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Does the Economic Freedom Index Measure Liberal Economic Governance?
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Are majority-Muslim countries laggards when it comes to developing liberal economic institutions? Using an Index of Economic Freedom and its component parts, this study finds that Muslim-dominant countries (>50% of the population) are positively associated with free-market capitalism. Protestant dominance is also positively correlated, but the association stems from just two components of the index, mainly “legal security and property rights protection.” Surprisingly, Protestant countries correlate negatively with “small government” and “freedom to trade,” two critical components of free-market capitalism. Muslim dominance shows positive correlations with all areas except for “legal security and property rights.” The results are consistent when assessing similar variables measuring property rights and government ownership of the economy collected by the Varieties of Democracy Project. Capitalistic policies and institutions, it seems, may travel across religions more easily than culturalists claim.
This paper applies a multistep semiparametric stochastic production frontier estimator to investigate the effects of economic freedom (EF) on the production frontier and technical efficiency. We allow output elasticities and technical efficiency to depend on EF, estimate a smooth coefficient stochastic production frontier, and compare with parametric alternatives. Our results highlight the flexibility of semiparametric approaches as we find parametric approaches are too restrictive in estimating marginal productivity. Output elasticities of labor, human capital, and physical capital vary with the level of EF and our average efficiency estimates are at least 20% higher than those obtained from parametric counterparts. (JEL C14, O43)
Abstract It is widely believed that individualistic societies, which emphasize personal freedom, award social status for accomplishment, and favor minimal government intervention, are more prone to higher levels of income inequality compared to more collectivist societies, which value conformity, loyalty, and tradition and favor more interventionist policies. The results in this paper, however, challenge this conventional view. Drawing on a rich literature in biology and evolutionary psychology, we test the provocative Parasite Stress Theory of Values, which suggests a possible link between the historical prevalence of infectious diseases, the cultural dimension of individualism-collectivism and differences in income inequality across countries. Specifically, in a two-stage least squares analysis, we use the historical prevalence of infectious diseases as an instrument for individualistic values, which, in the next stage, predict the level of income inequality, measured by the net GINI coefficient from the Standardized World Income Inequality Database (SWIID). Our findings suggest that societies with more individualistic values have significantly lower net income inequality. The results are robust even after controlling for a number of confounding factors such as economic development, legal origins, religion, human capital, other cultural values, economic institutions, and geographical controls.
Political instability is often exacerbated in periods of aggregate demand shortfall. It has been conjectured that inadequate policy responses to recessions may be inimical to free economic institutions. This paper uses the Economic Freedom of the World index as its measure of economic institutions, and finds that the change in economic freedom in the following five, ten, and fifteen years is negatively impacted by an aggregate demand shortfall as measured by negative NGDP growth.
It is widely believed that economic institutions such as competitive markets, the banking system, and the structure of property rights are essential for economic development. But why economic institutions vary across countries and what are their deep origins is still a question that is widely debated in the developmental economics literature. In this study, we provide an empirical test for the provocative hypothesis that the prevalence of infectious diseases influenced the formation of personality traits, cultural values, and even morality at the regional level (the so called Parasite- Stress Theory of Values and Sociality), which then shaped economic institutions across countries. Using the prevalence of pathogens as an instrument for cultural traits such as individualism, we show in a two-stage least squares analysis that various economic institutions, measured by different areas of the index of Economic Freedom by the Heritage Foundation, have their deep origins in the historical prevalence of infectious diseases across countries. Our causal identification strategy suggests that cultural values affect economic institutions even after controlling for a number of confounding variables, geographic controls, and for different sub-samples of countries. We further show that the results are robust to four alternative measures of economic and political institutions.
The Heritage Foundation and the Fraser Institute measure economic freedom in nations using indices with ten and five indicators respectively. Eight of the Heritage indicators and four of the Fraser-indicators are about specific types of institutional quality, like rule of law, the protection of property, and the provision of sound money. More of these is considered to denote more economic freedom. Both indices also involve indicators of ‘big government’, or levels of government activities. More of that is seen to denote less economic freedom. Yet, levels of government spending, consumption, and transfers and subsidies appear to correlate positively with the other indicators related to institutional quality, while this correlation is close to zero for the level of taxation as a percentage of GDP. Using government spending, consumption transfers and subsidies as positive indicators is no alternative, because these levels stand for very different government activities, liberal or less liberal. This means that levels of government activities can better be left out as negative or positive indicators. Thus shortened variants of the indices create a better convergent validity in the measurement of economic freedom, and create higher correlations between economic freedom and alternative types of freedom, and between economic freedom and happiness. The higher correlations indicate a better predictive validity, since they are predictable in view of the findings of previous research and theoretical considerations about the relations between types of freedom, and between freedom and happiness.
