How much economic freedom

To be sure, this does not necessarily imply an endorsement of neo-Malthusian alarmism, since an overall worldwide decline in fertility levels has been noticeable for quite some time Maudlin, ; Coale, ; Wilson, A continuation of this trend, given our empirical results, would actually provide some grounds for optimism regarding growth prospects in less developed countries.

In any case, our results clearly support the view that high fertility levels are, other things equal, a negative factor in terms of per capita income growth. In the Solow model this negative effect arises from the fact that, for a given investment rate, higher population growth implies, in the long-run, a lower capital-labor ratio. The results confirm this theoretical prediction, but our empirical estimate probably also picks up two other fertility-related effects that are not explicitly developed in formal growth models:.

High-fertility countries have high birth rates, which implies that they tend to have "young" populations, and hence, lower average productivity than countries with lower birth rates. For explorations of some of these issues see Sarel and Crenshaw, Ameen and Christenson This is partly an income-effect higher income families tend to have less children , but not entirely, since the family-size effect on schooling levels shows up even after controlling for income 9.

Thus, declining fertility can be expected to boost per capita income growth through its effects on human capital. We have used the change in average years of schooling, rather than the level of schooling, since this is what seems to correspond to an investment concept for human capital. Notice that in the case of physical capital, what actually affects economic growth in the Solow model is not the stock of physical capital, but the rate of investment, which is the change in the capital stock.

Higher stocks of capital, both physical and human, will of course be associated with higher income levels, but not necessarily with higher growth rates. The value for this coefficient implies that each one-year increase in the level of adult schooling over the sample period has been associated, on average, with an increase of about 0. This too is an interesting result, since the empirical contribution of education to economic growth has recently been questioned Moreover, it matters whether economic freedom is increasing or decreasing through time: the coefficient on DEFW implies that each one point increase in the EFW index over the sample period has been associated, on average, with an increase of about 0.

The mechanism involved is probably quite complex, since the EFW index is a composite of several different indicators. Many of these elements amount to measures of price distortions resulting from misguided government policies, which can be expected to affect output growth through their effects on resource allocation -inflation rates, taxes, public spending, government enterprises and state-directed investment, tariff protection and non-tariff trade barriers, price controls, labor and credit market distortions, etc.

However, it is also possible that the EFW index affects growth indirectly through effects on some other explanatory variable.

It certainly seems plausible to assume, for instance, that greater economic freedom provides more incentives and a better "investment climate " Therefore, it is theoretically interesting to determine whether the main growth-effect of economic freedom is through a direct "efficiency effect" on overall productivity, or through an indirect "incentive effect" on investment. Of course, these effects are not contradictory in any way, and they might both be present.

The issue is also important empirically, since if the main effect is through the investment rate, this would pose an estimation problem for the regressions in Table 2 -in fact, it would not make much sense to include both INV and EFW as regressors in that case. Dawson has outlined some of the statistical implications of this issue for empirical growth analysis:.

First, if institutions are the primary factor driving cross-country differences in investment, it is redundant to include both investment and an institutional measure as regressors in a cross-country [growth-regression]. One should, however, observe a strong relationship between institutions [i. Second, if factors other than institutions also contribute to cross-country variation in investment or if the effect of institutions operates partially outside the investment channel, the inclusion of an institutions variable should attenuate the size and significance of the estimated coefficient on investment to the extent that the investment channel is operative.

Elimination of investment as a conditioning variable would not be appropriate in this case, however, as important information would presumably be lost In summary, if institutions operate predominantly through the investment channel, measures of freedom will have little or no explanatory power if the saving rate is already included as an explanatory variable in cross-country regressions.

If institutions work primarily through a direct effect on factor productivity, however, including a measure of freedom in a growth regression can be expected to add explanatory power.

If institutions work through both channels simultaneously, the inclusion of an institutions variable as a regressor should add explanatory power and reduce the estimated size and significance of investment's impact on growth pp.

By these criteria, the results clearly support the hypothesis of a "productivity effect" EFW and DEFW are significant in every regression , but do not seem to favor the "investment channel" as a main line of influence, since the coefficients for INV are pretty much the same in Regression 3 as in Regressions 5 and 9. Moreover, there does not seem to be any strong positive relationship between the investment rate and economic freedom in the sample period Therefore, it seems likely that the "efficiency effect" is the main causal link between the EFW index and economic growth.

In this regression, the effect of changes in the investment rate is now conditional on the value of EFW: each one point increase in the EFW index increases the impact of a one point increase in INV by about 0. Thus, other things equal, if the investment rates in two countries differ by 10 points say, 10 and 20 percent of GDP , on average their annual growth rates would differ by about 1.

