different The continued decline of income per capita in Greece beyond 2011 coincided with a rapid increase in political support for populist parties At the same time, populist support in Ireland barely budged, although it did increase slightly This could indicate that voters adjust their political preferences only after a certain patience threshold has been reached, e.g., several years of consecutive decline in income per capita, as in Fig 6.1c, or several years of increase in long-term unemployment, as in Fig 6.1d Ireland and Greece witnessed not only divergent patterns of income per capita, unemployment, and populist support, but also how government changed its spending in response to the Crisis Since 1995, Greece has traditionally had a larger government than Ireland In both countries, the share of government purchases in GDP, which traditionally measures the size of government, was growing before the Crisis Both also saw a marked decline in government intervention after 2008, with a far steeper decline in Ireland, especially after 2013 The sharper decline in government expenditures in Ireland, which coincided with a smaller increase in populist support, indicates that austerity is perhaps not the core factor behind the rise of populism, at least not in Europe This is clearly visible in Fig 6.1e At the same time, income inequality was rising equally fast in both countries after 2008, with dramatically different political outcomes Despite rising income inequality, Irish voters did not change their attitudes toward populist parties, while Greek voters have elected a populist government to negotiate its debt restructuring with their international creditors What this tells us is that voters can tolerate a rise in income inequality after a deep recession as long as the median voter becomes betteroff fast enough However, if the income pattern of the average household mimics an economic depression, as in the Greek scenario, it is far more likely that populists will occupy the executive power—a lesson taught with even more vigor in Latin America 6.6.2 Latin America Latin America has long exhibited stark contrasts in its political environment, economic freedom policies, and economic performance The two countries illustrating those contrasts best are Chile and Venezuela Figure 6.2 presents some of the stark differences between Chile and Venezuela Between 1985 and 2015, Chile has tripled its income per capita Today, it is the only country in South America that is also a member of the Organization for Economic Cooperation and Development (OECD)—the club of the world’s richest countries Meanwhile, Venezuela has experienced a secular stagnation around its 1980 level of income per capita Today, Venezuela’s per capita income is at or lower than it used to be in 1980—a remarkable stagnation despite the country holding one of the richest oil reserves on the globe Fig 6.2 The crisis, economic freedom, and populism: Chile vs Venezuela Source a Own calculations Data source EFW and WDI b Own calculations Data source EFW and Milanovic (2014) c Data source EFW, Nohlen (2005), http://www.electionguide.org d Data source WDI, Nohlen (2005), http://www.electionguide.org e Data source WDI, Nohlen (2005), http://www.electionguide.org f Data source WDI, Nohlen (2005), http://www.electionguide.org A significant part of the income variation across the two countries can be attributed to how policies have panned out since 1980 While Chile has been a champion of market-oriented reforms in South America, Venezuela has steadily deteriorated its economic freedom Interestingly, until approximately the mid-1980s, Venezuela was the freer economy, as indicated in Fig 6.2a However, it rapidly reduced its economic freedom, initiating a perilous welfare trend One of the very few positive achievements of macroeconomic policy management in Venezuela is a faster decline in income inequality than that of Chile By 2010, Venezuela had managed to reduce its Gini coefficient to around 40—an impressive decline given its enormous income inequality in 1980 Meanwhile, Chile started with about the same income inequality as Venezuela in 1980: an astounding Gini coefficient of around 55 Figure 6.2b shows that more than 30 years later, Chile has not managed to reduce it significantly Politically, the two countries also paid a very different price for their macroeconomic policy management Since the mid-1990s, voters in Venezuela have elected left and far-left populists whose policy priorities are macroeconomic redistribution at the expense of economic stability and growth The significant populist support in Venezuela also coincides with a marked shift toward less economic freedom, as suggested for a cross-section of countries by Rode and Revuelta (2015) Meanwhile, Chilean voters have barely noticed the existence of left-wing parties, let alone left-wing populists Today, not only is Chile one of the most economically free countries in the world, but its voters also barely notice the existence of politicians whose agendas emphasize the need for macroeconomic redistribution, a story consistent with the recent findings of Pecoraro (2017) The detrimental