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Constitutional Political Economy

, Volume 23, Issue 2, pp 95–133 | Cite as

Economic freedom and growth. Which policies matter the most?

  • Martin Rode
  • Sebastian CollEmail author
Original Paper

Abstract

Empirical studies provide evidence that economic freedom, as measured by the Economic Freedom of the World Index, is related to economic growth. None the less, identifying which aspects of economic freedom are more conducive to growth has proven difficult, due to multicollinearity among the index areas. A possible explanation is that certain countries score high in all areas, whereas others tend do bad in all of them, simply because the former are more freedom-friendly than the latter. However, it is also true that each country presents a combination of freedoms, and restrictions to freedom, at the level of the individual indicators that make up each area. If some regularity exists with respect to these combinations, empirical detection of the most popular policy combinations would alleviate the collinearity problem, when assessing growth effects. Our article explores this possibility by means of cluster analysis, which we conduct at the individual indicator level. We show that multicollinearity can indeed be reduced in this way and identify policy packages that seem to be more conducive to economic growth than others. Results further indicate that certain policy packages may have only a short-term effect on growth, whereas others seem to have an enduring one.

Keywords

Economic freedom Economic growth Aggregation Cluster analysis 

JEL Classification

C43 B53 O10 O43 

Notes

Acknowledgments

The authors thank the following persons for having made helpful comments: Niclas Berggren, Judith Clifton, Sven-Olov Daunfeldt, Daniel Díaz, Marcos Fernández-Gutierrez, Kevin Grier, James Gwartney, Santiago Lago, Felix Meier zu Selhausen, Julio Revuelta, Carmen Trueba and Erich Weede, as well as three anonymous referees. Preliminary versions of this paper were presented at the following conferences: The 2010 Annual Meeting of the Public Choice Society in Monterey, CA, the 2010 Annual Meeting of the European Public Choice Society in Izmir, Turkey, and the 2010 Annual Conference of the International Society for New Institutional Economics in Stirling, UK. Martin Rode would also like to thank the Spanish Ministry of Education for financial support in the framework of an FPU scholarship.

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Copyright information

© Springer Science + Business Media, LLC 2011

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of CantabriaSantanderSpain
  2. 2.Department of EconomicsFlorida State UniversityTallahasseeUSA

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