Notice that EFW has an independent effect of its own in Regression 10, which implies that not all of its effect occurs through effects on investment productivity The coefficients for the other variables are quite similar to those in Regression 9, and the explanatory power is practically the same in both regressions, so there is not much reason for preferring one over the other on purely statistical grounds, though Regression 10 seems theoretically more appealing since it allows for changes in the productivity of investment as a function of economic freedom It certainly makes sense to assume that any given level of investment will have a smaller growth impact in countries with lower degrees of economic freedom The "productivity of investment" effect might even explain the low correlation between the investment rate and the level of economic freedom.

There is no theoretically compelling reason to assume that higher investment productivity will necessarily lead to higher rates of investment. It might happen in some countries, but other countries might prefer to enjoy the benefits of economic freedom by actually investing less, and consuming more, since any given growth objective could be achieved with less investment, the higher the degree of economic freedom.

Presumably, this will depend on the prevailing rates of time preference, which probably differ greatly across countries. This situation is analogous to the role of income and substitution effects in analyzing the effects on labor supply of an increase in wage rates: some countries might prefer to invest less if the productivity of investment rises, just as some people might actually work less when wages rise if preference for leisure is very high. Tropical countries do seem to have a disadvantage, even controlling for other relevant variables, and the reasons for this effect are probably due to the factors stressed in the literature on this issue Gallup, Sachs and Mellinger, ; Sachs, The estimated coefficient implies that, other things equal, a tropical country will have a lower growth rate than a non-tropical country, the penalty for "tropicality" amounting to an average difference of about 1 percentage point in the annual growth rate of per capita GDP.

This study has drawn on a large body of previous theoretical and empirical work, in order to provide a framework for the analysis of growth rates in a broad cross-section of the world economy during the last two decades of the 20 th century. We should now recapitulate our main findings and summarize the conclusions that derive from them:. Other things equal, a country's growth rate will tend to decline as its per capita income rises, and this factor must be taken into account in any empirical growth analysis.

The worldwide trend over the past few decades has been in the direction of declining fertility levels, but they still remain quite high in many less developed countries. A continuation of this trend would provide some grounds for optimism regarding the prospects for growth in low-income countries. Countries that maintain persistently high population growth, however, will be at a disadvantage in terms of per capita income growth.

In the average level of the Barro-Lee educational attainment measure "average years of schooling for the population aged 1 5 or over" was about 6 years per adult, with a median value of 5. In other words, in half of the countries surveyed, the average adult had not completed primary education. Major improvements in this area can be expected to boost per capita income growth in less developed countries in the foreseeable future, and should remain a priority for development policy planners.

Higher degrees of economic freedom, as measured by the EFW index, are associated with higher rates of economic growth. The main channel of influence appears to be through a direct "productivity effect," since many of the components of the EFW index amount to measures of price distortions, which can be expected to affect economic growth through their effects on efficiency in the allocation of resources.

An indirect "incentive effect" via the investment rate may also be present, but the evidence is less clear on this point though there does appear to be a strong positive relationship between economic freedom and the productivity of investment.

This pessimistic conclusion, however, should be tempered by a healthy dose of pragmatism: geographic location is a unalterable fact, and there is nothing that can be done about it, though much can be done in terms of the other determinants of economic growth. The penalty for "tropicality" can be overcome, for instance, by promoting policies that increase the level of economic freedom. In tropical countries, therefore, the case for economic freedom is even stronger than in non-tropical countries Finally, though these variables explain a large share of the observed cross-country variation in growth rates, a significant portion of this variation over 20 percent remains unexplained.

Some part of this, no doubt, is due to measurement error, and country-specific factors also play some role. Single Account. The ideal entry-level account for individual users. Corporate solution including all features. Statistics on " U. The most important statistics. Further related statistics. Further Content: You might find this interesting as well.

Topics U. Learn more about how Statista can support your business. The Heritage Foundation. March 4, Country ranking of the Index of Economic Freedom [Graph].

In Statista. Accessed November 11, Our data on economic freedom is available for countries and for the years , , , , , and Table 2 presents summary economic freedom ratings and its five components and rankings for the year as an illustration. The higher the rating, the closer a country is to a truly free economic environment. Hong Kong, United States and Singapore occupy the top three positions on the overall index ranking.

A number of interesting patterns emerge from an analysis of these data. This was particularly true for western European countries. On the other hand, a number of developing nations show the opposite pattern. Bolivia makes an interesting case study. It shows that reasonably sized government is not enough to reap the benefits of economic freedom. The institutions of economic freedom, such as the rule of law and property rights, as well as sound money, trade openness, and sensible regulation are required.

