Development and freedom as risk management

- Development and freedom allow individuals to better cope with risk and uncertainty.
- Volatility of consumption growth is negatively related to life expectancy, political rights, and property rights.
- Volatility of consumption growth is positively associated with literacy.
- These results are stronger for Latin American countries.

Amartya Sen has argued that many development and freedom measures such as health, education, political and civil liberties are important constituents of human welfare. We concur with Sen and conjecture that an important reason these measures affect human welfare is because they allow individuals to better cope with risk and uncertainty that cannot be hedged using market based insurance mechanisms. We find some empirical support for this conjecture in that the volatility of consumption growth appears to be negatively related to life expectancy, political rights, and property rights (but is positively related to the rate of literacy) after controlling for the size of the country, per capita income, and openness to trade and capital flows, (which, as one would expect, also reduce consumption growth volatility) in cross-country panel regressions.