We study the relationship between income inequality and economic freedom for a panel of 100 countries for the 1971–2010 period. Using a panel Granger non-causality approach, we reject the null hypothesis of Granger non-causality running from income inequality to economic freedom, but not vice versa. From a series of dynamic panel estimations we show that the effect of income inequality on economic freedom is negative and robust to the inclusion of additional controls. In particular, inequality is negatively associated with those components of economic freedom related to international trade, domestic market regulation as well as the rule of law and property rights protection. We argue that the negative effect of inequality on economic freedom is due to the economic elite converting its economic power into de facto political power to defend its economic interests; these interests run counter to economic freedom, discouraging innovation and competition as well as protecting the elite's rents. Finally, we show that economic freedom decreases with income inequality even in democratic countries, suggesting that democratic institutions do not prevent economic freedom from eroding. We argue that the latter finding corresponds to a system of political capitalism or captured democracy, where a powerful economic elite can nevertheless exercise de facto political power by cooperating with politicians and other decision-makers for their mutual benefit.
This article presents a theory of 7 cultural value orientations that form 3 cultural value dimensions. This theory permits more finely tuned characterization of cultures than other theories. It is distinctive in deriving the cultural orientations from a priori theorizing . It also specifies a coherent, integrated system of relations among the orientations, postulating that they are interdependent rather than orthogonal. Analyses of data from 73 countries, using two different instruments, validate the 7 cultural orientations and the structure of interrelations among them. Conceptual and empirical comparisons of these orientations with Inglehart’s two dimensions clarify similarities and differences. Using the cultural orientations, I generate a worldwide empirical mapping of 76 national cultures that identifies 7 transnational cultural groupings: West European, English-speaking, Latin American, East European, South Asian, Confucian influenced, and African and Middle Eastern. I briefly discuss distinctive cultural characteristics of these groupings. I then examine examples of socioeconomic, political, and demographic factors that give rise to national differences on the cultural value dimensions, factors that are themselves reciprocally influenced by culture. Finally, I examine consequences of prevailing cultural value orientations for attitudes and behavior (e.g., conventional morality, opposition to immigration, political activism) and argue that culture mediates the effects of major social structural variables on them.
Measures of material standards of living such as gross domestic product dominate national debates on social and economic progress. Such measures, however, often fail to capture important dimensions of quality of life related to the strength of social networks, quality of education, frequency of civic engagement, personal health, and psychological well-being. In this paper, I provide some preliminary evidence on the relationship between economic freedom and more than twenty indicators of quality of life separated into eleven dimensions of well-being from a recently developed well-being index, Your Better Life Index, by the Organization of Economic Cooperation and Development (OECD). I find that economic freedom is strongly and positively correlated with most of these areas of well-being even after I control for the positive impact of income. More importantly, however, the strongest effect of economic freedom is associated with some of the nonmaterial dimensions of quality of life such as community, safety, and life satisfaction, which are still underresearched areas in the economic freedom literature. Additional evidence from the Human Development Index from 1972 to 2010 for a large set of developed and developing countries further shows that changes in economic freedom foster human development in both the short run (five years) and the long run (ten years).
