Economic Freedom Data Research Articles

The relationship between economic freedom and growth: Evidence from the Next Eleven (N-11) countries

This study examines the association between economic freedom and economic growth in the Next Eleven (N-11) economies from 2001 to 2020. This paper also links the individual areas of economic freedom with growth in these countries. The study obtains economic freedom data from the Fraser Institute and the Heritage Foundation. It uses fixed effects and random effects techniques to examine the relationship between economic freedom and per capita income growth. The paper finds a positive association between economic freedom and growth in N-11 countries. The results also highlight that three areas of the economic freedom index (legal system & property rights, sound money, and free trade) are found to be positively associated with growth. In contrast, the other two areas (size of government and regulation) exhibit an insignificant relationship with growth. The results of this study highlight that N-11 countries with higher levels of economic freedom and better quality of economic institutions are likely to witness higher growth. Therefore, formulating policies that focus on improving the legal system, safeguarding property rights, maintaining a stable macroeconomic environment, and fostering free trade to facilitate economic progress in the N-11 countries is necessary.

‘Free-Market Capitalism’ and Democracy in the Period of Democratic Recession: Investigating the Relationship in 141 Countries, 2006–2017

Since the mid-2000s, democratization has slowed, stopped, and even reversed across the world. At the same time, societies have become more oriented toward free markets as measured by indexes of economic freedom. Relying on a panel sample of 141 developed and developing countries between 2006 and 2017, this paper is the first to investigate whether the two phenomena are related by employing economic freedom data. It finds that there is no net-negative relationship between aggregate economic freedom and democracy in this time-period. Instead, mixed findings of both an overall positive and overall neutral (but not negative) association are uncovered in between-country and within-country analyses, respectively. In between-country analyses, using the disaggregated index shows that the legal system/property rights component drives most of the positive relationship between aggregate economic freedom and democracy in the developed world. The same between-country analyses in the developing world show that freedom of international trade is positively associated with democracy, while modest regulation has a negative relationship. However, additionally controlling for omitted variable bias using country-fixed effects, the paper does not find evidence for either a positive or negative relationship between subsequent changes in levels of economic freedom and democracy.

Institutions and incarceration: The role of economic freedom at the MSA level

AbstractObjectiveWe evaluate the relationship between economic freedom and incarceration at the U.S. metropolitan statistical area level.MethodWe use economic freedom data at the metropolitan statistical area unit and local incarceration data from the Vera Institute in 5‐year intervals from 1977 through 2017.ResultsOur evidence suggests that greater economic freedom is associated with lower rates of incarceration in jails for the overall population. The channel tends to be through both the first and second economic freedom components (“size of government” and “taxation,” respectively). Finally, the results for juvenile incarcerated populations are largely driven by labor market freedoms.ConclusionTo the extent that reducing incarceration rates continue to be viewed as a positive outcome in line with recent trends, this study suggests that promoting laws and policies aimed at enhancing economic freedom could be an avenue to advancing that goal. For proponents, this policy implication has the rare advantage of bipartisan appeal.

Who are the champions? Inequality, economic freedom and the Olympics

AbstractDoes inequality affect outcomes? To answer, we use the microcosm of Olympic competitions by asking whether a country's level of inequality diminishes its performance. If it does, is it conditional on institutional factors? We argue that the ability of economically free societies to win medals will not be affected by inequality. In these societies, institutions generate incentives to invest in the talents of individuals at the bottom of the income distribution (potential athletes otherwise constrained in the ability to expend resources on training). These effects mitigate those of inequality. The incentives that promote investments in skills across the income distribution are weaker in unfree societies and they cannot mitigate the effects of inequality. Using the Olympics of 2016 in combination with the Economic Freedom data, we find that inequality only matters in determining medal numbers for unfree countries. We link these results to inequality and its effects on economic outcomes.

Comparison of fuzzy clustering methods in economic freedom ranking in Asia-Pacific

Economic freedom can be defined as freedom in which individuals can perform their economic activities freely without being exposed to the pressures and constraints. The aim of the studies on the classification of countries according to their economic freedoms is to determine the place of the countries in the world or in the continent where they are located. In this way, the status of the countries with sustainable growth and high welfare is determined. In this study, it is aimed to rank Asian countries according to economic freedom data. In contrast to many classifications and sorting studies, the present study attempts to determine the best sorting method by comparing multiple methods. As a result of the economic freedoms published by the Heritage Foundation every year, the conditions of Asian countries between 2015-2019 were determined. Fuzzy C-Means, Gath-Geva and Gustafson-Kessel methods, which are the three most commonly used methods, were used in the fuzzy clustering analysis. The results obtained from all fuzzy clustering methods were compared and interpreted with the results of the Heritage Foundation year by year. According to all analysis results, it can be said that the Fuzzy C-means method is more successful for Economic Freedom data and classification studies. According to the Fuzzy C-Means method, the three best Asian countries were Hong Kong, New Zealand and Australia respectively

Do Economic Freedom and Entrepreneurship Impact Total Factor Productivity?

The economics of growth has shown that countries not only grow by deploying higher levels of inputs to production, but also by better allocating whatever resources are at their disposal and by introducing productivity-enhancing innovations. We proffer arguments as to why and how entrepreneurship as well institutions of liberty (i.e., economic freedom, including the rule of law, easy regulations, low taxes and limited government interference in the economy) positively impact total factor productivity (TFP): These institutions allow entrepreneurial experimentation with the combination of factors to take place at low transaction costs. We test these ideas on a unique panel data set derived from Compendia, World Bank data and the Fraser Institute’s economic freedom data. We find that while entrepreneurship positively impacts TFP, the marginal contribution of entrepreneurship to TFP is strongest in economies with substantial government activity.