However, it scored poorly in all the other categories, especially Legal Structure and Security of Property Rights , where it placed th.

Despite high rankings in a couple of areas, Bolivia's overall ranking is only 45 th. Weakness in the rule of law and property rights is particularly pronounced in sub-Sahara Africa, among Islamic nations, and for several nations that were part of the former Soviet bloc.

However, many Latin American and Southeast Asian nations also score poorly for rule of law and property rights. The nations that rank poorly in this category also tend to score poorly in the trade and regulation categories, even though several of these nations have reasonably sized governments and sound money.

The economies most open to foreign trade were Hong Kong, Singapore, and Ireland. Two former Soviet bloc nations also rank fairly high in openness to trade, Estonia in 7 th place and Hungary in 14th. The data on economic growth, GDP, population growth and investment rate was taken from the Penn World Tables version 6. The first consists on the average real 1 1 PPP converted. GDP per capita rate of growth constant prices: Chain series for five-year periods from to be compatible with the available economic freedom data.

Population growth consists on the average rate of growth for five-year periods from It also indicates that economic freedom, besides fostering economic growth on its own, might also enhances economic progress through another channel, that is, by stimulating capital accumulation, leading to a higher steady-state level of output.

The results are presented in Table 3 appendix. With a three exceptions government consumption , transfers and subsidies and marginal income tax rate , the estimated correlations are positive. In particular, the investment rate is shown to be high when the intellectual property is protected, there is no military interference in the rule of law, there is access to sound money, legal system is upright and taxes on international trade are low. In this paper, we plan to understand which role economic freedom and its components play on growth.

To study this matter, we present in this section a simple version of the standard neoclassical growth model with labor augmenting technical progress. This model will be the theoretical framework adopted here that will support and give solid grounds to our analysis. To simplify our exposition, we can actually think of AL as the amount of effective labor i.

So, output grows due not only to increases in capital and labor units K and L , but also by increasing the effectiveness of each labor unit A. The rate of growth of y and the steady-state level of output y ss can be written as:.

Therefore, substituting that into 3a and 4a , we find:. In other words, to assess the welfare of the economy, we want to look at output and consumption per physical labor unit.

Consequently, output per person , y ss and c ss are growing at the steady rate q, the rate of technical progress. Thus, in the steady-state situation, output per person growth is determined by technological progress. Equations 3b and 4b imply that, under the hypothesis we have made, economic freedom must have significantly positive effects on economic growth and the steady-state level of output when we control for the effects of initial income, investment rate and population growth rate.

The functional form of these equations is another issue that is important to consider. It can to a certain extent be determined by using econometric tests, but should as far as possible be based on economic theory. It is not evident that the relation between economic freedom and growth is linear and the appropriate specification may differ among categories.

For example, there could be diminishing returns in the relation between the size of government and growth. Moreover, a certain economic freedom category may only have a small effect on growth at low degrees of freedom, but a large effect at high degrees of freedom, or only have an effect if a critical level of freedom is reached. For example, increasing access to sound money from a very low level might not have an impact on the agents in the economy since their trust in the government, based on previous behavior, is still low.

For simplicity, we estimate linear versions of 3b and 4b , testing for several components of economic freedom, but we would like to stress that further research into the functional form of the model is needed.

That economic freedom spurs economic growth by unleashing individual dynamism and improving productivity is hardly questionable. The matter here is to determine empirically which aspects of economic freedom mostly contribute to economic expansion and thereby to point out the issues which should have priority on the political effort to foster freedom.

We believe that economic freedom is a very wide concept and we find that the synthesis of data on the index construction, although very useful, causes loss of relevant information. Thus, in this section we present a more specific kind of empirical analysis that treats more in detail this issue. We estimate equations 3b and 4b assuming that the rates of saving and population growth are independent of country-specific factors shifting the production function A , therefore, we can estimates both equations with pooled ordinary least squares POLS.

Table 4 appendix presents a number of linear specifications of equation 3b. We begin with specification i which ignores the economic freedom term and estimates a standard growth regression.

The results from this specification are consistent with the implications of the neoclassical model. Because of conditional convergence, per capita income at the beginning of the period has a negative and statistically significant sign: ceteris paribus, countries that start poorer grow faster. The investment rate, human capital and population growth variables also have the expected signs positive, positive and negative, respectively and both are statistically significant.

In specifications ii - xxiii of Table 4 , we successively include in the regression each of the twenty-one sub-components of the economic freedom index. Firstly, we find that the estimated coefficients and statistical significance of investment rate and income in are robust to the inclusion of the new variables and continue to be as predicted by the neoclassical model population growth is somewhat less robust and becomes statistically insignificant in several cases.