Parasite adversity was an important source of Darwinian selection in human evolutionary history because parasites selected for a diversity of human behavioral parasite-defenses in addition to the numerous defenses provided by the classical human immune system. We argue for a broader view of behavioral immunity than has been emphasized recently. We propose a new hypothesis for the evolution of the unique cognitive and social adaptations of humans. We argue that, in human evolutionary history, as weaponry and other technologies reduced the importance of the physical environment, typical ecological challenges, and predators as agents of selection shaping mental and social traits, parasites became more important selection agents on these traits. Also, we suggest that the reduction of natural selection in the context of predation in human evolutionary history resulted in selection favoring high pathogenicity in human parasites because predation is focused on debilitated prey and hence selects against pathogenicity in the parasites involved. The new hypothesis argues that, in human evolutionary history, temporal variation in local parasite adversity gave rise to frequent change and complexity in the values that are adaptive for individuals to use in their social navigation in relation to the degree of local disease stress, and that selection in this context accounts for the evolution of aspects of human uniqueness in cognitive ability and sociality. The new hypothesis is akin to the social brain hypothesis but is contrary to the version of that hypothesis deemphasizing parasites. Tests of the new hypothesis are addressed. (PsycINFO Database Record (c) 2014 APA, all rights reserved)
This paper examines the empirical relationship between business cycle volatility and economic freedom across countries. In a diverse sample of 85 countries, the results suggest a significantly negative relationship between volatility and a broad measure of freedom—even after controlling for other determinants of cross-country volatility and using an instrumental variables procedure to account for the likely endogeneity of economic freedom. Among the underlying areas of the freedom index, all but the size of government component also have a significantly negative relationship with volatility. Size of government is found to have a significantly positive relationship with volatility. Measures of changes in freedom and the volatility of freedom are found to be statistically insignificant, suggesting that freedom is not among the shocks that cause business cycles. Rather, freedom appears to allow economies to better adjust to those shocks that drive business cycles.
Hofstede's framework, which is based on survey data collected in the late 1960s and early 1970s, dominates quantitative culture research in international strategic management. However, as countries develop economically, modernization theory predicts shifts in cultural values, which likely affect countries' scores on Hofstede's work-related values dimensions, in turn raising doubt about the continued relevance of this framework for global strategy researchers and practitioners. We examine how country scores on Hofstede's dimensions have developed over time by replicating Hofstede's dimensions for two birth cohorts using data from the World Values Survey. Results indicate that, on average, contemporary societies score higher on Individualism and Indulgence versus Restraint, and they score lower on Power Distance than do past societies. We find that cultural change is absolute rather than relative, meaning that countries' scores on the Hofstede dimensions relative to the scores of other countries have not changed very much. As a consequence, cultural differences between country pairs (i.e., cultural distances) are generally stable. We discuss the implications of our findings for global strategy research.
In this paper, we survey our recent work showing theoretically and empirically a link between individualist culture on one hand and long run growth and innovation. The individualism-collectivism cultural dimension is the only one that has a robust effect on measures of long run growth. We survey the cross-cultural psychology culture that finds that the individualism-collectivism cleavage is also the most important one in that literature. We discuss some of the implications of the lessons from the psychology literature on the economic and institutional effects of the individualism-collectivism cleavage.
The relationship between culture and language was examined across 39 languages spoken in 71 cultures. Correlations were computed across languages and cultures between the use of first- and second-person singular pronouns (e.g., "I" and "you") and global cultural dimensions such as Individualism, which were previously extracted in large-scale cross-cultural surveys. The personal pronouns were analyzed in terms of the number of first- and second-person singular pronouns and whether the pronouns can be dropped when used as the subject of a sentence in speech. Cultures with pronoun drop languages tended to be less Individualistic than those with nonpronoun drop languages. The number of personal pronouns correlated with some cultural dimensions that reflected different conceptions of the person. Personal deixis (person-indexing pronouns) may provide a window through which cultural practices can be investigated.
In the last decade authors have increasingly examined the role of two cultural traits – trust and individualism – on a variety of economic outcomes ranging from gendered attitudes to entrepreneurship, human capital accumulation, and economic development. While both have positive effects, recent literature suggests that the effects of trust are often conditional on other variables, and this aspect has been neglected in the literature. Indeed, a recent paper found that with respect to gendered attitudes, there are important interactions between the traits of trust and individualism. Building on this foundation we explore how views of trust and individualism interact to affect attitudes about income inequality. Our results show that while views regarding social trust generally positively affect the desire for income equality, this effect is strengthened in the presence of high individualism. Alternatively stated, distrust in highly individualistic environments leads to a greater desire for income differences (inequality). Our result highlights the important role played by market-based price and profit incentives in fostering economic activity and exchange in larger, impersonal extended orders where interpersonal trust and reputational effects are generally absent (in contrast to personal, small group exchange). Our results are robust to a variety of techniques to establish identification and account for sample selection and omitted variable bias.
