December 6, 2001

December 6, 2001 | Backgrounder on Trade, Economic Freedom

Expand Freedom to Counter Terrorism

"There is a current in history and it runs toward freedom. Our enemies resent it and dismiss it, but the dreams of mankind are defined by liberty...."
--President George W. Bush1

Policymakers in Europe, the United States, and various developing nations have proffered a variety of "root causes" of terrorism. Some argue that America's foreign policy, particularly its support of Israel, is primarily responsible. Others place the blame on the poverty that pervades much of the developing world. In fact, the terrorists themselves are responsible for their actions. Placing blame elsewhere inappropriately portrays terrorists as powerless pawns merely reacting to third parties. This is not the case. America should not accept this rejection of responsibility, but instead should hold terrorists fully responsible for their brutal actions.

There is ample evidence, however, that the poverty caused by a lack of economic freedom fuels the resentment, desperation, and hopelessness that terrorist organizations utilize to recruit new members and muster support for their activities. A key component of any long-term solution to terrorism, therefore, must be eliminating the circumstances under which people are susceptible to the enticement of terrorists by promoting economic freedom around the world. Specifically, the Administration and Congress should cooperate in reforming U.S. foreign policy to advance economic freedom through these steps:

  • Pass trade promotion authority (TPA) . Economic liberalization is central to increasing growth in developing nations. For the United States to be an active participant in forging trade agreements bilaterally with developing countries and during the next round of the World Trade Organization meetings, President George W. Bush must be given the authority necessary to negotiate trade agreements successfully.
  • Establish links between development assistance and economic freedom . Since 1945, the United States has committed approximately $500 billion in bilateral assistance to promote development in developing countries, but this assistance has had not created economic growth for recipients.2 Congress and the Administration should cooperate in crafting legislation that establishes a more immediate link between assistance that is intended to promote economic development (as opposed to humanitarian relief or the advancement of U.S. security interests) and the policies of the governments of recipient countries that are conducive to economic growth.
  • Urge international financial institutions to focus on policies that promote economic freedom . The International Monetary Fund (IMF) and World Bank have established dismal track records in promoting economic growth. Until the IMF and World Bank are reformed, they will continue the activities that have proved ineffective and, in many cases, counterproductive in the past.

Despite the claims of many terrorists, the governments of developing countries are not puppets of the United States and America is not responsible for poverty in the developing world. On the contrary, developing countries would be much freer economically and politically if America were setting policy.

The governments of those countries must be held responsible for policies that undermine or oppose freedom, stifle economic growth, and help create the circumstances under which terrorism flourishes. America's battle in Afghanistan against the Taliban regime and al-Qaeda terrorist network is merely the first skirmish in a long war. If the war on terrorism is to be won, and if this victory is to be sustainable, America must focus on encouraging the governments of developing countries to embrace economic liberty in order to counter the poverty and desperation upon which terrorist groups depend.

Economic Repression Breeds Terrorism
Some policymakers in Europe and the United States, and some leaders of international organizations, have criticized America's war on terrorism as ineffective because it does not address the "root causes" of terrorism. For instance, at a September 19, 2001, press conference, United Nations Secretary-General Kofi Annan said that

As part of that fight we should intensify our efforts to get to the root causes...conflict, poverty, ignorance and racism. Indeed, people who are desperate and in despair become easy recruits for terrorist organizations.3

These policymakers are right to cite poverty and repression as a factor in terrorism. Lack of options to improve living standards generates great anger that can be twisted to support terrorism. But external factors cannot be blamed either for terrorism or for the poverty that allows it to take root. The governments of these countries, not the United States or other external agents, are the source of "poverty and despair" through their economic policies.

The hopelessness and poverty in many developing nations are not due to a paucity of development assistance. On the contrary, as World Bank economist William Easterly illustrates in Figure 6.1 of his 2001 book The Elusive Quest for Growth, there is an inverse relationship between the amount of IMF and World Bank lending and per-capita growth in those countries. As Easterly notes:

The World Bank and the IMF pursued the ambitious hope of achieving "adjustment with growth".... The operation was a success for everyone except the patient. There was much lending, little adjustment, and little growth in the 1980s and 1990s. A later study showed that World Bank Projections overestimated long-run growth in adjustment lending recipients by 3.5 percentage points. The per-capita growth rate of the typical developing country between 1980 and 1998 was zero. The lending was there but the growth wasn't.4

Poverty is a condition that is largely imposed on a people through ill-conceived and repressive economic policies. The solution to poverty is to provide greater economic freedom, because only economic freedom can provide the opportunities that lead to greater growth.