Second, the estimated coefficients of all the economic freedom variables have the expected sign positive , although they are not all significantly different from zero.

In particular, the empirical results enable us to identify fourteen components of economic freedom which have had statistically significant positive effects on growth, when one controls for the effects of initial income, the investment rate, human capital and the population growth rate.

The finds in Table 4 show us that productivity A is enhanced when i government consumption is small compared to total consumption, ii transfer and subsidies are kept low, iii public sector responds for a low share of total investments, iv judiciary is independent, v courts are impartial and can be trusted, vi intellectual property is protected, vii there is no military interference in the political process, viii money growth is kept close to real GDP growth, ix low standard inflation variability in the last five years x low recent inflation levels, xi trade barriers are small and clear, xii official exchange rate is near black-market rate, xiii credit market is less regulated and xiv business and prices are less regulated.

Surprisingly, marginal tax rate, integrity of legal system, freedom to own foreign currencies, taxes on international trade, size of international trade sector, foreign capital control and labor market regulations did not present statistically significant coefficients.

We obtain very similar results when we estimate a number of linear specifications of equation 4b , using the logarithm of the per capita income as a proxy for the steady state. Specification i once again ignores the economic freedom terms. Because of persistence, per capita income at the beginning of the period has a large positive effect on current income and it is statistically significant: ceteris paribus, countries that were rich in continue to be rich in The investment rate and population growth variables also have the expected signs positive and negative, respectively and both are almost in every case statistically significant.

As in Table 4 , specifications ii - xxiii of Table 5 successively include in the regression each of the twenty one economic freedom variables. The estimated coefficients and statistical significance of the three first variables are even more robust to the inclusion of the economic freedom variables then for equation 4a.

All specifications show very high adjusted goodness-to-fit R 2 measure, never lower than 0, Also, the estimated coefficients of all the economic freedom variables have the expected positive sign, and thirteen of them are significantly different from zero.

We also note that the list of statistically significant economic freedom components is similar to the one produced by Table 4. The difference appears basically in the coefficient of government consumption , transfer and subsidies , military interference in the rule of law and difference between official exchange rate and black-market rate.

In , it was ranked eighty-first. Meanwhile, some of these nations have shown little progress; Russia and Romania, for instance, rank near the bottom of the list and show few signs of improvement. In these countries, the near inability of the legal system to protect property and fairly enforce contracts—and the corruption this inevitably ensures—is a particularly big problem from the standpoint of both economic freedom and economic growth.

Only a few countries have moved away from economic freedom in the last twenty years. Zimbabwe has recently taken a turn for the worse as the government continues to attack property rights and impose tight controls on economic activity. Venezuela has steadily declined in its rating and ranking. In the early s, Venezuela ranked in the top twenty, but by it had fallen to the very bottom. An economic freedom index allows researchers to examine the empirical relationships between economic freedom and other desirable social outcomes.

The big question is: Do countries that exhibit greater degrees of economic freedom perform better than those that do not? Much scholarly research has been and continues to be done to see if the index correlates with various measures of the good society: higher incomes, economic growth, income equality, gender equality, life expectancy, and so on.

While there is scholarly debate about the exact nature of these relationships, the results are uniform: measures of economic freedom relate positively with these factors. The figures that follow illustrate the simple relationship between the economic freedom index and various measures of economic and social progress.

These figures indicate the relationships that more scholarly studies have found, but they are not conclusive evidence. Economic growth, for example, appears to be related to both the level of economic freedom and changes in the level of economic freedom as well as to investment in physical and human capital.

The simple graphs on the next page are no substitute for more scholarly work. Figure 1 shows the economic freedom ratings related to GDP per capita. The chart organizes the world into five quintiles ordered from the countries with the least economic freedom to the countries with the most. As economic freedom increases, so does average income.

The level of economic development at any point in time is, of course, the result of the accumulation of capital and technology over a long period. Figure 2 illustrates the correlation between economic growth rates of change in GDP per capita between and and the average level of the economic freedom index since Figure 3 illustrates the large improvements in life span associated with greater economic freedom.

While there is no clear evidence that economic freedom creates greater income inequality, there is clear evidence that lowest-income people in freer countries are better off than their counterparts in less free countries.

Figure 4 shows the average income level of the poorest tenth of the population by economic freedom quintile. Clearly, as Adam Smith recognized more than years ago, economic freedom and the economic prosperity it brings work to the advantage of the poor. As time goes on, these measures of economic freedom will improve and our understanding of the relationship between private property and free markets and economic performance will similarly improve.

But in the great debate between economic freedom and political planning, the evidence is increasingly clear. Economic freedom leads to better economic results.

Robert A. Lawson is the George H.