Individualism is associated with an emphasis on personal liberty and self-determination, values that reduce support for patriarchal norms and increase gender equality. Here, we investigate whether individualism affects women's economics rights, a key institutional determinant of the economic opportunities available to women. We provide evidence of an economically and statistically significant association between individualism and the de facto level of women's economic rights. This result is robust to a variety of controls, including per capita income, women's educational attainment, oil production, historical determinants of patriarchal culture, and the quality of legal and political institutions. In addition, we present evidence that this association is causal, drawing on instruments motivated by roles of climate and disease in cultural evolution. Finally, we show that individualism's influence on women's economic rights is magnified in democratic and common law countries, suggesting that democracies and common law systems channel cultural preferences into legal outcomes.
In this paper, I advance and empirically support the indigenous religious values hypothesis, which holds that religions espouse values indigenous to the countries in which they developed. To identify the indigenous values of a religion’s homeland, I rely on the negative relationship between individualism and rainfall variation. I find strong empirical support for the hypothesis that contemporary individualism depends on rainfall variation in the homelands of religions to which a country’s population adheres. Indeed, this relationship explains over a quarter of the international variation in individualism. This effect is robust to controls for the role of religion in institutional and technological transfers and the confluence of conversion and colonisation. In keeping with the explicitly religious nature of the mechanism proposed here, I also find that rainfall variation in religion homelands plays a greater role in explaining the values of countries with greater religious freedom and the values of individuals who are more religious or members of religious minorities.
This paper examines the relationship between economic risk and the evolution of social cooperation. We hypothesize that trust developed in pre-industrial times as a result of experiences of cooperation aimed at coping with climatic risk. We document that European regions with higher pre-industrial climatic variability display higher levels of trust today. This effect is driven by variability in the growing season months and is more pronounced in agricultural regions. Regarding possible mechanisms, our results indicate that climatic risk favored inter-community exchange and the early adoption of inclusive political institutions which is associated with higher quality of local governments today.
The previous literature finds that self-reported ‘fear of failure’ has a significant negative effect on individuals’ choice to become entrepreneurs. We hypothesize this effect is lessened in economies with a larger number of additional, alternative, entrepreneurial opportunities to pursue if a failure occurs. Prior literature also concludes the number of entrepreneurial opportunities is enhanced significantly by having policies and institutions consistent with higher levels of economic freedom. We therefore test and confirm that fear of failure hurts the entrepreneurial process less when levels of economic freedom are higher as there are more additional chances for failed entrepreneurs to pursue.
We forward the hypothesis and empirically establish that variations in the strength of family ties are rooted in culture. In particular, we show that individualism is associated with looser family ties. We exploit the associations between contemporary individualism and historical climatic and disease environments to establish a causal relationship. At both the individual- and country-levels, we find strong support that individualism reduces family ties. The estimated effects are economically large and robust to a wide variety of potentially confounding variables.
A large literature has found positive associations between economic freedom and income, growth, and a variety of other desirable outcomes. This paper surveys the literature that seeks to explain the causes of economic freedom. Some of the most consistent findings in this literature are that current levels of economic freedom are strongly correlated with past levels; freer countries have more difficulty continuing to improve their economic freedom; democracy and political freedom are positively associated with economic freedom; and inequality is negatively related. (JEL E02, E14, O17, O43, P1)
We argue that individualism promotes gender equality. Individualist values of autonomy and self-determination transcend gender identities and serve to legitimize women’s goals and choices. In contrast, collectivist values may subordinate women’s personal goals to their social obligations, generating greater acceptance of gender inequality. Using individual level data from World Values Surveys, we find that individualism is significantly associated with support for gender equal attitudes regarding employment, income, education, and political leadership. Individualism is also associated with greater levels of female employment and educational attainment, and lower levels of fertility. These results are robust to controlling for income, education, religion, historical plough use, gendered language, and country-time fixed effects. Our within country analysis allows us to isolate the impact of individualism from other confounding effects. Using historical rainfall variation as an instrument for individualism, we find that the exogenous portion of individualism reduces support for patriarchal attitudes and fertility, and it increases female employment and educational attainment. These effects are economically large. We address concerns over instrumental validity by controlling for a variety of factors, including historical plough use, religious affiliation, religiosity, social trust, average rainfall levels, distance from the equator, cool-water conditions, agricultural suitability, historical political and economic development, and the presence of large animals. This paper contributes to a mounting body of evidence suggesting a key role for highly persistent cultural norms and values in determining gender inequality, the gender division of labor, and economic and social outcomes for women.