Numerous studies have shown that greater economic freedom leads to increased economic growth.5 This is particularly true for developing nations. Statistics show that developing nations that open their markets to foreign capital, investment, and trade are more prosperous than those that close their markets. This relationship is illustrated in Chart 1.

Contrary to the arguments of anti-globalization activists, economic growth benefits the poor as well as the wealthy in developing nations. Two recent World Bank studies conclude that the income of the poor (defined as the bottom one-fifth income bracket) in developing countries rises in proportion to the economic growth of their respective nations.6 Although variance is wide, Chart 2--which graphs the relationship between the 2002 Index of Economic Freedom scores and the Human Development Index scores from the United Nations Development Program--illustrates that there is a similarly positive relationship between economic freedom and increased human development.7

This pattern is confirmed when the average level of education (measured by literacy) and general welfare (measured by life expectancy) are viewed with respect to the four levels of economic freedom as measured by the Index (see Chart 3).

  • Education . Literacy among free economies is nearly universal at 97.8 percent of the adult population, and the mostly free economies are close behind, with a literacy rate of 89.3 percent of the adult population. The mostly unfree economies have an average adult literacy rate of only 71.4 percent and are actually outperformed by the repressed economies, which have an adult literacy rate of 81.6 percent. It should be noted, however, that the literacy rate of repressed economies falls sharply if the six nations that were not scored in the 2002 Index due to economic and political chaos are included in the repressed category.
  • General Welfare . General welfare, as measured by life expectancy, is higher in free economies (where it averages 77 years) than any other group. Mostly free economies, at 71 years, have a life expectancy nearly 10 years higher than that of both the mostly unfree and repressed economies. As with education, the mostly unfree countries lag behind the repressed in welfare, but only if the six countries that are in economic or political chaos are not included in the repressed category.

By providing greater opportunities for people to improve their lives, economic freedom increases the well-being of individuals on average. Increased well-being creates greater tolerance and less resentment that can be used by terrorists to recruit supporters.

Consider the seven state sponsors of terrorism identified by the U.S. Department of State: Cuba, Iran, Iraq, Libya, North Korea, Sudan, and Syria.8 The 2002 Index of Economic Freedom , a joint publication of The Heritage Foundation and The Wall Street Journal, rates Cuba, Iran, Iraq, Libya, North Korea, and Syria as repressed economies. In fact, these six countries are all among the world's 12 least economically free economies.

Sudan escapes this list only because the country was suspended from rating because of a brutal civil war that is being waged by the government against its own people. Afghanistan, not included in the Department of State's list of terrorist sponsoring states, is also excluded from the 2002 Index because of a civil war and the lack of a functioning economy.9 While they did not receive formal rankings in the Index, the government in Khartoum and the Taliban that has been ruling Afghanistan clearly espouse repressive economic policies.

North Africa and the Middle East--generally regarded as the most concentrated source of terrorist activity--are regions with dismal levels of economic freedom, besting only sub-Saharan Africa in terms of average economic freedom. (See Chart 4.) In the 2002 Index, nine of the 17 countries in these regions have improved their scores since the 2001 edition. However, eight became less free, giving the region a net gain in economic freedom of only one country.

Due to their common lack of economic freedom, with its resultant poverty and the hopeless anger of their people over their inability to improve their lives, the Middle East and Africa share the same disease--instability and violence. In the Middle East, this disease manifests itself as terrorism more often than in political instability; in Africa, it manifests itself more often as instability than as terrorism.

It is no coincidence that the country that has made the greatest strides against terrorism, Bahrain, is also the most economically free country in the region. Embracing freedom has done wonders in curbing terrorism in Bahrain, as noted by The Wall Street Journal: "Five years ago that Arab nation faced political unrest, but after its democratic reforms Bahrain has had to confront relatively little anti-American sentiment now."10

Bahrain's lead is followed by the United Arab Emirates, Israel, Jordan, and Kuwait--all moderate states that have been relatively supportive of America's war on terrorism.

A Long-Term Strategy
The conflict in Afghanistan is merely the most immediate phase of the war on terrorism. For America and its allies to win the war and sustain this victory, they must adopt a strategy that attacks the incentives for terrorism.

This strategy must be centered on the promotion of economic freedom. As noted by U.S. Trade Representative Robert B. Zoellick:

[Terrorists] stand for intolerance and abhor openness. They fear foreign ideas, religions, and cultures. They see the modern world as a threat, not an opportunity. They leave people in poverty and half of humankind, women, in subjugation. Their strategy is to terrorize and paralyze, not to debate and create.

