Monday, November 13, 2017

Strong Property Rights Lead to Economic Prosperity

In July 2017, the Property Rights Alliance at Americans for Tax Reform published the 2017 International Property Rights Index (IPRI), ranking 127 countries around the world based on the strength of both physical and intellectual property rights. The 2017 edition comprises over 98% of global gross domestic product (GDP) and over 93% of the world’s population. Importantly, the IPRI finds that property rights are a defining factor impacting a country’s investment, entrepreneurship, and economic prosperity.
The International Property Rights Index includes three core components (legal and political environment, physical property rights, and intellectual property rights) and ten corresponding categories. The legal and political environment component includes judicial independence, rule of law, political stability, and control of corruption. The physical property rights component includes the protection of such rights, the ability to register property, and the ease of access to loans. The intellectual property rights component includes the protection and enforcement of such rights, strength of patent protections, and the level of copyright piracy. Using data from other international indices, the IPRI compiles these scores into a 0-10 scale for each of the 127 countries.
New Zealand ranks highest with a score of 8.63, followed by Finland and Sweden with scores of 8.62 and 8.61, respectively. The United States ranks 14th with a score of 8.07, moving up from 15th in 2016 when it scored a 7.74. On the other hand, the bottom three countries are Bangladesh, Venezuela, and Yemen, with scores of 3.12, 3.06, and 2.73, respectively.
Significantly, the Index provides insight into correlations between IPRI scores and many economic outcomes. Free State Foundation scholars often have stated that strong protection of property rights, specifically strong protections of intellectual property rights, will foster creativity, innovation, and economic growth. The strong positive correlations found in the IPRI are consistent with those statements. For example, IPRI scores have a correlation coefficient of 0.814 with GDP per capita, 0.764 with gross capital formation per capita, and 0.878 with global entrepreneurship. Other strong positive correlations include a 0.857 coefficient with networked readiness/connectivity, 0.801 with civic activism, and 0.768 with overall economic freedom.
With these robust positive correlations, it should not be a surprise that the top 20% of countries in the IPRI have an average GDP per capita of over $57,000, while the bottom 20% of countries have an average GDP per capita of just over $4,500.
The IPRI, in addition to the U.S. Chamber of Commerce’s Global Intellectual Property (IP) Center’s 2017 edition of the International IP Index, provide U.S. policymakers a useful tool for assessing how to improve our country’s physical and intellectual property rights systems. (See this February 2017 blog.) Providing strong protections to property rights is a principle embodied in the U.S. Constitution and improving such protections will enhance creativity and innovation and foster economic growth. (For much more concerning foundational principles supporting IP rights protections in the United States, please read “The Constitutional Foundations of Intellectual Property: A Natural Rights Perspective” by FSF President Randolph May and Senior Fellow Seth Cooper.)
Additionally, policymakers in the countries which rank towards the bottom, such as Venezuela or Yemen, should use these indices to their advantage. From the correlations cited above, it is clear that strong physical and intellectual property rights foster innovation and economic prosperity. As undeveloped and developing countries continue to improve their property rights protections, U.S. companies will be more inclined to expand international trade into those countries, creating economic opportunities in impoverished parts of the world. Robust property rights reduce poverty by incentivizing economic activity because entrepreneurs understand that their innovations and earnings will be protected.

Finally, the U.S. must continue to be a leader throughout the world by participating in trade agreements that contain effective provisions that support protection of property rights. As more countries adopt strong property rights through trade agreements, the global economy will grow substantially because mutual gains from international trade are much higher when participating countries adopt and enforce laws that protect physical and intellectual property rights.