Milk Without the Cow: The Relationship Between Innovation and Freedom

by Shamil Ibragimov, Scholar-in-Residence, Legatum Center

"You want the milk without the cow,"

 MIT Professor Loren Graham remarked in response to a straightforward question from Herman Gref, Chairman of Russia’s largest state bank, Sberbank: “Can Russia compete?” Graham’s answer, though longer, cut to the heart of the issue.  He emphasized that while Russia boasts technical expertise, it lacks the freedom needed to translate inventions into commercial success.  True innovation, the successful commercialization of invention, demands an environment where ideas can circulate freely, dissent can be expressed, and entrepreneurs are empowered. But in Russia, despite the government’s efforts to build innovation cities, the political climate of suppression, authoritarian control, and legal manipulation suffocates the very conditions that innovation requires. In Graham’s words, they want the benefits of progress, "the milk," without embracing the openness, "the cow," that makes it possible.

North and Thomas, authors of "The Rise of the Western World," argue that growth isn't driven just by technical factors, but by the institutional conditions that enable innovation. Some scholars have questioned why institutions differ between countries, suggesting that societal norms, values, and organizational principles may influence the quality of institutions. Acemoglu, Johnson, and Robinson, in "Why Nations Fail," argue that political institutions and fair resource distribution are key drivers of economic growth. But the question remains: what are the prerequisites for fair resource distributions and inclusive institutions? What drives citizens to claim and develop those drivers of economic growth? In "The Power of Freedom," Jean-Pierre Chauffour proposes that freedom—economic, civil, and political—fuels growth in emerging markets. He argues that institutions built on this broad concept of freedom significantly impact economic development and that respecting human rights is vital for sustainable progress. Chauffour challenges the traditional approach, claiming that empowering individuals with freedom leads to growth and dignity.

However, the link between freedom and economic growth is complex. While freedoms do promote growth and innovation, relationships are often non-linear. Additionally, applying Western-style freedoms in developing markets presents unique challenges that need careful consideration.

Some authoritarian regimes, like China and Singapore, have experienced economic success, but these are exceptions. Their growth models rely on controlled economic freedoms rather than broad civil liberties. In China, for instance, Yasheng Huang argues in "Capitalism with Chinese Characteristics" that state-directed capitalism and selective liberalization drive its growth. Similarly, Singapore’s economic success occurred under limited political competition but with strong institutions and economic freedom. These cases show that while economic freedoms can foster growth, they don't necessarily come with full civil liberties.

While economic freedom with limited civil liberties may lead to growth in the short to mid-term, this approach can create long-term challenges. As the middle class grows, so do their expectations for greater political inclusion and personal freedoms. Over time, the absence of these freedoms may lead to civil unrest or tension, as people seek more control over their lives and government. Without addressing these demands, authoritarian regimes may face increasing pressure, which could destabilize the economic gains they have achieved. This suggests that sustainable growth requires not just economic freedom but also broader civil and political liberties.

Looking at the economic performance—good and bad—of more than 100 countries over the last 30 years, we must re-examine the long-term relationship between freedom and economic growth; and disentangle the respective role of economic freedom, civil, and political liberties, and the pursuit of economic, social and cultural rights on economic growth. 

Economic freedom and civil liberties collectively satisfy people's demands and drive technological progress and economic growth. Sustained economic growth, in turn, creates conditions for achieving various human development goals. Friedman argues that economic growth yields benefit beyond the material, bringing "greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy" (2005: 4). Conversely, economic stagnation or decline tends to erode citizens' "moral character," resulting in decreased tolerance, openness, and generosity towards disadvantaged groups and undermines the trust what turns citizens to keep their savings in jurisdictions they have more trust to, benefiting them, instead of their home markets. We can see manifestations of this claim in a few examples like economic crises in Greece (2009-2018), with severe recession, high unemployment, austerity measures that expressed in rise in xenophobic attitudes and support for far-right parties like Golden Dawn and increased hostility towards immigrants and refugees. There was also a capital flight as citizens moved savings to foreign banks, particularly in Germany. A very similar pattern witnessed in Russia in the recent years, exacerbated after invasion of Ukraine.

To further illustrate the relationship between freedom and economic outcomes, we can look at quantitative measures. The Economic Freedom Index, published annually by the Heritage Foundation, shows a strong positive correlation between economic freedom and GDP per capita. Countries in the top quartile of economic freedom have an average GDP per capita of $63,591, compared to $6,937 for those in the bottom quartile (Miller et al., 2023). But as we know, correlation does not imply causation, and other factors such as institutional quality, human capital, and natural resources also play significant roles in economic development.

However, economic freedom is just one dimension of individual liberty. Civil rights and political liberties are equally fundamental. Amartya Sen in his book "Development as Freedom" argues that securing economic rights alone will not achieve expected economic benefits if civil and political rights are violated. When the state engages in physical harm against its citizens, the resulting climate of fear is unlikely to foster innovation, investment, and growth. These three dimensions of freedom aim to liberate individuals from various forms of state and non-state oppression.

