Economic and Democratic Freedoms
Institutions, Lobbying, and Economic Performance
Economics & Politics forthcoming
Abstract. We investigate whether the impact of institutions depends not just on their current state, but also on how they came to be. In particular, we hypothesize that while economic freedom that emerges spontaneously may be growth promoting, economic freedom that emerges as a result of costly lobbying efforts may be less fruitful. In an extreme case, costly lobbying efforts may even negate the growth-enhancing effect of economic freedom. To the extent that lobbying efforts constitute an opportunity cost of resources diverted away from investment and production, our hypothesis also implies that the opportunity cost of lobbying is greater the more efficient is the institutional environment. Panel data analysis reveals the expected positive relation between economic freedom and growth, and consistent with our hypothesis, the findings indicate that the impact of economic freedom on growth does indeed diminish as lobbying efforts increase. In addition, we find that lobbying is more harmful to growth at greater levels of economic freedom.
Has Assistance from USAID Been Successful in Promoting and Sustaining Democracy? Evidence from the Transition Economies of Eastern Europe and Eurasia
Journal of Institutional and Theoretical Economics 168: 636-657, 2012.
Abstract. Foreign aid, especially official development assistance (ODA), has received increasing criticism in past decades. In particular, it has been put into question if and to what extent aid can help foster the aims for which it has been paid. In most cases, it seems that there is no discernable effect or even a negative effect of ODA on economic development. One reason for aid ineffectiveness may be seen in a lack of good governance on the side of the recipients. It has been argued that aid should concentrate more on creating better institutions. In the past 20 years, democracy promotion has become a pillar of USAID’s mission and the funding for democracy and governance has steadily increased. The transition economies in particular have received special attention upon the fall of the Soviet Union. We assess the success of this aid by testing whether US aid is enhancing democracy in 26 transition countries. Using Freedom House Nations in Transit data, we find that in simple linear panel regressions aid has generally not been a significant factor in a country’s overall democracy score. However, aid has significantly contributed to certain components of the democracy score, namely civil society, electoral process, judicial framework, and media independence. In addition, the impact of aid is found to depend on the number of years of past central planning. Countries having a history of less than 50 years of central planning had a significantly negative association to aid, whereas countries with more than 65 years of central planning benefited from greater aid.
Do Political Freedoms Attract or Discourage Foreign Direct Investment? Evidence from Central and Eastern Europe and Former Soviet Union
Developing Economies: Innovation, Investment and Sustainability (Joanne M. Carcillo(ed.)), Nova Science, pp. 175-186, 2012
Abstract. The evidence on the relationship between political freedoms and foreign direct investment (FDI) is mixed. Part of the problem in interpreting results is that past cross-country studies have generally used a large sample of diverse nations and broad measures of political freedoms which do not vary much over time. In this chapter the relationship between political freedoms and FDI in the Central and Eastern European and Former Soviet Union nations is analyzed using recently developed political freedom indexes by Freedom House specific to the transition economies, over the period 1999-2008. By focusing on a specific region of the world which has undergone recent dramatic change in its political institutions, both in terms of positive reforms in certain nations and increased repression in others, a better estimation of the true impact of political freedom can be determined. It is found that greater political freedoms in general discourage FDI. However, not all types of political freedoms significantly hinder FDI. In particular, freedoms related to judicial framework, civil society, and corruption significantly limit FDI, while freedoms related to electoral process and governance do not. Finally, the results for media independence are dependent on specification.
The Connection between Democratic Freedoms and Growth in Transition Economies
Applied Economics Quarterly 56: 121-146, 2010
Abstract. The Freedom House democracy index is often used in regression analysis to estimate the relationship between democratic freedoms and growth. The index is comprised of two broad categories for political rights and civil liberties. However, the relationship between the underlying types of rights and liberties to growth remains unknown. A newer alternative democracy index developed by Freedom House specifically for the transition nations is compared to the original democracy index. The two are highly correlated but the latter entails a greater breakdown across six democracy areas including civil society, judicial framework, media independence, corruption, electoral process, and governance. Except for corruption, each is found to be individually significant in separate growth regressions, but when all are included simultaneously, only greater freedoms in civil society and electoral process are significantly correlated with higher growth, while greater freedom in judicial framework is significantly correlated with lower growth. The remaining areas are not statistically significant.
Kyklos 63: 558-579, 2010
Abstract. Past studies have not been supportive of the ability for foreign aid to create increased development and market liberalization. Less attention has been devoted to investigating the role aid has played in fostering democratic institutions. For a sample of 26 nations in Eastern Europe and former Soviet republics, I find more aid per capita is strongly associated with democratic reforms, but less robust is the relationship for aid as a percentage of gross national income. When analyzing various types of democratic freedoms, it appears both measures of aid improve the categories of judicial framework and governance, and aid per capita is also positively correlated with improvements in civil society and electoral process, but aid does not lead to more media independence.
Constitutional Political Economy 21: 80-96, 2010
Abstract. Empirical studies often use Freedom House ratings for Political Rights and/or Civil Liberties as institutional proxies for the degree of democracy. In this study, Granger-causality tests are used which reveal that Political Rights tend to precede Civil Liberties, but not the reverse, in a panel data set of former Soviet Republics. For transition nations, Freedom House also publishes a separate breakdown of democratic characteristics. Empirical tests suggest Civil Society and Judicial Framework Granger-cause Electoral Process, Governance Granger-causes Civil Society, and all four components Granger-cause Independent Media. Each measure of democracy is related to at least one other but no evidence for dual causation is found.