effects of macroeconomic redistributive policies pursued by populists have already been discussed It seems that more than 25 years after the influential study of Latin American populism by Dornbusch and Edwards (1990), the lessons from the rest of the continent have not been learned in Venezuela For a long time now, its politicians have produced a textbook example of an economy trapped in a resource curse as discussed by Sachs and Warner (1999), which has been further complicated by persistently loyal voters to populist platforms This may be about to change For the 30 years running till 2010, Venezuelan voters have trusted mostly left-wing parties pursuing macroeconomic redistribution policies Since Hugo Chavez was elected in 1998, economic freedom has stagnated The negative correlation between left-wing governments and economic freedom has been recently documented for a number of OECD and EU countries by Jaeger (2017) In Venezuela, initially the economy picked up, fueled by rising oil prices The rising economy in the run-up to 2008 brought surging support for the economic policies pursued by Chavez His party swept more than 60% of votes in the elections before the Great Recession However, the decline in oil prices and the global recession hit the Venezuelan economy hard The policy response to the Crisis was more populist measures which, unlike in the boom years before the Crisis, did not help this time around The economy continued to plunge, and voters finally noticed The electoral results on parliamentary and presidential elections in Venezuela since 2010 portray a certain populism fatigue —a decline in the share of voters supporting Chavist policies, which mimics the renewed decline in their income per capita This is clearly indicated in Fig 6.2d At the same time, populism fatigue was exacerbated by rising inflation and unemployment Those are seen in Fig 6.2e,f This will inevitably cause a surge in income inequality as well when more data becomes available All this fits very well into the populist paradigm: sooner rather than later, macroeconomic mismanagement pursued by populists hurts most exactly the people who were supposed to benefit from populist policies The tragic Spring 2017 protests across Venezuela illustrate the dire political consequences of the long-term pursuit of populist redistribution and of stifling economic freedom Meanwhile in Chile, the rapid increase in income per capita, combined with long-term price stability and a steady decline in unemployment has produced one of the most stable political environments in Latin America which, since the early 1970s, is void of any influential left-wing populists The parallels between Greece and Ireland and Venezuela and Chile produce an intuitive conclusion which further supports the empirical results in earlier chapters Specifically, long-term income stagnation gives rise to populist movements If populists are elected to power, economic freedom suffers In turn, this produces a hostile business environment which worsens the prospects for a welfare increase The only meaningful choice variable populists have—income inequality — turns out to be a poor policy target Instead, it is better left as an outcome of prudent macroeconomic policies like those pursued by Ireland and Chile Yet, some milder forms of redistribution are perhaps inevitable This is to pre-empt a further surge in populist movements, given the recent uptick in voter support for populism in traditional economic freedom strongholds like Chile and Ireland 6.6.3 Land-Locked Countries: Latin America and Africa Land-locked countries are interesting to analyze because trading with them is harder, which makes domestic economic policies—including economic freedom policies—all the more important for welfare Bolivia and Paraguay are the only two land-locked countries in Latin America Both have accelerated their efforts to become more free from government intervention since 2000, and both are growing strong In fact, Paraguay’s GDP per capita and overall economic freedom pattern have very much in common: Whenever economic freedom rose, GDP per capita followed suit, and whenever economic freedom was at risk, the average citizen of that country suffered a blow to their income Paraguay suffered its own lost decade in terms of income per capita The years between 1995 and 2007 saw the average citizen of that country experiencing a marked decline in per capita income, which had risen steadily in the decade before Bolivia experienced not one but two lost decades in the period between 1980 and 2000 However, realizing its economy was not doing well, Bolivian governments have pursued more economic freedom since 1985 As soon as the government started introducing more freedom, the economy slowed its decline, and recovery ensued soon thereafter Today, Bolivia’s average income is 40% larger than in 2000, which is at least partly due to its growing economic freedom, as seen from Fig 6.3a At the same time, income inequality is also correlated with economic freedom in the long run This is easily seen in Fig 6.3b The marked improvement in economic freedom in both countries between 1985 and 1995 preceded