Thursday, April 27, 2017

Individual Rights and Government Influence Help to Start Economic Clusters

Government administrators often wonder how to foster business within their cities and improve overall economic development. The debate between more or less government influence has been raging since the beginning of the country. A study of socio-economic clusters in the Applied Economics Letters helps us understand the government influence in the beginning of cluster development is helpful while it may not be as helpful later on (Huskinson & Lawson, 2014).

Capitalistic societies desire to have a "hands off" approach to government while socialist societies want more government influence. Using K-means clustering helps us identify that the free market capitalistic system along with social policies can help get clusters going. At least in the short run, social-democratic systems outperform liberal systems. The reasons might be based in the need to set the "right" conditions for economic growth.

They used a K-means cluster analysis to determine their results. The method is to take observations (data points) and then associate them to the nearest cluster mean. Each new piece of data is added to the closest cluster and helps recalculate the mean. The method can be done by hand but often uses statistical software.

They used an EFW index, with data for five areas:
(1) size of government,
(2) legal system and property rights,
(3) sound money,
(4) freedom to trade internationally and
(5) regulation.

What they found was that the most free nations earned higher incomes, had larger GDP, and life expectencies. However, social based nations had higher civil rights and civil liberties. The essential mix seemed to focus on how those nations where government protects individual rights and the freedoms of individuals had higher cluster development.

This would make sense if we consider a cluster a mini-economy. One doesn't need to adapt a socialist system but simply protect individual rights within the cluster and ensure the right elements are available when a cluster begins. As clusters are innovative by nature it is beneficial to protect and allow for maximum freedoms for individuals to be entrepreneurial within the system.

Thus the study found that the free market system along with protections of individual rights have a significant impact on cluster growth. It doesn't elaborate on why. However, one could put forward the idea that setting the right elements in place based on taxes, development zones, recruiting businesses, etc.. require a collaborative effort to get clusters going in the beginning but may not be as important later on as the cluster businesses find "footing" and their own efficiency. Still, protecting individual rights continues to allow for the maximum freedom of individuals to maintain their entrepreneurial activities.

Huskinson, T. & Lawson, R. (2014). Clusters of Economic Freedom. Applied Economics Letters, 21 (13-15). 

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