The international market economy...offers an antidote to this violent rejectionism. Trade is about more than economic efficiency; it reflects a system of values: openness, peaceful exchange, opportunity, inclusiveness and integration, mutual gains through interchange, freedom of choice, appreciation of differences, governance through agreed rules, and a hope for betterment for all peoples and lands.... Just as our Cold War strategy recognized the interconnection of security and economics, so must America's strategy against terrorism.11

In accordance with Zoellick's observations, to strengthen efforts to eliminate terrorism, the Administration should create incentives for countries to increase economic freedom. Specific policies to achieve this goal include:

  • Granting the President trade promotion authority (TPA) . Economic liberalization will benefit developing nations regardless of their access to U.S. markets. Access to the world's largest economy, however, would maximize the opportunities that will be created through economic liberalization in developing countries. For instance, even though America's trade agreement with sub-Saharan Africa (the African Growth and Opportunities Act) was entered into only in December 2000, total imports from sub-Saharan Africa increased 63 percent from January 2000 to January 2001, rising to $2 billion, including a 165 percent increase in imported precious stones and metals, a 68 percent increase in fuel and oil imports, a 49 percent increase in imported knit apparel, and a 17 percent increase in woven apparel.12

TPA is important because it ensures America's trading partners that the deals they strike with America's trade negotiators will not be undone through a congressional amendment. For the United States to be a leader in forging trade agreements with developing countries bilaterally and during the next round of the World Trade Organization meetings, President Bush must be given the authority necessary to negotiate trade agreements successfully.

  • Establishing links between bilateral development assistance and economic freedom . Since 1945, the United States has committed approximately $500 billion in bilateral assistance to promoting development in developing countries, but this massive transfer did not generate economic growth in the countries that received assistance.13 Congress and the Administration should cooperate in passing legislation that establishes a more immediate link between development assistance and the policies of the governments of recipient countries that are conducive to economic growth.

A model for the policies that should be included in such legislation is the International Responsibility and Self Sufficiency Act of 1998 (H.R. 3256), introduced by Representative Gerald Solomon (R-NY) in 1998. This legislation required the U.S. Agency for International Development to rank potential aid recipients with regard to their level of economic freedom and to dispense development assistance based on those rankings.14 The importance of maximizing the impact of America's foreign assistance has been highlighted by the September 11 attacks.

  • Urging international financial institutions to focus on growth . The IMF and World Bank have established dismal track records in promoting economic growth despite disbursing billions in development assistance. The IMF has given concessional development assistance to over 50 countries. Ironically, however, among countries for which data are available, growth in per-capita GNP was significantly higher, on average, in eligible countries that did not receive IMF concessional assistance than in countries that did receive it. Similarly, most less-developed countries that first received World Bank loans and credits between 1965 and 1970 and continued to receive assistance and advice from the World Bank over the next three decades are no better off today than they were before receiving such aid. In fact, many are worse off.15

The Administration and Congress must complement efforts to tie bilateral assistance to policies that increase growth with similar efforts to reform the practices of international financial institutions. Until the IMF and the World Bank are reformed, they will continue the activities that have proved ineffective (and, in many cases, counterproductive) in the past.

In addition to these policies, the Administration must be willing to deny assistance to countries that refuse to adopt policies that are conducive to economic growth. A World Bank analysis of past loans and credits found that assistance "has a positive impact on growth in countries with good fiscal, monetary, and trade policies."16 The study further found that "whatever the amount of aid, growth was minuscule, or even negative" for countries with poor management.17

These studies, combined with a previous World Bank study concluding that "aid appears not to affect policies either for good or for ill,"18 put the onus on governments to adopt policies conducive to growth. Policy reform in other nations cannot be forced, but the United States can refuse to subsidize bad policy through aid.

Conclusion
Economic repression in many developing countries provides fertile ground for terrorism. As noted by President Bush in his November 13 speech to the United Nations General Assembly:

We face enemies that hate not our policies, but our existence; the tolerance of openness and creative culture that defines us. But the outcome of this conflict is certain: There is a current in history and it runs toward freedom. Our enemies resent it and dismiss it, but the dreams of mankind are defined by liberty--the natural right to create and build and worship and live in dignity. When men and women are released from oppression and isolation, they find fulfillment and hope, and they leave poverty by the millions.

These aspirations are lifting up the peoples of Europe, Asia, Africa and the Americas, and they can lift up all of the Islamic world.19

Governments that resist economic liberalization have only themselves to blame for the rise of terrorist groups that threaten their own countries as much as the United States. America's battle in Afghanistan against the Taliban regime and al-Qaeda terrorist network is merely the first skirmish in a long war. If the war on terrorism is to be won and victory is to be sustained, America must focus on encouraging the governments of developing countries to embrace economic liberty, which is the solution to the poverty and desperation that provides a fertile environment for terrorists.