A country's cumulative experience with statehood influences its ability to consolidate power and create a capable bureaucracy. Longer statehood experience gives countries more time to adapt their laws to local needs, provided the legal system is adaptable. We find that, relative to British common law countries with the most flexible laws, German and Scandinavian civil law countries initially exhibit lower financial development. However, as their history of statehood grows longer, financial development improves in countries with adaptable laws such as the German and Scandinavian civil law countries. This is not the case in French civil law countries with more rigid legal systems. Our results mainly show no or at most a weakly negative effect of French civil law legal origin on financial development. We also explore how changes in stock market development over time, financial integration, and financial crises are impacted by statehood experience, legal origins and their interaction.
Using a novel panel data set from the Credit Suisse on the top wealth shares for 46 sample countries spanning 2000-2014, this paper empirically investigates to what extent wealth inequality influences economic freedom and whether this relationship is affected by the level of democracy. Economic freedom is measured by the Fraser Institute's economic freedom summary index as well as its five major sub-indices, such as government size, property rights, access to sound money, freedom to trade, and regulations. Wealth inequality is measured by the top wealth shares. Trade union density is used as an instrument for wealth inequality. Empirical results suggest that the rising wealth inequality significantly hampers overall economic freedom, property rights protection, freedom to trade, soundness of money and regulatory environment. Furthermore, this negative effect of wealth inequality is reinforced at a lower level of democracy. These findings are robust to alternative measures of wealth inequality, economic freedom, treatment for endogeneity, and model specification.
We argue that a more individualist culture leads to more innovation and to higher growth because of the social status rewards associated with innovation in that culture. We use data on the frequency of particular genes associated with collectivist cultures, as well as a measure of distance in terms of frequencies of blood types, and historic prevalence of pathogens to instrument individualism scores. The relationship between individualism and innovation/growth remains strong even after controlling for institutions and other potentially confounding factors. We also provide evidence consistent with two-way causality between culture and institutions. © 2017 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
We examine a potential link between culture and financial development by considering culture's influence on contract enforcement regulation. Specifically, we investigate the role of individualism in determining the variation in enforcement costs across countries. Individualism positively and significantly relates to efficient contract enforcement, an association that is independent of a particular political system. Interaction effects, however, suggest that democracy magnifies individualism's influence on the contract enforcement efficiency. These results provide insight into how culture can shape financial outcomes. It further suggests that culture serves as a constraint on policymakers, as any given policy or formal institutional structure will function very differently depending on the cultural environment.
We investigate the causes of increases in economic freedom by examining a cross-section of countries from 1990-2010. We find that higher initial GNI per capita is associated with larger subsequent increases in economic freedom. We also found countries are less likely to improve their freedom the higher that their initial levels of freedom and energy exports are. In some causes inflationary crises and ethnolingusitic fractionalization were also correlated with smaller increases in economic freedom. These impacts were generally more important in countries with lower initial levels of economic freedom and in preventing countries from making above average increases in economic freedom.
The European Union (EU) may promote reforms to policies and institutions through at least two distinct mechanisms. First, accession to the EU requires countries to undertake reforms. Second, the EU common market may promote Tiebout jurisdictional competition. We empirically evaluate these two mechanisms using an unbalanced panel of up to 45 European countries during 1970-2010. We find that relationships between EU accession/membership and measures of policies/institutions are often statistically insignificant. Furthermore, when the estimated effects are statistically significant they are generally modest.
Kashima and Kashima's (1998) linguistic dataset has played a prominent role in the economics of culture, providing the instrumental variables used in two seminal works to identify the causal effect of culture on institutional quality. However, for economists, this dataset has a number of weaknesses, including poor overlap with a key cultural dataset and reliance on sources of linguistic information of uneven quality. We address these issues by constructing a new linguistic dataset based on an authoritative source of linguistic information, the World Atlas of Language Structures. The resulting dataset has greater overlap with key sources of cultural information, is arguably less subject to selection bias, and provides more refined information regarding key dimensions of linguistic variation. We show that the variables in this dataset are significantly correlated with commonly used measures of individualism and egalitarianism. In addition, we reexamine the key results from the literature on culture and institutions, showing the causal relationship between culture and institutions is robust to the use of the new linguistic instruments.