a sharp increase in income inequality, measured by the Gini coefficient Around 1995, the governments in both countries slowed their progress with economic freedom, which coincided with a steady decline in income inequality at least until the Crisis Their after-crisis policy efforts to spur economic freedom expectedly coincided with a period of renewed growth in income inequality Therefore, land-locked countries in Latin America become richer when more economic freedom is adopted, but at the same time, experience rising income inequality Fig 6.3 The crisis and economic freedom in land-locked countries Data Source a EFW and WDI b EFW and Milanovic (2014) c EFW and WDI d EFW and Milanovic (2014) The lessons from two small land-locked African economies are very similar They can be seen in Fig 6.3c Following an aggressive improvement of economic freedom since 1995, Rwanda’s people today are, on average, twice as rich as they were in 2000 This remarkable improvement, however, was not always present In the years preceding 1995, Rwanda’s economic freedom policies were wavering, and its income per capita was declining Burundi’s GDP per capita, on the contrary, increased before 1990, coinciding with a gradual long-term improvement in its economic freedom score However, since 1990, Burundi has experienced a dramatic slump in its income per capita By the year 2000, its citizens lost a third of their income, which went hand in hand with a deterioration of economic freedom Ever since 1995, Burundi has been trying to gradually improve economic freedom, with varying success Ten years later, the decline in per capita income has stopped, and a noticeable, yet still meager, recovery of income per capita has ensued This has coincided with bolder advancements in economic freedom policies As in Latin America, bold advances in economic freedom in African countries also comes with a hefty increase in income inequality This is seen in Fig 6.3d Between 1985 and 2005, Rwanda dramatically improved its economic freedom At the same time, however, its income inequality doubled Only recently, after years of remarkable economic growth, has its inequality growth began to abate Still, a Gini coefficient of above 50 signals an extremely polarized population in terms of economic opportunities, despite the extraordinary improvement in economic freedom over the last 20 years The data on Burundi is too scarce to enable any meaningful conclusions on the link between inequality and freedom Therefore, we can safely conclude that economic freedom is indeed conducive to income per capita growth, perhaps even more so in land-locked countries However, more freedom is also correlated with higher income inequality, as our graphical analysis has shown in earlier chapters If that is the case for small land-locked countries in Latin America and Africa, can we observe similar trends in large open economies? The next section elaborates Fig 6.4 The crisis and economic freedom in large open economies Source a EFW and WDI b EFW and Milanovic (2014) 6.6.4 Large Open Economies: China and Japan China and Japan are two of the largest economies on the globe, experiencing different reform and income patterns over the last 35 years They also have remarkably different growth trajectories, observed in Fig 6.4a By 2000, the average Chinese person was four times richer than they were in 1980 By 2015, income per capita almost quadrupled yet again! This exceptional growth path is in dramatic contrast to Japanese income patterns over the same period of time Today, the income per capita in Japan is hardly different from what it was in 1990 Figure 6.4a reveals a possible reason for this astonishing difference in China and Japan’s income growth patterns, which complements the traditional explanations of income convergence By 1990, the Japanese economy was still improving its economic freedom, and its GDP per capita grew After 1990, it worsened its economic freedom, and income stagnation followed suit Japan is still a free economy by any standards However, it has not done much to improve its economic freedom since 1990 In contrast, China has done a great deal It started as one of the less free countries in 1980 Since 1990, Chinese policies have always been consistent with a gradual yet very noticeable improvement in its overall freedom rankings Therefore, similarly to small, land-locked countries, large open economies like China and Japan have also gained additional income per capita after becoming freer economies However, as with many other countries, more economic freedom has meant rising income inequality, as seen from 6.4b In 1990, the year in which China began its March toward economic freedom, its income inequality was comparable to that of many developed European nations 25 years later, its inequality looks similar to that of many Latin American countries It is only recently, after decades of remarkable growth, that income inequality growth has stagnated It even notched down, similarly to other nations experiencing rapid long-term growth The long-term trends in Japan have been similar yet somewhat more subtle While the Japanese economy was growing and its economic