Which Economic Freedoms Contribute to Growth?

Recent studies have investigated the relationship between a country’s overall measure of economic freedom and its economic performance over time. On the one hand, institutions promoting economic freedoms are thought to increase productivity (Dawson 1998) and investment opportunities (Besley 1995). However, while economic freedom may be certainly desirable from a normative perspective, De Hann and Siermann (1998) present evidence that the relationship between economic freedom and growth is not robust. This paper is an attempt to separate out those aspects of economic freedom which apparently fail to increase growth from those that are empirically correlated with growth. Typically, a single overall measure of economic freedom, based on an aggregation of various underlying freedom indexes, is used in empirical studies on growth. In this paper, we follow a different tract. By disaggregating the specific components of economic freedom and measuring the relevant independent impact on growth exhibited by each component, we can derive an empirically weighted summary index of growth-promoting economic freedoms, rather than relying upon a subjective index of economic freedom used to project economic growth. A direct comparison of these indexes can then be made as well as a comparison of the resulting growth projections for each country. Our empirical results indicate that some characteristics of economic freedom that are widely