Does culture affect the manner in which a society regulates the entry of new firms? Our results suggest it does. We find more individualistic countries regulate entry more lightly. We investigate how culture matters presenting evidence of significant interactions between individualism and formal legal and political institutions. Individualism has a greater impact on entry regulation in societies with democratic political institutions or a common law tradition. This outcome is consistent with the idea that culture influences social preference for regulation, and political and legal institutions determine the degree to which those preferences are expressed as policy outcomes.
This research uses predicted genetic diversity unadjusted for the ancestral composition of current populations, as a plausible source of exogenous variations for indicators of economic institutions. While genetic diversity has a robust, concave and significant effect on economic institutions, reduced-form regressions and numerous falsification tests ostensibly suggest that genetic diversity affects development only via indices of multidimensional measures of economic institutions. Second-stage results indicate that allowing for cognitive skills, latitude and ethno-diversity, economic institutions exert a positive and strongly statistically significant effect on development. These findings are robust to the inclusion of deep and proximate growth determinants, different measures of geography, institutions, and horse races between cognitive skills and economic freedom, as well as to the use of different estimators. Human capital, gauged by cognitive skills, in most specifications is not significant in the second stage; however, it is positive and a strong significant predictor of economic institutions in the first stage. The empirical evidence unveiled in this study lends credence to the primacy of economic institutions hypothesis to ignite long-term growth and highlights the crucial role of human capital in enhancing economic institutional quality.
Can foreign aid promote economic freedom? The existing literature does not provide a conclusive answer. Using a panel of 108 countries from 1971 to 2010, we provide insight to this discussion by examining aid's impact on economic freedom conditional on the quality of political institutions. We find some evidence suggesting that aid can improve economic freedom when given to democracies, but it may decrease it in autocracies. Also, aid given to entrenched regimes may reduce economic freedom. We illustrate that the results are sensitive to model selection, choice of controls, time period sample, and measurement of aid. Our results have important policy implications. Most countries that ‘need’ aid do not have healthy political institutions. As such, aid is less likely to have a positive impact on economic freedom, partially explaining the contradictory findings in the literature. This also highlights the difficulty of finding a top-down solution to institutional improvements.
We have undertaken a partial evaluation of our constitutional and political institutions from the standpoint of economic freedom. That suggests there is a basis for explicit choice if economic freedom is valuable per se, or as an instrumental variable in the determination of other desiderata (like economic welfare as measured by (say) income per capita and/or its growth rate). While as economists or as individuals, we may not be able to make such a choice with respect to the constitution of any given country where we may happen to be advisors and/or residents, we can make a choice as to which countries we will move our human and/or non-human capital, if it is not already there. Such a consideration may explain immigration and capital flows between the countries of the world and account for the strength of their economics and currencies. Those who are in a position to set constitutional constraints, or the laws, regulations, and the administration of policy based on them, can ignore the economic incentives that economic freedom provides only at their peril, and at the peril of their administration and economies.
This study examines the relationship between resource abundance, economic freedom, and economic growth. In a cross-sectional analysis, we find that an abundance of energy is only a "curse" if it affects economic freedom and investment. Controlling for economic freedom and investment, an abundance of resources is not negatively related to growth but rather may increase economic growth. However, consistent with the literature, we find an abundance of natural resources has a negative impact on economic freedom and investment, which leads to an observed resource curse.
There is a small but growing literature on the determinants of economic freedom. This paper contributes to this literature in two ways. First, it is empirically shown that β-convergence in economic freedom occurred from 1980 to 2010. Countries with low levels of economic freedom in 1980 “catch up” at a rate of 0.7 percent a year on average, ceteris paribus. Second, the structural characteristics that contribute to this institutional convergence are documented. Conditional convergence estimates suggest democratic institutions do not con- tribute to conditional convergence. Exitability, a variable that captures how easy it is for citizens to “vote with their feet” is related to the change in economic freedom from 1980 to 2010 in a statistically significant manner across all specifications. This provides some preliminary evidence as to the importance of “exit” versus “voice” with respect to the question of institutional change. © 2015 Springer Science+Business Media New York (outside the USA)
Despite a sizeable theoretical and empirical literature, no firm conclusions have been drawn regarding the impact of political democracy on economic growth. This article challenges the consensus of an inconclusive relationship through a quantitative assessment of the democracy-growth literature. It applies meta-regression analysis to the population of 483 estimates derived from 84 studies on democracy and growth. Using traditional meta-analysis estimators, the bootstrap, and Fixed and Random Effects meta-regression models, it derives several robust conclusions. Taking all the available published evidence together, it concludes that democracy does not have a direct impact on economic growth. However, democracy has robust, significant, and positive indirect effects through higher human capital, lower inflation, lower political instability, and higher levels of economic freedom. Democracies may also be associated with larger governments and less free international trade. There also appear to be country- and region-specific democracy-growth effects. Overall, democracy's net effect on the economy does not seem to be detrimental.
