The commercial peace?

The Cato Institute has come out with their 9th annual Economic Freedom of the World report. According to Cato’s press release, this edition has one particularly intriguing finding:

Economic freedom is almost 50 times more effective than democracy in restraining nations from going to war. In new research published in this year?s report, Erik Gartzke, a political scientist from Columbia University, compares the impact of economic freedom on peace to that of democracy. When measures of both economic freedom and democracy are included in a statistical study, economic freedom is about 50 times more effective than democracy in diminishing violent conflict. The impact of economic freedom on whether states fight or have a military dispute is highly significant while democracy is not a statistically significant predictor of conflict. (emphasis added)

I know Erik, and I know that Erik knows a lot about the causes of war, so this tidbit definitely piqued my interest. You can read Gartzke’s paper by clicking here. His policy conclusions are provocative. For example:

The results here suggest that efforts to promote peace in the Middle East and in other regions dominated by autocratic governments through democratization are of particularly questionable worth. Whether Iraq, for example, can achieve stable democracy remains to be seen; but even success in such ventures appears unlikely to yield a meaningful reduction in interstate conflict unless it is paired with substantial and successful economic reform. Given finite resources, the attentions of developed nations are best directed upon reinforcing and propagating the free-market principles and practices that lead to peace over much of the northern hemisphere. The United States in particular has used its status as hegemon to champion capitalism and to encourage economic development. This effort should not be allowed to falter now that terrorism and the end of the Cold War have shifted US focus from containment of the Soviet Union to a more pro-active international policy. Democracy should be encouraged but the evidence suggests that democracy alone will not yield peace, while popular rule appears unstable in the absence of some degree of prosperity. In short, to achieve the goals of peace and freedom, the developed countries of the world cannot afford not to sponsor the extension of capitalist institutions and practices.

I’d really like for Gartzke’s theoretical conclusions to be true, and he makes a persuasive case in the paper. I have three small cavils, however:

1) What, exactly, makes governments decide to increase economic freedom in their own countries? One possibility is that democracies are more likely to do this than non-democracies. For example, Helen Milner and Keiko Kubota argue in “Why the Rush to Free Trade? Democracy and Trade Policy in the Developing Countries” that:

Rising international trade flows are a primary component of globalization. The liberalization of trade policy in many developing countries has helped foster the growth of these flows. Concurrent with this rush to free trade, there has been a global movement toward democracy. We argue that these two trends are related: democratization of the political system reduces the ability of governments to use trade barriers as a strategy for building political support…. We provide empirical evidence to support our claim through econometric analysis of the developing countries from 1970-1999. Democracy seems to be associated for these countries with trade liberalization. Globalization may be fostered by democratization.

In other words, it’s possible that the best way for countries to promote economic freedom is to promote political freedom as the antecedent. 2) That said, the other thing that worries me about Gartzke’s finding is that trade openness is not significant in any of the regression results (though, as the appendix makes clear, trade metrics are included in the economic freedom score, so this could just be multicollinearity at work). Again, it could be that trade openness leads to more economic freedom across the board, which then leads to less violent behavior. But if that’s not the case, it’s profoundly disturbing, since besides democracy promotion, trade diplomacy is the primary engine through which the United States promotes economic freedom in the rest of the world. 3) One last musing — the economic freedom score is a composite of a series of measures, including rule of law (which is correlated with democratic regimes) low inflation (which is correlated with economic development) and low tariffs (which is correlated with economic openness). How much of the empirical results are driven by multicollinearity between the explanatory variable and the the control variables?

Again, I still think Gartzke is onto something. Plus, I can’t pass up mentioning Gartzke’s observations about offshore outsourcing:

To avoid development creating a tinderbox of the southern hemisphere, it is necessary that increasing prosperity coincide with a relative decline in the value for territory and with growing dependence on global capital. The advantage of late-industrializing countries is that they may skip the most dangerous stages of industrialization. Early industrialization creates the need for natural resources and the where-with-all to acquire them through force. Labor costs are low, allowing the staffing of occupying armies. More important, valuable assets and resources remain ?lootable? through conquest. Knowledge industries call for heavy investments of capital and human ingenuity but little that can be ransacked by an invader. The ?outsourcing? of services, telemarketing, and software industries, while vexing to many in the developed world, helps to create economies in the developing world that are less inclined toward war. The Indo-Pakistani conflict has regularly erupted in warfare but leaders in both countries have recently come to accept that their more open economies suffer greatly from active hostilities. The growing dependence on international capital and the declining value of disputed territory relative to technological innovation means that the impetus to make peace has increased and the value of war has declined.

Check out Cato’s web page on economic freedom for more (here’s a link to the executive summary)