The Impact of Economic Freedom on Economic Growth

Fayrouz Al–Katout,Amir Bakir

doi:10.11648/j.ijber.20190806.27

Fayrouz Al–Katout, Amir Bakir

Open Access

https://doi.org/10.11648/j.ijber.20190806.27

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Abstract

This study investigated the relationship between economic growth and economic freedom. Fourty two countries were covered for the period 1996- 2017. The dependent variable is the real GDP per capita and the independent variables are; the index of economic freedom, real fixed capital formation, real government spending and average number of hours worked. The sources of data is the World Bank Group (WBG) and the Center for Growth and Development (GGDC). The sample of 42 countries was divided into two groups, based on the score of the country on the index of economic freedom for 2017. While the economic freedom index, which ranges from 100 to 70, has 13 countries. The second group having 69.9 to 50 points, consisted of 29 countries. The data was subjected to cross sectional panel analysis; the unit root indicated that all variables in the two groups were stable at the level, and The Pedroni Residual Co-integration Test showed that there was no co-integration between the variables. The normal least squares method was applied for each group of countries. The results of the analysis showed that the fixed effects model (Fixed Effect) was the appropriate model for data analysis. The study showed that there was a positive and statistically significant relationship between the economic freedom index and the real GDP per capita. In addition, the relationship was positive and statistically significant between real GDP per capita, and both fixed capital formation and government expenditure. The study recommended that more attention should be directed to the factors that have an impact on economic freedom, as these factors might have a positive impact on economic growth.

Highlights

Theories of economic growth have evolved throughout history, starting with Adam Smith, who is considered the most important pioneer of the classical school, as well as David Riccardo and Robert Malts, who considered work and capital accumulation the main elements of production, with reference to technology
Solow tried to avoid gabs found in previous models, by pointing out that short-term economic growth is due to capital accumulation, whilelong-term economic growth is lead by external shocks such as technological advances and population growth
The Pedroni Residual Co-integration Test verifies the null hypothesis that there is no co-integration between the variables

Summary

Introduction

Theories of economic growth have evolved throughout history, starting with Adam Smith, who is considered the most important pioneer of the classical school, as well as David Riccardo and Robert Malts, who considered work and capital accumulation the main elements of production, with reference to technology. Economists developed theories of economic growth using mathematical models, such as Schumpeter, Harrod and Dumar, followed by Solow in 1956. Solow tried to avoid gabs found in previous models, by pointing out that short-term economic growth is due to capital accumulation, whilelong-term economic growth is lead by external shocks such as technological advances and population growth. The radical turning point of the Great Depression in 1929 proved the Keynesian thought that the state should play a role in the economy to emerge from the crisis, and this approach was quickly reversed in favor of a call for state non-intervention again in the mid-1980s. The Marxist-socialist economic thought promoted by the Soviet Union prompted the emergence of economic philosophical schools embodied in the experiences of China, East Germany, and a number of Scandinavian countries

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