The present study is an attempt to quantify relationships between economic development and disaggregated factors that constitute elements of 'economic freedom' in current terminology. The three main objectives of this paper are (1) to verify that the currently spreading belief that economic freedom helps (some would even say is essential for) economic growth has empirical foundations; (2) to identify those elements of economic freedom for which sufficient analyzable data exist that demonstrate a statistically significant relationship to economic growth; and (3) to indicate desirable directions for further research and policy implications. This attempt is now feasible owing to the meticulous work of the Fraser Institute team for over a decade, the results of which were recently published in Economic Freedom of the World 1975-1995, by James D. Gwartney, Robert Lawson, and Walter Block. In that volume they identified, classified, assembled, and indexed data on economic freedom between the years 1975 and 1995. We fully agree with Gary S. Becker, the 1992 Nobel laureate, that research on the contribution of economic freedom to 'economic prosperity and growth ... has been hampered by incomplete and inadequate measures of freedom in economic life. This book helps fill the void with detailed measures.'.
This study explores the determinants of ethnolinguistic diversity within as well as across countries, shedding light on its geographic origins. The empirical analysis conducted across countries, virtual countries, and pairs of contiguous regions establishes that geographic variability, captured by variation in regional land quality and elevation, is a fundamental determinant of contemporary linguistic diversity. The findings are consistent with the proposed hypothesis that differences in land endowments gave rise to location-specific human capital, leading to the formation of localized ethnicities. (JEL J15, J24, Z13)
The debate on populism has recently been revitalized by the rise of new political actors, especially in Latin America and Europe. Despite the renewed interest, the concept of populism remains vague, complicating any empirical investigation on its political and economic outcomes. Still, all populist politicians strongly emphasize the defense of the common man's interest against those of privileged elites, suggesting that such governments will have notable implications for economic policy and institutions. Using a non-partisan indicator of populism, this paper seeks to assess the impact of populist policies on institutional change, as measured by the economic freedom of the world index. Results indicate that populist governments actively reduce economic freedom. In particular, they erode legal security, reduce freedom to trade, and tighten economic regulation. Findings expand on previous research with empirical methodology, questioning the importance of ideological orientation in some definitions of populism.
This paper tests the hypothesis that the presence of economic inequality may lead to erosions of economic freedom. Using Economic Freedom of the World as a measure of free economic institutions, it finds that a one standard deviation increase in the gini coefficient reduces the presence of free economic institutions by 0.18 standard deviations. This effect is modest but not at all trivial, and the magnitude of the effect may be especially important in increasing the size of government. Surprisingly, the evidence is mixed for the effect of inequality on regulation, with modest evidence suggesting it may improve the regulatory environment. While many methods of reducing economic inequality involve restrictions on economic freedom, this evidence underscores the importance of stressing reforms free market proponents are confident will mitigate inequality.
Overall country ratings on economic freedom by Fraser Institute and Heritage Foundation, which are probably the two most widely-used sources, are compared. Numerous cases of huge differences between country ranks for the two sets of ratings are noted. A simple illustration shows that inferences based on one set of ratings can be very different from those suggested by the other set. Researchers, policy-makers and other users are urged to exercise caution in drawing strong conclusions on the basis of ratings from either source.
The Economic Freedom of the World (EFW) index was first produced by Gwartney, Block, and Lawson (Economic Freedom of the World: 1975–1995; 1996) and has been updated annually since. During this period, the EFW index has been cited in hundreds of academic articles. Here, we provide an accounting and description of this literature. Of 402 articles citing the EFW index, 198 used the index as an independent variable in an empirical study. Over two-thirds of these studies found economic freedom to correspond to a “good” outcome such as faster growth, better living standards, more happiness, etc. Less than 4% of the sample found economic freedom to be associated with a “bad” outcome such as increased income inequality. The balance of evidence is overwhelming that economic freedom corresponds with a wide variety of positive outcomes with almost no negative tradeoffs. (JEL P0, O43)