IT'S A SMALL WORLD AFTER ALL: INTERNET ACCESS AND INSTITUTIONAL QUALITY

I. INTRODUCTION For more than 20 years economic freedom has been on the rise throughout the world. The Fraser Institute scores individual countries in terms of their economic freedom on a scale of 0-10, with 10 indicating most free. The average Economic Freedom of the World (EFW) score rose from about 5.7 in 1990 to about 6.9 in 2010. This increase of 1.2 points followed 20 years of stagnation where the average score declined slightly from about 5.88 in 1970. Starting in 1990, however, the average country saw its government expenditures share shrink, its regulations of markets become less burdensome, and its barriers to international trade become smaller. (1) The time period since 1990 has also corresponded to increasing global interconnectivity associated with the proliferation of the Internet. Following the introduction of commercial Internet service providers (ISPs) in 1989, the rate of worldwide Internet use has grown exponentially. Starting from less than .05% of the world population in 1990, nearly 30% of people used the Internet in 2010, and nearly 35% in 2012. (2) In this paper, we ask if these corresponding trends--increasing Internet use and increasing economic freedom--are not merely coincidental. To wit: is Internet use an important impetus for institutional change? Numerous researchers have stressed the importance of institutional quality for economic growth and well-being. (3) As Rodrik, Subramanian, and Trebbi (2004) famously proclaimed: institutions rule. The concept of economic freedom embodies various dimensions of institutional quality that have been shown to positively correlate with growth in cross-country samples (e.g., Ayal and Karras 1998; Dawson 1998; Gwartney, Lawson, and Holcombe 1999; Heckelman and Stroup 2000; Young and Sheehan 2014). (4) Economic freedom has, furthermore, been shown to correlate positively with health outcomes (Stroup 2007), political freedoms (Lawson and Clark 2010), the extent of trust within a population (Berggren and Jordahl 2006), and measures of subjective well-being (Gehring 2013; Nikolaev 2014; Ovaska and Takashima 2010). (5) Understanding which factors lead to the expansion of economic freedom is of clear importance to students of economic development. We estimate the relationship between Internet use and changes in EFW scores in a panel of up to 114 countries for the years 1990 through 2010. The estimated relationship is generally positive, but it also appears to be conditional on a country's initial level of economic freedom. Starting from an EFW score of about 6 or lower, the marginal effect is positive and statistically significant. Countries with 2010 EFW scores around this threshold included China, Nigeria, and Pakistan. Alternatively, our preferred estimates imply that starting from a score of about 7.7 or higher the relationship turns negative, and that the negative marginal effect is statistically significant starting from EFW scores greater than 8.5. However, only two countries, Hong Kong and Singapore, had 2010 EFW scores greater than 8.5. Our research is motivated by several studies that empirically identify cross-country institutional spillovers and their effects. Bosker and Garretsen (2009) find that an important determinant of a country's economic growth is the institutional quality of its neighbors. Leeson and Dean (2009), Seldadyo, Elhorst, and de Haan (2010), and de Groot (2011) all report evidence suggesting that countries cluster according to their institutional qualities. Furthermore, Simmons and Elkins (2004) find that countries do not indiscriminately copy their neighbor's policy innovations; rather, they specifically adopt liberalizing innovations. In all of the above studies, a country's neighbors are defined in the conventional, geographic sense of the term. Our point of departure is to acknowledge that the Internet allows individuals to transcend geography. In discussing the importance of institutional quality for economic development, Hayek (1960, 30) stresses that "we should provide the maximum of opportunity for unknown individuals to learn of facts that we ourselves are yet unaware of and to make use of this knowledge in their actions. …