One would think that, in the case of an economic shock such as a pandemic, a country’s economy would suffer less damage and recover more rapidly the greater its level of economic freedom and the more flexible the economy is. To the typical economist, this seems rather obvious in theory. But is it empirically confirmed?
Worse than the current Covid-19 pandemic, the influenza pandemic that started in 1918 infected half a billion individuals or one-third of the world population and killed 50 million.
In a recent paper “Economic Freedom and the Economic Consequences of the 1918 Pandemic” (SSRN, May 2020), two young economists, Vincent Geloso (King’s University College, Ontario) and Jamie Bologna Pavlik (Texas Tech University) provide an empirical confirmation that economic freedom dampened the effects of the 1918 pandemic. They analyze 20 countries where, over the period 1901 to 1929, estimates of economic freedom are available as well as data on deaths from the pandemic (and from WWII, to avoid this confounding factor). They regress the levels or growth of real GDP per capita on these variables. They admit that the small number of countries in the sample represent “the main downside of [their] approach.”
Economic freedom is measured by a long-term index (going back to 1850 in some cases) developed by Leandro Prados de la Escosura of the Universidad Carlos III in Madrid and similar to the contemporary Economic Freedom of the World Index by the Fraser Institute. In both cases, the score of economic freedom can run from zero to a maximum of 10.
Geloso and Bologna Pavlik’s econometric estimates are generally highly statistically significant, especially in their main specification. They show that
countries with higher levels of economic freedom suffered substantially less from the pandemic … [H]igher levels of economic freedom mitigate the effect of the crisis. In terms of magnitude, an extra point [on 10] of economic liberty offsets roughly 16% of the [economic] effect of an extra flu death per 100,000 persons.
Another very interesting, but not surprising, result is that it is general regulation and restrictions to international trade that interfered most with the maintenance and recovery of GDP per capita in the 1918 pandemic.
A longer version of the article will be published in Contemporary Economic Policy. The revised paper further shows that democracy had a much smaller effect than economic freedom in mitigating the economic impact of the pandemic.
Let me add that the importance of economic freedom in mitigating the impact of the 1918 pandemic suggests that the American economy (and most if not all other economies in the world) would have weathered Covid-19 much better if prices had not been controlled as they would have rationed quantity demanded (better than queues), incited producers to increase quantity supplied, and thus prevented shortages. In America, the majority of states have “price gouging” laws that prevent prices from increasing once an emergency is declared. At the federal level, the Defense Production Act, invoked by President Donald Trump on March 18, have also contributed to the shortages. I have a number of Econlog posts on this topic.