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

By Cebula, Richard J. | Journal of Private Enterprise, Spring 2011 | Go to article overview

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


Cebula, Richard J., Journal of Private Enterprise


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).

In this study, economic growth is measured by the natural log of the purchasing-power-parity adjusted per capita real GDP. Given that the OECD is expressly concerned with economic growth, the framework for the study consists solely of the nations that comprise the OECD. In the interest of thoroughness and in deference to the existing related literature, this study begins by considering all ten of the measures of economic freedom developed by the Heritage Foundation (2008). To supplement these economic freedom measures, this study adopts a measure of political stability developed by the World Bank (2009). In order to investigate and confirm the resilience of the economic freedom indices as well as political stability in promoting economic growth, strictly economic variables are also integrated into the model (as de facto control variables). The PLS (panel least squares) and P2SLS (two-stage panel least squares) estimations apply for the period 2003 through 2007.

II. The Basic Framework

This study focuses on economic growth among the OECD member countries for the period 2003-2007. Economic growth is measured as the natural log of per capita real GDP over the study period; log RPCY, made comparable across nations by PPP (purchasing power parity) adjustments. In turn, following a number of studies focused upon economic growth (Tortensson, 1994; Cebula, 1978, 1995; Goldsmith, 1995; Ali, 1997; Barro, 1997; Nelson and Singh, 1998; Norton, 1998; Dawson, 1998, 2003; Cole, 2003; Gwartney, Holcombe, and Lawson, 2006), it is hypothesi2ed that economic growth depends upon (a) various forms of economic freedom (FREEDOM), as well as (b) political stability (POLSTAB), and (c) purely economic factors (ECON), such that:

log RPCYppp^sub j^ = f(FREEDOM^sub j^, POLSTAB^sub j^, ECON^sub j^) (1)

where logRPCYppp^sub j^ is the natural log of the purchasing-power-parity adjusted per capita real GDP in OECD nation j; FREEDOM^sub j^ refers to the values of economic freedom measures (indices) in nation j; POLSTABj refers to the value of a measure of political stability in nation j; and ECON^sub j^ refers to the values of economic factors in nation j. …

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