At the Legatum Center for Development and Entrepreneurship at MIT, we focus on emerging markets, which we refer to as “growth markets.” These are regions not only experiencing economic expansion but also striving to transform their ecosystems to embrace innovation and participate in the global knowledge economy. While building the necessary institutions and legal frameworks for entrepreneurial growth is essential, identifying the true agents of change—those who cultivate and foster innovative ecosystems—is equally crucial. These individuals and organizations create the fertile conditions necessary for sustainable innovation to thrive and scale in growth markets. Returning to Graham's metaphor, civil organizations and entrepreneurs advancing individual, political, economic and civil freedoms are the "cows" that produce the "milk" of innovation and a knowledge-based economy.

In efforts to effect systemic change, it is important to pay attention to this level of intervention, enhancing collaboration with civil society actors. This includes enhancing understanding of the relationships between innovation levels and freedoms, and between entrepreneurs' openness and risk-taking propensity and existing state-level barriers. What makes a certain city or a region attractive for global talents nowadays, in the time of rising authoritarianism globally, are factors of freedom and security that the bright minds of today's innovators are looking for. By recognizing these interconnections and supporting civil society's role in fostering an environment conducive to innovation, emerging economies may be better positioned to develop thriving knowledge-based sectors and participate more fully in the global innovation landscape.

It's worth noting that technological advancements are changing the traditional relationships between freedom, innovation, and economic growth. The digital revolution has created new forms of economic and social freedoms that can sometimes circumvent traditional barriers. For example, Estonia's pioneering e-governance system has significantly enhanced economic and civil freedoms, fostering a thriving innovation ecosystem (e-Estonia, 2023). This demonstrates how digital technologies can create new pathways to freedom and economic development, even in smaller economies.

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Another critical factor to consider is the impact of freedom on human capital mobility. The OECD (2008) report on "The Global Competition for Talent" highlights how countries with greater economic, civic and political freedoms tend to attract and retain skilled professionals more effectively. This "brain gain" can significantly boost a country's innovation capacity and economic growth potential. Conversely, restrictions on freedom can lead to a "brain drain," depriving countries of their most talented innovators and entrepreneurs.

Growth markets stand at a unique crossroads, poised to forge new pathways to innovation and economic liberty that legacy nations often struggle to replicate. These markets present a diverse landscape of challenges and opportunities, each with its own distinctive ecosystem of civil society and entrepreneurial engagement. For instance, in Central Asia, we observe that advocacy for economic, civic, and personal liberties often falls to a thin layer of civic activists, quite often oppressed by political regimes as "advocates for Western values," while the entrepreneurial community maintains a cautious, "politically neutral" stance. This contrasts sharply with other growth markets, where entrepreneurial communities actively champion civil and economic liberalization, serving as powerful catalysts for change.

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The Legatum Center understands that fostering systemic change in growth markets requires more than just supporting entrepreneurial ventures—it demands a deep, tailored approach that addresses the unique socio-political and economic landscapes of each region. Our mission is to go beyond traditional entrepreneurship support by equipping innovators with the skills to navigate complex systems and transform their environments. By helping them to bridge the gap between innovation and institutional reform, we nurture a new generation of leaders who can shape sustainable ecosystems of freedom, innovation, and economic progress.

Returning to the metaphor of “milk without the cow”, true innovation cannot flourish without the underlying conditions that enable it. Just as you can't have the benefits of progress without freedom, you can't foster lasting change without the institutions, freedoms, and civic frameworks that support it. At the Legatum Center, we are committed to ensuring that growth markets don’t just adopt the outward signs of success but cultivate the foundations—like freedom, inclusivity, and systemic understanding—that make innovation possible. In doing so, these markets not only catch up with legacy economies but may lead the way in pioneering new models of inclusive, sustainable development for the global stage.

References

• Acemoglu, D., & Robinson, J. A. (2012). Why nations fail: The origins of power, prosperity, and poverty. Crown Business.
• e-Estonia. (2023). e-Estonia — We have built a digital society and we can show you how. https://e-estonia.com/
• Friedman, B. M. (2005). The moral consequences of economic growth. Alfred A. Knopf.
• Huang, Y. (2008). Capitalism with Chinese characteristics: Entrepreneurship and the state. Cambridge University Press.
• Miller, T., Kim, A. B., & Roberts, J. M. (2023). 2023 Index of Economic Freedom. The Heritage Foundation. https://www.heritage.org/index/
• North, D. C., & Thomas, R. P. (1973). The rise of the western world: A new economic history. Cambridge University Press.
• OECD. (2008). The global competition for talent: Mobility of the highly skilled. OECD Publishing.
• Rafiqi, A., & Jansen, F. (2021). Innovation Under Constraint: Examining Digital Communication Innovations in Repressive Contexts. International Journal of Communication, 15, 23.
• Rodrik, D. (2007). One economics, many recipes: Globalization, institutions, and economic growth. Princeton University Press.
• Sen, A. (1999). Development as freedom. Oxford University Press.