Brett D. Schaefer is the Jay Kingham Fellow in International Regulatory Affairs in the Center for International Trade and Economics at The Heritage Foundation.


1. Remarks by President George W. Bush to United Nations General Assembly, November 13, 2001.

2. The U.S. Senate Committee on Foreign Relations has estimated that the U.S. spent $450 billion on development assistance between 1946 and 1996. See Report 104-99 to accompany S. 961, the Foreign Aid Reduction Act of 1995, p. 12.

3. Transcript of press conference by President Jacques Chirac of France and Secretary-General Kofi Annan, SG/SM/7964, United Nations, September, 19, 2001, at http://www0.un.org/News/Press/docs/2001/sgsm7964.doc.htm.

4. William Easterly, The Elusive Quest for Growth (Cambridge, Mass.: MIT Press, 2001), pp. 102-103.

5. See Craig Burnside and David Dollar, "Aid, Policies, and Growth," World Bank, Policy Research Department, Macroeconomic and Growth Division, June 1997; David Dollar and Lant Pritchett, Assessing Aid: What Works, What Doesn't and Why, World Bank Policy Research Report, 1998; Robert J. Barro, "Rule of Law, Democracy, and Economic Performance," in Gerald P. O'Driscoll, Jr., Kim R. Holmes, and Melanie Kirkpatrick, 2000 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2000) pp. 31-51; Alejandro A. Chafuen and Eugenio Guzmán, "Economic Freedom and Corruption," in ibid., pp. 51-65; and William W. Beach and Gareth G. Davis, "The Institutional Setting of Economic Growth," in Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick, 1999 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones and Company, Inc., 1999), pp. 1-21.

6. David Dollar and Aart Kraay, "Growth Is Good for the Poor," World Bank, Development Research Group, March 2001, at http://www.worldbank.org/research/growth/pdfiles/GIGFTP3.pdf, and David Dollar and Aart Kraay, "Trade, Growth, and Poverty," World Bank, Development Research Group, March 2001, at http://www.worldbank.org/research/growth/pdfiles/Trade5.pdf.

7. See 2002 Index of Economic Freedom, at http://www.heritage.org/bookstore/2001/index2002/, and Human Development Report 2001: Making New Technologies Work for Human Development, United Nations Development Program, at http://www.undp.org/hdr2001/.

8. "Overview of State-Sponsored Terrorism," in Patterns of Global Terrorism--2000, Office of the Coordinator for Counterterrorism, U.S. Department of State, April 2001, at http://www.state.gov/s/ct/rls/pgtrpt/2000/index.cfm?docid=2441.

9. See Brett D. Schaefer, "The Best Humanitarian Aid for the Afghan People: Oust the Taliban," Heritage Foundation Backgrounder No. 1498, October 25, 2001, at http://www.heritage.org/library/backgrounder/bg1498.html.

10. Editorial, "The Saudi Contradiction," The Wall Street Journal, October 30, 2001, p. A22.

11. U.S. Trade Representative Robert B. Zoellick, "The WTO and New Global Trade Negotiations: What's at Stake," speech before the Council on Foreign Relations, Washington, D.C., October 30, 2001, at http://www.ustr.gov/speech-test/zoellick/zoellick_10.pdf.

12. "U.S. Trade and Investment Policy Toward Sub-Saharan Africa and Implementation of the African Growth and Opportunity Act," A Report Submitted by the President of the United States to the United States Congress, Prepared by the Office of the United States Trade Representative, May 2001, p. 106, at http://www.ustr.gov/regions/africa/repo_2001.pdf.

13. See note 2, supra.

14. See Bryan T. Johnson "The International Responsibility and Self Sufficiency Act," Heritage Foundation Backgrounder No. 1153, January 26, 1998, at http://www.heritage.org/library/categories/forpol/bg1153.html.

15. For a detailed history of the IMF and the World Bank, and the actions leading up to their creation, see Brett D. Schaefer, The Bretton Woods Institutions: History and Reform Proposals, Heritage Foundation Economic Freedom Project Report No. EFP00-01, April 2000.

16. Burnside and Dollar, "Aid, Policies, and Growth," cover.

17. Dollar and Pritchett, Assessing Aid: What Works, What Doesn't and Why, p. 36.

18. Burnside and Dollar, "Aid, Policies, and Growth," cover.

19. Remarks by President George W. Bush to United Nations General Assembly, November 13, 2001.

About the Author

Brett D. Schaefer Jay Kingham Senior Research Fellow in International Regulatory Affairs
The Margaret Thatcher Center for Freedom