freedom improved before 1990, its income inequality also rose When it slumped into stagnation of both income and economic freedom after 1990, its income inequality was also trendless between 1993 and 2005—it was comparable to the more equal European nations The broad lessons are confirmed for large open economies as well as for small land-locked countries In sum, economic freedom works well for income per capita, and less so—for income inequality This broad conclusion is in line with the large-scale review of the literature by Hall and Lawson (2014) References Alvaredo, F., L Chancel, T Piketty, E Saez, and G Zucman 2017 Global inequality dynamics: New findings from WID.world Working Paper 23119, National Bureau of Economic Research Beck, T., G Clarke, A Groff, P Keefer, and P Walsh 2001 New tools in comparative political economy: The database of political institutions The World Bank Economic Review 15 (1): 165–176 [Crossref] Bittencourt, M 2010 Democracy, populism and hyperinflation(s): Some evidence from Latin America Working Papers 169, Economic Research Southern Africa Cahill, B 2007 Of note: Institutions, populism, and immigration in Europe SAIS Review 27 (1): 79–80 [Crossref] Cruz, C., P Keefer, and C Scartascini 2016a The database of political institutions 2015 Last updated Jan., 2016 Cruz, C., P Keefer, and C Scartascini 2016b Database of Political Institutions: Changes and Variable Definitions InterAmerican Development Bank A codebook to the DPI2015 Dornbusch, R., and S Edwards 1990 Macroeconomic populism Journal of Development Economics 32 (2): 247–277 [Crossref] Dornbusch, R., and S Edwards 1991 Introduction to “the macroeconomics of populism in Latin America” In The macroeconomics of populism in Latin America, ed R Dornbusch and S Edwards, 1–4 University of Chicago Press Greskovits, B 1993 The use of compensation in economic adjustment programmes Acta Oeconomica 45 (1/2): 43–68 Hall, J.C., and R.A Lawson 2014 Economic freedom of the world: An accounting of the literature Contemporary Economic Policy 32 (1): 1–19 [Crossref] Hawkins, K.A 2009 Is Chávez populist? Measuring populist discourse in comparative perspective Comparative Political Studies 42 (8): 1040–1067 [Crossref] Heinö, A.J 2016 Timbro authoritarian populism index, 2016 Sweden: Timbro Institute, Stockholm Hewison, K 2005 Neo-liberalism and domestic capital: The political outcomes of the economic crisis in Thailand The Journal of Development Studies 41 (2): 310–330 [Crossref] Jaeger, K 2017 Economic freedom in the early 21st century: Government ideology still matters Kyklos 70 (2): 256–277 [Crossref] Jagers, J., and S Walgrave 2007 Populism as political communication style: An empirical study of political parties’ discourse in Belgium European Journal of Political Research 46 (3): 319–345 [Crossref] Jones, E 2007 Populism in Europe SAIS Review 27 (1): 37–47 [Crossref] Kaufman, R R and B Stallings 1991 The political economy of Latin American populism In The macroeconomics of populism in Latin America, ed R Dornbusch and S Edwards, 15–43 University Of Chicago Press Lago, R 1991 The illusion of pursuing redistribution through macropolicy: Peru’s heterodox experience, 1985–1990 In The macroeconomics of populism in Latin America, ed R Dornbusch and S Edwardspp, 263–330 University of Chicago Press Lawson, R.A., and J.R Clark 2010 Examining the Hayek-Friedman hypothesis on economic and political freedom Journal of Economic Behavior & Organization 74 (3): 230–239 [Crossref] Leon, G 2014 Strategic redistribution: The political economy of populism in Latin America European Journal of Political Economy 34: 39–51 [Crossref] Milanovic, B.L 2014 All the Ginis, 1950–2012 Updated in Autumn 2014 Moffitt, B 2015 How to perform crisis: A model for understanding the key role of crisis in contemporary populism Government and Opposition 50 (2): 189–217 Pecoraro, B 2017 Why don’t voters ‘put the Gini back in the bottle’? Inequality and economic preferences for redistribution European Economic Review 93: 152–172 Roberts, K.M 2007 Latin America’s populist revival SAIS Review 27 (1): 3–15 [Crossref] Rode, M., and J Revuelta 2015 The wild bunch! An empirical note on populism and economic institutions Economics of Governance 16 (1): 73–96 [Crossref] Sachs, J.D., and A.M Warner 1999 The big push, natural resource booms and growth Journal of Development Economics 59 (1): 43–76 [Crossref] Tejapira, K 2002 Post-crisis economic impasse and political recovery in Thailand: The resurgence of economic nationalism Critical Asian Studies 34 (3): 323–356 [Crossref] The World Bank 2017 World Development Indicators, 1960–2016 Last updated Feb 01, 2017 Učeň, P 2007 Parties, populism, and anti-establishment politics in East Central Europe SAIS Review 27 (1): 49–62 [Crossref] © The Author(s) 2017 Petar Stankov, Economic Freedom and Welfare Before and After the Crisis, https://doi.org/10.1007/978-3-319-62497-6_7 Conclusion Petar Stankov1 (1) University of National and World Economy, Sofia, Bulgaria Petar Stankov Email: petar.stankov@gmail.com This book reviews the dynamics of market-oriented reforms and their impact on welfare between 1970 and 2014 The need to analyze