Economic Freedom Matters A Lot More for Economic Development Than You Think!

21 Pages Posted: 28 Feb 2023 Last revised: 12 May 2023

See all articles by Sean Patrick Alvarez

Sean Patrick Alvarez

Political Economy Research Institute

Vincent Geloso

George Mason University - Department of Economics

Macy Scheck

Political Economy Research Institute at Middle Tennessee State University

Multiple version iconThere are 2 versions of this paper

Date Written: February 23, 2023

Abstract

The literature connecting economic freedom indexes to income levels and growth generally points in the direction of a positive association. In this paper, we argue that this finding is a highly conservative as the data is heavily biased against finding any effects. The bias emerges as a result of the tendency of dictatorial regimes to overstate their GDP level. Dictatorships also tend to have lower scores of economic freedom. This downwardly biases any estimations of the relation between income and economic freedom. In this paper, we use recent corrections to GDP numbers — based on nighttime light intensity — to estimate the bias. We find that the true effects of economic freedom at its component on income levels are between 1.1 and 1.33 times greater than commonly estimated. For economic growth, the bias is far smaller and only appears to be relevant for some individual components such as size of government and property rights.

Keywords: Economic Freedom, Economic Growth, Dictatorship, Development

JEL Classification: O11, O20, P16

Suggested Citation

Alvarez, Sean and Geloso, Vincent and Scheck, Macy, Economic Freedom Matters A Lot More for Economic Development Than You Think! (February 23, 2023). GMU Working Paper in Economics No. 23-14, Available at SSRN: https://ssrn.com/abstract=4368623 or http://dx.doi.org/10.2139/ssrn.4368623

Sean Alvarez

Political Economy Research Institute ( email )

Murfreesboro, TN
United States

Vincent Geloso (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

Macy Scheck

Political Economy Research Institute at Middle Tennessee State University ( email )

MTSU Box 190
1301 E Main St
Murfreesboro, TN 37132
United States

HOME PAGE: http://www.macyscheck.com/

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