Human Freedoms Make Better Markets

October 24, 2017

Perth TolleGovernments that treat their citizens better tend to have stronger markets. That's the premise underpinning the Life + Liberty Emerging Markets Index, which uses human and economic freedom metrics as the primary factors in its investment selection process.

Recently, spoke with Perth Tolle, founder of Life + Liberty Indexes, about their flagship index. Before forming Life + Liberty Indexes, she was a private wealth advisor for Fidelity Investments in Texas and California. Tolle has lived and worked in Beijing, Shanghai and Hong Kong, where she learned firsthand the relationship between freedom and market impact.

Tolle is a panelist at the upcoming Evidence-Based Investing Conference, presented by Ritholtz Wealth Management and IMN on Nov. 2. What does evidence-based investing mean in the context of emerging markets?

Perth Tolle: Basically, the empirical evidence shows that freer markets grow faster, they're more innovative, they're more resilient. They use their human capital more efficiently. Data shows the freer a market, the higher its GDP growth and per capita income.

And it's not only economic freedoms, but human freedoms that play a part in this. You can't be "half-free." How do you mean?

Tolle: Look at China. It's Exhibit A of [a market that’s experiencing] tremendous economic-freedom growth from an abysmally low base. That alone has propelled them into what they are now, in just 30 years. But now they've hit a ceiling of sorts, because they haven't coupled those economic freedoms with human freedoms. Instead, human freedoms continue to decline.

If they'd allow people to be free, and if they would encourage innovation and creativity, they'd be more efficiently using their human capital. They'd have less human capital flight, even destruction that they're experiencing right now. If they were to actually reform, not just in rhetoric, that would give them a huge advantage. Freedom is kind of a nebulous term. How do you define and evaluate "human" freedom, "economic" freedom, and so on?

Tolle: I categorize it into three properties: Life, Liberty and Property. "Life" refers to civil freedoms, "Liberty" is civil freedoms, and "Property" is economic freedoms. Economic freedoms have been quantified pretty well, but before this index, nobody else had quantified human freedoms as well.

So, under the category of "Life," some of the things we evaluate for each market are how much violent conflict there is, organized crime, terrorism, disappearances, detainment, torture and trafficking.

Under "Liberty," you've got things like the rule of law, due process, judicial independence, corruption, freedom of movement, freedom of expression, freedom of the press and assembly. These freedoms have been reported on in the past, but mostly in qualitative reports. We've developed a patent-pending process on how to quantify those freedoms instead. Something like human trafficking actually has a measurable impact on how a country's markets perform?

Tolle: That's human capital, right? Again, China is a prime example. China had the one-child policy for three decades. That led to a shortage of women in the country; in turn that led to heightened trafficking, not just in the country or in the region, but around the world, such as the high percentage of women who are trafficked in Colombia end up going to China.

Things like this don't stay contained. They have a ripple effect on other countries and regions as well. Basically, you're saying we can't treat markets as mechanical; we can't separate markets from the context in which they operate.

Tolle: Exactly. There's a quote by [investor and co-founder of Discovery Institute] George Gilder that I love: "An economics of systems only—an economics of markets but not of men—is fatally flawed." You can't ignore the people within the mechanical models.

How did we come to the innovations we have right now? The iPhone, for example, or the automobile—nobody could have predicted they would be invented and change the way we do things in such dramatic fashion. These are the surprises that arise from human creativity, the things that create wealth and change the world.

There are so many factors in investing now. But freedom is a new factor, something that's never been used before. It's a new way to drive alpha, especially in emerging markets.


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