Good Neighbors

Is capitalism contagious?


Every policy maker wants to expand markets, wealth, and human freedom. The economists Russell S. Sobel of West Virginia University and Peter T. Leeson of George Mason University think they know how to accomplish all three at almost no cost. According to their 2006 paper "Contagious Capitalism," nations whose neighbors have liberalized markets themselves become more economically liberated. If their neighbors have free trade policies, those nations engage in freer trade too.

The Sobel-Leeson study, which has been updated and included in the Cato Institute's 2007 Economic Freedom of the World report, assigns every nation an "Economic Freedom Rating" from one to 10. The highest score went to Hong Kong, which netted an 8.9; the lowest went to Zimbabwe, which got a 2.9. The worldwide average is 6.5. As one country's economic freedom increases, its neighbors' freedom inches up. A one-point rise in one country leads to a 0.2 increase in a country on its border. A country surrounded by rising economic freedom rates sees this its score increase by 0.2 point for each border.

"What our data suggest is that trading partners end up catching institutions from other trading partners," Sobel says. More than that, Sobel and Leeson's findings suggest that the more violent methods of spreading freedom—embargos, invasions, coups—are less effective than free trade. Sobel points to Cuba as a nation that would immediately become more free if its massive American neighbor reopened trade lines.

"Even if you turn Iraq into a model of democracy," Sobel says, "the effect on the rest of the Middle East would be minimal at best. Compare that to effects you get from trade: They're slightly larger. So what would be better policy for making the Middle East more free?"