Does Free Trade Really Reduce Growth? Further Testing Using the Economic Freedom Index

Abstract

While studies of the relationship between economic freedom and economic growth have shown it to be positive, significant and robust, it has rightly been argued that different areas of economic freedom may have quite different effects on growth. Along that line, Carlsson and Lundstrom (2002) present the surprising result that International exchange: Freedom to trade with foreigners is detrimental for growth. We find that Taxes on international trade seems to drive this result. However, using newer data and a more extensive sensitivity analysis, we find that it is not robust. Least Trimmed Squares-based estimation in fact renders the coefficient positive.

Keywords: free trade, economic freedom, economic growth

JEL Classification: E61, F13, F43, O24, O40, P17