Economic freedom and Economic growth in ECOWAS: Does colonization heritage matter?

1. Economic freedom and Economic growth in ECOWAS: Does colonization heritage matter? By Felix Fofana N'Zué, Ph.D.

2. Plan de Présentation I- Introduction II- Stylized facts III- Brief review of Selected literature IV- Theoretical Framework, Data and Method of Analysis V- Empirical Results VI- Conclusion

3. I- Introduction Definition of Economic Freedom  all liberties and rights of production, distribution, or consumption of goods and services. It provides an absolute right of property ownership; fully realized freedoms of movement for labor, capital, and goods; and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself (Beach and Tim, Heritage Foundation)  Individuals have economic freedom when (a) property they acquire without the use of force, fraud, or theft is protected from physical invasions by others, and (b) they are free to use, exchange, or give their property to another as long as their actions do not violate the identical rights of others (Gwartney et al. , the Fraser Institute,). In trying to explain the plight of underdevelopment in general and especially in Sub-Saharan African countries, several scholars including Grier (1999 and 1997), Bertocchi and Canova (1996, 2002) etc., have identified colonial heritage as a key determining factor. For these scholars the colonial heritage of sub-Saharan African countries has a bearing on how well these countries handle economic challenges and how in general they react when faced with unusual events

4. I- Introduction These specific indices taken from Beach and Tim (2008) are: • Business freedom which is the ability to create, operate and close an enterprise quickly and easily; • Trade freedom is a composite measure of the absence of tariff and non-tariff barriers; • Fiscal freedom is a measure of the burden of government from the revenue side. It includes both the tax burden (tax rate on income) and the overall amount of tax revenue (tax revenue to GDP ratio); • Government size is define to include all government expenditures, including consumption and transfers; • Monetary freedom combines a measure of price stability with an assessment of price controls; • Investment freedom is an assessment of the free flow of capital (especially foreign capital); • Financial freedom is a measure of banking security as well as independence from government control; • Property rights is an assessment of the ability of individuals to accumulate private property, secured by clear laws that are fully enforced by state; • Freedom from corruption is based on quantitative data that assess the perception of corruption in business environment. • Labor freedom is a composite measure of the ability of workers and businesses to interact without restriction by the state. Each of the above freedom index is graded using a scale from 0 to 100 where 100 represents maximum freedom

5. I- Introduction Former British colonies outperform former French colonies in terms of economic performance. Reasons • More educated • More decentralized style of colonization (no assimilation) • No imposed constitution • Vernacular languages accepted for education • Colonies not forced to give British goods preferential treatment • The French established institutions and customs that were not conducive to development and growth after the colonial period • Francophone Africans are portrayed to be abstract and evasive in their dealings, no risk taking and very sly • Anglophone Africans are portrayed as pragmatic, direct in their dealings, risk taking, more entrepreneurial and above all they speak their mind out.

6. I- Introduction Development policies implemented in ECOWAS countries especially economic reforms will have different outcomes depending on their colonial heritage. • How relevant is such statement, 50 years of independence? • Does colonial heritage still matter in the successful implementation of economic reforms? • What to do if colonial heritage appears to matter significantly? Objective • Contribute to the understanding of the factors affecting the relationship between economic freedom and economic growth with a special focus on the impact of the colonial heritage. • Determine the impact of colonial heritage of selected African countries on their economic performance and on the outcome of the relationship between economic freedom and economic performance.

7. II- Stylized facts

8. II- Stylized facts (Con’t)

9. III- Brief Review of Selected Literature • Colonization matters • Bertocchi and Canova (1996; 2002) • Grier (1997) • Brown (2000) • Colonization does not matter • Acemoglu et al. (2001)

10. IV- Theoretical Framework, Data and Method of Analysis Production=f(Labor, Capital, Economic Freedom, Others) Others Openness, Life expectancy Data • The Heritage Foundation/Wall Street Journal annual Index of Economic Freedom • World Development Indicators 2009 • The time period runs from 1995 to 2008. Former British colonies The Gambia, Ghana, Nigeria and Sierra Leone Former French colonies Benin, Burkina Faso, Cote d’Ivoire, Guinea, Mali, Niger, Senegal and Togo

11. V- Empirical Results • Economic freedom is not a statistically significant determinant of economic performance in ECOWAS countries unlike previous studies • However, in line with past works our empirical results suggest that economic freedom could have a positive impact on economic performance in the ECOWAS countries • Although positive, it is not significant implying that for the sample under investigation, colonization did not matter • Consistent unidirectional causality running from economic performance to economic freedom. • Government freedom could be harmful to economic performance • Thus in former French colonies government and monetary freedoms impact economic performance more than they do in former British colonies. • However, when the freedom index is interacted with the colonization variable it is the former British colonies that are better off. Indeed, it can be observed that although former French colonies maintained a very low inflation rate

12. VI- Conclusion This paper investigated the factors affecting the relationship between economic freedom and economic growth with a special focus on the colonial heritage of ECOWAS countries. Findings • Level of economic freedom is not an important determinant of economic performance in ECOWAS countries; • Colonial heritage does not matter in general for economic performance. • It is economic performance that causes economic freedom and not the other way round; • The colonial heritage of English speaking countries together with government and monetary freedoms impact their economic performance more than it does with French speaking countries; • Fiscal freedom together with colonization variable impacted former British colonies more than they impacted their French counterparts; • Government freedom could be harmful to economic performance in ECOWAS countries; • The colonial heritage together with monetary freedom has improved economic performance in former British colonies more than former French colonies; In light of the above, it is clear that although colonial heritage does not matter in general terms for economic performance, it does matter for government and monetary freedoms. It is therefore important that peculiarities of countries are taken into consideration when it comes to specific policy reforms.

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