Economic Freedom, Political Freedom, and Economic Well-Being: A Causality Analysis

Abstract

In recent years, a renewed interest has been shown in trying to further comprehend the factors that determine a country’s rate of economic growth. This is important since a higher growth rate means greater national output, potentially higher living standards, and an enhanced ability to attain economic and social objectives. Earlier studies of the causes of economic growth focused on the importance of increasing exogenous quantities of physical resources (land, labor, and capital) to enhance the rate of growth, while more recent evidence suggests that growth is determined by a much larger set of endoge-nously determined variables.1 Institutional factors—the political and economic customs and prac-tices that exist within countries—have received particular attention in a number of recent studies. The importance of these factors lies in the fact that all economic decisions are made within a given institu-tional setting. And while it is difficult to know with certainty how these factors influence economic growth, it is generally assumed that greater economic and political freedom act as catalysts to enhance growth. But economic growth may also, in turn, enhance economic and political freedom.2