Does Economic Freedom Promote Human Development? New Evidence from a Cross-National Study

Abstract

Previous studies of the relationship between economic freedom and human development have generally used either life expectancy, literacy rates, or subjective well-being as indicators of human development. These indicators tend to measure only some aspect of human development, ignoring other important attributes. For example, life expectancy alone is not an adequate indicator because a long life plagued by disease, malnutrition, and poverty does not constitute human development. To overcome these shortcomings the present paper uses an all-encompassing measure—the human development index—and two other less commonly used indicators: infant and maternal mortality rates. Thus, the paper analyzes the effect of economic freedom on these three indicators of human development in a sample of 88 countries. The paper uses economic freedom index constructed by the Fraser Institute and Human Development Index of the United Nations Development Program (UNDP). Conditional Quantile regression method is used to address the differential impacts of economic freedom across the distribution of human development. The results show that the effect of economic freedom varies across quantiles of the human development index, infant mortality, and maternal mortality. At lower quantiles of infant mortality the effect is small (-3.72 at the 0.10 quantile) and larger at the upper quantiles (-8.88 at the 0.90 quantile). To put these effects into perspective, for every country whose infant mortality rate is at the 10th percentile, a unit increase on its economic freedom index can be expected to reduce infant mortality by 3.7 deaths per 1,000 live births. For countries at the 90th percentile of infant mortality, it would reduce by 8.9 deaths per 1,000 live births. Concerning maternal mortality, the effect also varies across the quantiles from -6.59 at the 10th quantile to -36.55 at the 90th quantile. Thus, at the 10th percentile, a one-unit increase on the economic freedom index would only reduce maternal mortality by roughly 6.5 deaths per 100, 000 live births, while at the 90th percentile it would reduce maternal mortality by 36.5 per 100, 000 live births. At lower quantiles of the HDI distribution, economic freedom tends to have a pronounced effect and then levels off from the middle to upper quantiles. The opposite is true for infant and maternal mortality rates. The policy implication of these findings is that countries that have the least human development have the most to gain from improvement in economic freedom.