Boston - Intergenerational mobility has long been considered critical for economic growth in emerging markets (EM) economies, given its association with higher per capita GDP and lower poverty rates. As EM investors, we believe that a better understanding of mobility can yield important insights into the areas of reform that support improved long-term growth and social outcomes.
To this end, in our recent study "Making Education Investment Grade: The Hidden Returns to the Mobility of Economic Freedom,"1 we examine the effects of economic policy on educational attainment and mobility for five generational cohorts over the 1940s to 1980s.
To measure how different policy areas affect mobility, we use regression analysis to investigate the relationship between economic freedom and intergenerational persistence (IGP). Economic freedom is a framework for analyzing and scoring economic policy developed by the Fraser Institute, while IGP is a relative measure of intergenerational mobility in educational attainment that we use as a proxy for income mobility.
A key strength of the Fraser Institute's economic freedom index is its constituent subindexes, which cover five key areas including the legal system and property rights, freedom to trade internationally, size of government, sound money and regulation. For the IGP data, we use figures from the World Bank's Global Database on Intergenerational Mobility (GDIM), which provides the most comprehensive survey of mobility available.
In our analysis, we regress all five primary indicators and the overall economic freedom score against IGP data for each country within each cohort. As our control variable, we selected rural population share by country, as it is inversely related to life expectancy and serves as a useful indicator of economic development.
Policies that Empower Change
In the chart below, we present our findings. The R-squared values are an indicator of the relationship strength between mobility and the different economic policy areas. Analyzing these values, we find meaningfully positive relationships between mobility and a sound money supply, regulation and the legal system.
One possible explanation is that individuals prefer to make more long-term investments, such as an investment in their children's education, when they are certain that future income from this investment will be protected by strong institutions, such as the rule of law and private property rights. Furthermore, when there are fewer restrictions on credit and easier access to lending, barriers to investing in education are lowered for many parents.
Another important finding that we can surmise is that government size has little to no bearing on mobility, no matter the cohort. In short, large expenditure by the state are not guaranteed to generate better outcomes over generations on their own, as many might expect.
Rule of Law and Sound Money Matter Most
Sources: World Bank. Global Database on Intergenerational Mobility (GDIM), 2018; Fraser Institute. "Economic Freedom of the World: 2020 Annual Report."
An Edge for Investors
By connecting economic freedom with relative mobility in educational attainment, we find that countries that prioritize the liberalization of certain aspects of their political economy enjoy higher levels of relative mobility in education.
For investors, this observation may help better assess which kinds of policies are more likely to lead an emerging markets economy toward higher growth and better socioeconomic well-being. Reform programs have long been a good indicator of attractive returns for emerging markets investors, but mobility data provides a more incisive look at which kinds of reforms — monetary and legal — are most impactful when investing for the long term.
Bottom line: As investors, we believe that investigations into socioeconomic mobility are vital to help us understand what types of policies drive long-term growth and societal improvements in emerging economies. The Eaton Vance emerging markets team plans to continue using such insights to seek value for our clients.
- Stocker, M., Boers, J. "Making Education Investment Grade: The Hidden Returns to the Mobility of Economic Freedom." Eaton Vance white paper, October 2021.