Comparative Economic Studies 52: 351-378, 2010
Abstract. Several cross-country studies have found that corruption is detrimental to economic growth, but the findings are not universally robust. We utilize the economic freedom index to examine if corruption can facilitate growth by allowing entrepreneurs to avoid inefficient policies and regulations when economic freedom is limited. Using regression analysis, we find that corruption is growth enhancing when economic freedom is most limited but the beneficial impact of corruption decreases as economic freedom increases. Not all areas of economic freedom affect the corruption-growth relationship equally. In particular, we find the beneficial effect of corruption disappears most quickly when the size of government and the extent of regulation decrease.
Contemporary Economic Policy 27: 46-53, 2009
Abstract. Foreign aid has often been intended by donors to entice recipient nations into policy and institutional reforms favorable to private sector economic development. In this study, we investigate the relationship between aid and changes to economic freedom in recipient nations over the 1990-2000 decade. The evidence is mixed. In general we find that foreign aid has no significant effect on economic freedom overall. However, by utilizing an hedonic approach on the different categories of economic freedom we find that aid has still managed to contribute toward a policy and institutional environment favorable to growth, as the different categories of economic freedom improved by aid more than offset those which are harmed by aid, in terms of their impact on growth.
Economica 75: 524-548, 2008
Abstract. Market-oriented economic policies have been strongly linked to faster rates of economic growth. Foreign aid is often provided in part to encourage market-oriented reforms. We analyse the impact of aid on market-liberalizing policy reform, correcting for its potential endogeneity. Results indicate that higher aid slowed reform over the 1980-2000 period, as measured by a broad index of policies. Disaggregating policy into five areas, aid is associated with slower reform in some policy areas but not in others. Disaggregating by decade, the adverse impact of aid on policy reform is much more pronounced for the 1980s than for the 1990s.
European Journal of Political Economy 21: 953-966, 2005
Abstract. Empiricists have used various editions of an economic freedom index (EFI) initially developed by Gwartney, Lawson and Block (1996) to examine the relationship between economic freedom and other socio-economic variables, such as growth or investment. The EFI quantifies the level of particular institutional characteristics thought to promote economic freedom and aggregates them into a single index value. The aggregation procedures utilized by Gwartney and Lawson in developing their index have changed over time and other scholars have promoted alternative methods. We examine several index aggregation procedures and show that each design may have potential methodological flaws which can greatly affect the empirical findings.
Southern Economic Journal 72: 492-501, 2005
Abstract. Economic freedom indicators have become quite popular recently as a useful tool to quantify the relationship between a country's institutions and its prosperity. Hanson (2003) criticizes these types of studies for: (i) failing to adequately distinguish between different proxies for economic freedom, (ii) not considering the potential for endogeneity, and (iii) accepting significance of economic freedom's ability to promote prosperity even though regression analysis generates "nonsensical" results. Closer inspection reveals that most of his arguments are questionable, do not apply to much of the literature, or are not original, and that he is guilty of misinterpreting his own econometric evidence relating freedom to the level of GDP.
International Journal of Business and Economics 1: 251-261, 2002
Abstract. The measurement of economic freedom is discussed. One particular set of freedom indices, developed by Heritage Foundation, is detailed including how the indices are constructed and potential problems in the methodological design. Comparisons are made for the different levels of freedom individual nations and regions achieve.
Kyklos 55: 417-420, 2002
Abstract. Reply to comment by Sturn et al. on article below.
Kyklos 53: 527-544, 2000
Abstract. The literature on economic freedom and growth has utilized summary measures of freedom to determine its general significance for economic growth. We believe the summary measures lead to misspecification problems. We utilize Heston-Summers growth data to determine which of the disaggregated categories of economic freedom lead to growth and find that only a few of the indexes significantly affect growth. These growth regressions generate new weights for aggregating the indexes into an overall summary measure. This new measure can be interpreted as deriving a relative ranking of nations that have a relatively higher presence of growth promoting economic freedoms and more restrictions on those economic freedoms that inhibit growth.
Journal of Applied Economics 3: 71-91, 2000
Abstract. The freedom and growth literature has consistently shown that nations which have fewer restrictions on private agents and transactions tend to higher levels of economic growth. It is less clear, however, whether freedom causes growth, growth causes freedom, or the two are jointly determined. To assess these possibilities, Granger-causality tests are performed on annual freedom indicators developed by the Heritage Foundation and national growth rates. The underlying component indexes, which include Trade Policy, Taxation, Government Intervention, Monetary Policy, Capital Flows and Foreign Investment, Banking, Wage and Price Controls, Property Rights, Regulation, and Black Markets, are also tested in addition to the summary freedom rating. The tests suggest the average level of freedom in a nation, as well as many of the specific underlying components of freedom, precedes growth. However, growth may precede one of the component indexes (Government Intervention), and no relationship is found to exist between growth and two of the indexes (Trade Policy and Taxation).