Economic Freedom and the Economic Consequences of the 1918 Pandemic

Abstract

The 1918 flu pandemic constituted an exogenous shock on economic activity. In this paper, we condition the economic importance of these shocks on the level of economic freedom measured by the Historical Index of Economic Liberty project to test whether freer economies fared better. Our argument is that higher levels of economic freedom meant a greater ability to adjust to shocks by reducing frictions in the reallocation of resources and the reorganization of economic activity. We find that higher levels of economic freedom mitigated the pandemic's effect. We link this finding with the literature on economic freedom and crises. (JEL I15, N10, N30)

Economic freedom, pandemics, and robust political economy

“…Specifications (1) and (2) are identical with the exception that the dependent variable is either the average change in GDP per capita during a pandemic or the average change in total GDP during a pandemic. Unsurprisingly and in conformity with findings of the economic effects of pandemics (Keogh‐Brown et al ., 2010; Barro et al ., 2020; Geloso and Bologna Pavlik, 2020), excess mortality slows down economic growth. The effect is only significant at the 10% level.…”

“…Using a differences‐in‐differences approach, they found that lives lost to natural causes (i.e., non‐COVID related such as septicemia, pneumonia, and diabetes) and to COVID‐19 fell by 15 per 100,000 residents on a weekly basis. Given that the cumulative number of deaths in pandemics is related to the extent of economic contractions (Barro et al ., 2020; Beach et al ., 2020; Geloso and Bologna Pavlik, 2020), their results suggest that CON laws might have seeped through to economic activity on a more macro‐level. Taking the sum of all similar interventions that limit the ability of businesses to adjust, and that is a large sum, suggests that governments can deepen economic shocks.…”

“…While it is frequently invoked (Leeson and Subrick, 2006; Boettke et al ., 2007), with a few notable exceptions, it has never been used econometrically‐speaking to make the case that economic freedom makes economies more robust to shocks. The main exceptions are Bjørnskov (2016) and Geloso and Bologna Pavlik (2020). Bjørnskov (2016) used the Fraser Institute's Economic Freedom of the World (EFW) index to study the effect of 212 macroeconomic crises in 175 countries from 1993 to 2010.…”

“…He found that recessions were milder and shorter‐lived with higher levels of economic freedom. Geloso and Bologna Pavlik (2020) for their part found—using a different data set of economic freedom for the distant past—that economic freedom mitigated the damages caused by the pandemic of 1918. Both of these exceptions suggest that economic freedom serves to make economies better able to cope with exogenous shocks—including pandemics.…”

“…The pandemics of the 19th century that we include included no strong responses of government. The pandemic of 1918 occurred in wartime and governments made sizable effort to censor information as a result (Geloso and Bologna Pavlik, 2020). Responses to the 1957–58 and 1968–70 influenza pandemics were also minimal or inexistent (Henderson et al ., 2009; Honigsbaum, 2020).…”