Economic Growth, Ten Forms of Economic Freedom, and Political Stability: An Empirical Study Using Panel Data, 2003-2007

Article excerpt

Abstract

This study investigates the impact of the ten forms of economic freedom developed by the Heritage Foundation (2008), as well as a measure of political stability developed by the World Bank (2009), on economic growth in OECD nations. Both panel least squares estimations and panel two-stage least squares estimations find that the natural log of purchasing-power-parity adjusted per capita real GDP in OECD nations was positively impacted by monetary freedom, business freedom, investment freedom, labor freedom, fiscal freedom, property rights freedom, and freedom from corruption. Economic growth was also found to be positively impacted by political stability. Furthermore, economic growth was negatively impacted by higher long-term nominal interest rates. Thus, policies consistent with maintaining these economic freedoms and political stability should help promote economic expansion, especially when coupled with government policies that do not elevate long-term nominal interest rates. Interestingly, in estimating the model using the composite index of the level of economic freedom developed by Gwartney and Lawson (2008), it is shown that the latter results parallel those derived using the Heritage Foundation data, implying that both sets of economic freedom measures are potentially useful substitutes in demonstrating the role of economic freedom in real economic growth.

JEL Codes: 043, 047, O50, Pl 4

Keywords: Economic growth; Ten economic freedoms; Political stability

I. Introduction

The process of economic growth has been formally studied for decades. During the past 15 years, numerous studies have been conducted to investigate the linkage between economic growth and economic freedom. Most of these studies conclude that there exists a positive impact of various measures of economic freedom on the rate of economic growth (Ali, 1997; Ali and Crain, 2001, 2002; Barro, 1997; Clark and Lawson, 2008; Dawson, 1998; De Haan and Siermann, 1998; De Haan and Sturm, 2000; Gwartney, Holcombe, and Lawson, 2006; Heckelman and Stroup, 2000). Indeed, the study by Cole (2003, p. 196) concludes that "...economic freedom is a significant factor in economic growth, regardless of the basic theoretical framework." Other studies have found that governance is significant to the process of economic growth (Lui, 1996; Zhao, Kim, and Du, 2003; Akcay, 2006; Brito-Bigott et al., 2008).

This empirical study focuses principally on the relationship between economic growth on the one hand and both (1) various forms of economic freedom and (2) political stability on the other hand. Interestingly, in light of the global recession currentiy being experienced, the OECD is working with its own members and, to a degree, with non-member governments and other organizations to get economies back on the path of economic stabilization and expansion. As a central part of this effort, the OECD very strongly advocates the position that governments must be cautious not to jeopardize/ sacrifice economic freedom or domestic political stability as they seek ways in which to strengthen and revitalize their economies. In other words, nations are strongly encouraged to continue to support and promote economic freedom and political stability, especially in this post-9/11 era (OECD, 2009). The concern of the OECD in this context is that either the abandonment of economic freedoms or the loss of political stability will result over time in diminished economic growth and lead to a deeper and/or longer global economic slowdown.

Accordingly, the purpose of this study is to investigate the impact of the ten specific forms of economic freedom developed by the Heritage Foundation (2008), as opposed to a composite measure of economic freedom, as well as a measure of political stability developed by the World Bank (2009), on the economic growth rate in OECD nations in recent years, i.e., 2003-2007. The study focus on OECD nations and on the years 2003-2007 reflects the fact that the above concerns were expressed by the OECD per se and also were very recently conveyed (in 2009). …