The Contribution of Economic Freedom to World Economic Growth, 1980-99

Abstract

Since 1986, a group of researchers associated with the Fraser In-stitute have focused on the definition and measurement of an inter-nationally comparable index of economic freedom (Easton and Walker 1992; Gwartney, Block, and Lawson 1996). This work has resulted in the development of a numerical index that now ranks 123 countries in terms of their degree of economic freedom, as measured by a composite of 38 indicators grouped in five major categories: size of government, legal structure, monetary and banking policy, inter-national trade, and regulation (Gwartney and Lawson 2002). One important finding is that the degree of economic freedom, as mea-sured by the Economic Freedom of the World (EFW) index, is highly correlated with both the level and the rate of growth of real per capita GDP (Table 1). These comparisons, though striking, nonetheless suffer from two limitations: they are simple two-variable correlations, and they are average results for groupings of countries. Analyzing the results for countries grouped in quintiles averages out much of the actual dispersion in the data, and ignoring the effect of other explanatory variables biases the results due to an “omitted variables ” effect. The purpose of this study is to evaluate the incre-mental explanatory power of the EFW index in the context of more general models of economic growth. The period chosen for study is 1980–99, and the economic growth regressions are estimated for a sample of 106 countries.1