the long-term impact of reforms is motivated by the seismic changes the Great Recession has brought to both welfare and the political landscapes around the world In this work, welfare is understood more broadly than in the conventional sense Its measure is not only the traditional income per capita, but also how much average citizens consume, how long they live , and how they fare in terms of income inequality Throughout the work, reforms are monitored in five areas: government intervention, protection of property rights, monetary policies, free trade , and government regulation The data on welfare comes from three comprehensive sources: the Penn World Table 9.0, the World Development Indicators, and the income inequality data by Milanovic (2014) The data on reforms is taken from the Economic Freedom of the World 2016 annual report, which includes data from 1970 to 2014 Both qualitative and quantitative methods are employed through the book, with an emphasis on quantitative analysis, uncovering the dynamics of reforms from 1970 They also reveal the impact of those reforms on changes in welfare across countries and over time, as well as before and after the Great Recession The literature reviewed in Chap 2, including the most recent work by both theoretical and empirical social scientists, does not provide a unanimously positive answer to the question this book asks: Did more economic freedom produce more welfare ? Chapter demonstrates that most policies were moving toward less government since 1970 until the global Crisis of 2008 Thus, reforms were undertaken in the spirit of the neoliberal policy agenda of letting markets their job and limiting governments to simply set the stage for ever stronger private growth After 2008, however, governments around the world overwhelmingly reverted to protective policy mood, as was the case with many previous episodes of crises and wars (De La Escosura 2016), and despite earlier evidence to the contrary by Pitlik and Wirth (2003) This is especially valid for government intervention and property rights The evidence for monetary policies, free trade , and government regulation after the Crisis is mixed In those broad areas, governments either did not reform further or progressed one step forward, followed by two steps backward That is the case, for example, with government regulation and free trade Within the area of overall government regulations, business regulations have been made easier, but both financial and labor regulations have been made tightened In trade reforms, while governments did not embark on outright trade wars, as was the case in the aftermath of the Great Depression, they did impose harder non-tariff barriers to trade Overall, the Crisis has stalled the momentum of economic freedom reforms Chapter demonstrates a significant feature of reforms in all areas: policy convergence, i.e., policies becoming more similar across countries and over time We can look at this process in two ways First, countries lagging in economic freedom were catching up with the leaders In other words, we observed the so-called -convergence in policies Second, the entire distribution of policies was decreasing in diversity over time, a process known as -convergence in policies Both types of policy convergences were highly significant As a result, the world has become a far more uniform place in terms of policies than it used to be 45 years ago However, Chap also shows that, despite converging policies, income differences across countries persisted If you were born in a poor country, your income would not grow significantly faster than the income of a person in a rich country There is convincing evidence of convergence in consumption per capita, life expectancy , and income inequality Chapter tests if there was any significant relationship between policy and welfare convergence In other words, it addressed an important political question for most developing countries: If we adopt Western policies, are we going to gradually become as well-off as they are? As it turns out from the results in Chap 5, and contrary to the bulk of earlier evidence (Grubel 1998; Ali and Crain 2002; Dawson 2003), more often than not the answer is no More specifically, reducing the size of government did not bring significantly more income per capita, nor increase consumption per capita, nor make lives longer or reduce income inequality in most cases Improving property rights protection did have a positive effect on income and consumption growth It did not produce a significant long-term effect on life expectancy or income inequality Unlike property rights, monetary reforms produced robust positive welfare gains across all welfare measures Trade reforms did have a positive effect on income growth but less on consumption growth They seem to not affect life expectancy or income inequality in any systematic way, although indeed people live longer and enjoy lower income inequality in countries with freer trade Deregulation reforms also had a positive impact on income growth, but raised income inequality In fact, the case studies presented later in the book demonstrate that overall economic