Economic freedom and corporate environmental responsibility: The role of small government and freedom from government regulation

In international scientific literature, it is argued from institutional theory that economic freedom stimulates corporate environmental responsibility. However, economic freedom comprises several different dimensions, such as government size, rule of law, open markets, and (freedom from) government regulation. Whereas previous literature has shown that rule of law and open markets stimulate corporate environmental responsibility, the impact of government size and government regulation on corporate environmental responsibility of companies located in different countries has yet not been explored. This paper contributes to scientific literature by researching the effects of these two dimensions of economic freedom on corporate environmental responsibility. We hypothesize that small government stimulates corporate environmental responsibility and that freedom from government regulation discourages it. Using panel data from ASSET4 for the corporate environmental responsibility of 5023 companies, and data of government size and government regulation from Fraser Institute and Heritage Foundation for 41 countries, the authors perform panel analysis for the period 2005–2014 to test the hypotheses. The estimation results show that both small size of government and freedom from government regulation decrease corporate environmental responsibility. The test results are robust for the type of economic freedom data (Fraser Institute or Heritage Foundation) used.

Economic Freedom Variables Endogenous to Business Cycles

A large empirical literature has found positive effects of economic freedom on economic outcomes, such as output and per capita growth. However, several variables in the index are very likely to decline in conjunction with recessions. In the absence of these variables, does the well-studied positive relationship between economic freedom and economic output hold? This paper makes use of a dynamic panel to compare the performance of economic freedom with and without these variables, which pertain to levels of government spending, rates of inflation, government borrowing, and interest rates. Two specifications fall in their statistical significance from the 1% to the 10% level when variables relating to inflation are omitted. The worst case considered finds one specification size of the effect is still 66.3% of the effect size of the standard measure of economic freedom. These findings are consistent with this kind of endogeneity being a minor problem with the data set when imperfect identification strategies are employed, but the issue should be strongly considered when business cycles are pertinent to a research question using economic freedom data.

Classification of European Countries by Economic Freedom Data

The Index of Economic Freedom is an annual index and ranking created by The Heritage Foundation and The Wall Street Journal in 1995 to measure the degree of economic freedom in the world's nations. According to the web site of Heritage Foundation, Economic freedom is defined as below: In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself. Cluster analysis is a method for clustering a data set into groups of similar objects. It is an approach to unsupervised learning and also one of the major techniques in pattern recognition. Hard clustering methods allow each point of the data set to exactly one cluster. In fuzzy clustering, fuzzy techniques are used to cluster the data and with these techniques an object can be classified in more than one cluster. The advantage of fuzzy clustering over classical clustering methods is that it provides more detailed information on the data. In this study, European Countries has been classified with the help of Economic Freedom Data published by Heritage Foundation. Countries are classified according to a five-year period (2013 to 2017) with the help of fuzzy clustering analysis. So that european countries are divided into classes according to their economic freedoms. Also, countries with varying degrees of five-year period have been identified too.

Government Policies and Micro Lending in Emerging Markets

Abstract Although microfinance institutions have expanded rapidly since their inception in 1983, their growth has varied substantially among countries. This study examines the impact of government expenditures, taxes and regulations on the volume of microcredit for 92 emerging market countries for the period 2000-2011. The Index of Economic Freedom data is used as a proxy for government intervention while microcredit is represented alternatively by either the Gross Loan Portfolio Per-Capita or Penetration Index variables. While excessive government intervention could potentially encourage more lending in the informal microfinance markets, our findings suggest that, for both credit variables, the net impact is to reduce microcredit. The variables appearing to be most responsible are business regulations, taxes, and corruption. Tests using subperiods and also with a dynamic version suggest that our model is quite robust.

How Strategic Entrepreneurship and The Institutional Context Drive Economic Growth

The economics of growth has shown that countries grow by better allocating whatever resources are at their disposal and by introducing productivity‐enhancing innovations. Strategic entrepreneurship plays a key role in this process by searching for, combining, trying out, etc., new resource combinations in the pursuit of profits under uncertainty. Institutions that support economic freedom allow such experimentation to take place at low transaction costs, positively influencing total factor productivity. We test these ideas on a unique panel data set derived from Compendia, World Bank data, and the Fraser Institute's economic freedom data. Copyright © 2013 Strategic Management Society.

Index-Building in a System of Interdependent Variables: The Penalty for Bottleneck

While the importance and the popularity of indices able to capture complex categories and the multidimensional nature of a particular phenomenon have been increasing, most approaches are still not able to provide plausible policy recommendations. The Penalty for Bottleneck (PFB) methodology is based on the assumption that the performance of the system depends on the weakest link, i.e., the variable that has the lowest value. This approach deviates from the most frequently applied method of calculating the arithmetic averages of the variables, which explicitly assumes perfect substitutability and, hence, provides potentially false policy implications. The resulting PFB-based policy recommendation is clear: the bottleneck should be improved first because it has a magnifying effect on the other indicators in the system. The PFB methodology is applied to the Heritage Foundation Index of Economic Freedom data. We show how the original methodology and the PFB methodology differ from each other by using a conservative logarithmic penalty function.

Economic Freedom and Foreign Direct Investment in Developing Countries

This paper employs cross-country growth regressions for a sample of developing countries to examine the determinants of FDI. In addition to economic factors affecting foreign direct investment, the analysis also tests for the role of institutional quality (enforcement of property rights, corruption, etc.) and policy orientation factors (openness). The paper evaluates whether foreign investment responds to changes in levels of economic freedom. In addition it tests whether the insignificant coefficient found in previous studies is the result of the level of aggregation in the economic freedom data. Finally, it disaggregates the data on economic freedom and re-estimates the relationship between FDI and components of economic freedom. Foreign direct investment is found to vary positively with increases in certain components of economic freedom.