freedom reforms work well for income per capita and at the same time raise income inequality If that is the case, it is natural that policy agendas would shift from pro-market to proredistribution sooner rather than later The Crisis has definitely played a significant part in this As the average household still struggles with the consequences of the Great Recession, far-left and far-right populists ride the wave of social discontent Any sensible policy maker in the middle ground would also have a finger on the pulse of their voters In order to preempt a populist resurgence in their own countries, they could rely on a mix of more economic freedom with stronger income redistribution Elements of this redistribution agenda have already been suggested, among others, by Piketty (2015) A version of this preemptive policy agenda sold well in the May 2017 French presidential elections swept by Emmanuel Macron It remains to be seen if Macron-omics will evolve into a policy trend across Europe and the rest of the world or will prove to have been a oneoff event A careful redistribution to reduce discontent is a far smaller price to pay than the likely damage that could be caused by a long-run populist government However, if politicians pursue stronger redistribution, they should tread lightly, because largescale macroeconomic redistribution may push investors to more business-friendly places around the globe Reducing investment is the last thing a sensible politician—left or right—needs in the aftermath of the Great Recession As the last chapter demonstrates, voters go to political extremes predominantly when their income goes down If economic freedom is good for anything, it is per capita income As a result, more economic freedom does make sense, even if it does not much about welfare beyond raising incomes But if it thus prevents populism from March ing in, so be it Because the price of populism is decades of stagnation And no sensible voter would like that Therefore, enter more freedom References Ali, A.M., and W.M Crain 2002 Institutional distortions, economic freedom, and growth Cato Journal 21 (3): 415–426 Dawson, J W 2003 Causality in the freedom-growth relationship European Journal of Political Economy 19 (3): 479–495 Economic Freedom De La Escosura, L.P 2016 Economic freedom in the long run: evidence from OECD countries (1850–2007) Economic History Review 69 (2): 435–468 [Crossref] Grubel, H 1998 Economic freedom and human welfare: Some empirical findings Cato Journal 18 (2): 287–304 Milanovic, B L 2014 All the Ginis, 1950–2012 Updated in Autumn 2014 Piketty, T 2015 Putting distribution back at the center of economics: Reflections on ‘Capital in the Twenty-First Century’ Journal of Economic Perspectives 29 (1): 67–88 [Crossref] Pitlik, H., and S Wirth 2003 Do crises promote the extent of economic liberalization?: An empirical test European Journal of Political Economy 19 (3): 565–581 Economic Freedom Index A Austerity B Business environment C Capital human physical Capital accumulation Consumption Consumption convergence Consumption per capita Corruption D Data consumption per capita Database of Political Institutions (DPI) economic freedom GDP per capita income inequality life expectancy Penn World Table (PWT) populism rents welfare World Development Indicators (WDI) Democracy Developed countries Developing countries E Economic freedom Economic growth F Financial liberalization Free trade G Gini Government intervention Graphical evidence The Great Depression The Great Recession I Income convergence Income inequality convergence in Income per capita Institutional change Intellectual property rights L Life expectancy Life expectancy convergence Living standards M Market-oriented reforms Methods fixed effects instrumental variable OLS probit model Monetary policy Monetary stability N Non-tariff barriers P Policy agenda Policy coercion Policy convergence speed of Policy imitation Policy learning Policy makers Political capture Political market Populism authoritarian as a discourse fatigue left-wing measurement of political economy of right-wing Populist paradigm Post-Crisis growth Price stability Property rights Publication bias R Recession Redistribution Reform sequencing Reforms measurement of Regulation credit market deregulation labor market political economy of product market Rents natural resources Resource allocation Resource curse S Size of government Supply-side policies T Tolerance of taxation Trade liberalization Trade reforms V Voter discontent W Welfare measurement of Welfare convergence speed of ... Fig 6.1 The crisis, economic freedom, and populism: Ireland vs Greece Fig 6.2 The crisis, economic freedom, and populism: Chile vs Venezuela Fig 6.3 The crisis and economic freedom in land-locked... © The Author(s) 2017 Petar Stankov, Economic Freedom and Welfare Before and After the Crisis, https://doi.org/10.1007/978-3-319-62497-6_2 Contemporary Views on Welfare and Reforms Petar Stankov1 ... Authoritarian populism and crises © The Author(s) 2017 Petar Stankov, Economic Freedom and Welfare Before and After the Crisis, https://doi.org/10.1007/978-3-319-62497-6_1 Introduction Petar Stankov1 (1)