The Nexus between Improvements in Economic Freedom and Growth: Evidence from CEE Countries in Transition

Gurgul, Henryk and Lach, Łukasz (2011): The Nexus between Improvements in Economic Freedom and Growth: Evidence from CEE Countries in Transition. Published in: Central European Journal of Economic Modelling and Econometrics , Vol. 3, (2011): pp. 133-168.

Abstract

This study examines the causal links between improvements in economic freedom and changes in GDP per capita of new EU members in transition in the period 2000-2009. The empirical results suggest significant causality running from changes in monetary and fiscal freedom, trade openness, regulation of credit, labour, and business, legal structure and security of property rights, and access to sound money to movements in GDP per capita, especially in less and moderately developed CEE transition countries. Moreover, we find evidence that improvements in economic freedom are one of the main factors stimulating the convergence of these economies towards rich EU members. The evidence of causality in the opposite direction is much weaker.

• Item Type: MPRA Paper
• Language: English
• Keywords: economic growth, economic freedom, CEE transition economies.
• Subjects: K - Law and Economics > K0 - General; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O10 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

References

1. Aixala J., Fabro G., (2009), Economic freedom, civil liberties, political rights and growth: a causality analysis, Spanish Economic Review 11, 165-178.

2. Ali A.M., (1997), Economic Freedom, Democracy and Growth, Journal of Private Enterprise 13(1), 1-20.

3. Ali A.M., Crain M.W., (2001), Political Regimes, Economic Freedom, Institutions and Growth, Journal of Public Finance and Public Choice 19(1), 3-22.

4. Ali A.M., Crain M.W., (2002), Institutional Distortions, Economic Freedom and Growth, Cato Journal 21(3), 415-426.

5. Andrews D.W.K., (1991), Heteroskedasticity and autocorrelation consistent covariance matrix estimation, Econometrica 59, 817–858.

6. Andrews D.W.K., Buchinsky M., (2000), A Three–Step Method for Choosing the Number of Bootstrap Repetitions, Econometrica 68, 23–52.

7. Barro R.J., (1997), Determinants of Economic Growth: A Cross-Country Empirical Study, MIT Press, Cambridge.

8. Berggren N., (2003), The Benefits of Economic Freedom: A Survey, The Independent Review 8, 193-211.

9. Cao J., (2008), Is Competition Always Effective? The Theoretical Basis of Excessive Competition, The Chinese Economy 41, 74-104.

10. Cebula R.J., (2011), Economic Growth, Ten Forms of Economic Freedom, and Political Stability: An Empirical Study Using Panel Data, 2003-2007, The Journal of Private Enterprise 26(2), 61-81.

11. Clark J.R., Lawson R.A.,(2008), The Impact of Economic Growth, Tax Policy, and Economic Freedom on Income Inequality, Journal of Private Enterprise 24(1), 23–31.

12. Cole J.H., (2003), The Contribution of Economic Freedom to World Economic Growth, 1980–99, Cato Journal 23(2), 189–198.

13. Dawson J.W., (2003), Causality in the freedom-growth relationship, European Journal of Political Economy 19, 479–495.

14. de Haan J., Lundstrom S., Sturm J-E., (2006), Market-Oriented Institutions and Policies and Economic Growth: A Critical Survey, Journal of Economic Surveys 20, 157-181.

15. de Haan J., Siermann C.L.J., (1998), Further evidence on the relationship between economic freedom and economic growth, Public Choice 95, 363-380.

16. de Haan J., Sturm J-E., (2000), On the Relationship Between Economic Freedom and Economic Growth, European Journal of Political Economy 16, 215-241.

17. de Haan J., Sturm J-E., (2003), Does more democracy lead to greater economic freedom? New evidence for developing countries, European Journal of Political Economy 17(1), 1-16.

18. Doucouliagos C., Ulubasoglu M.A., (2006), Economic Freedom and Economic Growth: Does Specification Make a Difference?, European Journal of Political Economy 22, 60-81.

19. Easton S.T., Walker M.A., (1997), Income, growth and economic freedom, American Economic Review 87(2), 328-332.

20. Faria H.J., Montesinos H.M., (2009), Does economic freedom cause prosperity? An IV approach, Public Choice 141, 103–127.

21. Faust J., Leeper E.M., (1998), When do Long–Run Identifying Restrictions give Reliable Results? Journal of Business and Economic Statistics 15, 345–354.

22. Gelman A., (2005), Analysis of variance - why it is more important than ever, The Annals of Statistics 33, 1-53.

23. Granger C.W.J., Huang L-L., (1997), Evaluation of Panel Data Models: Some Suggestions from Time Series, Discussion Paper 97-10, University of California.

24. Granger C.W.J., Newbold P., (1986), Forecasting Economic Time Series (2nd ed.), Emerald, Orlando.

25. Guiso L., Sapienza P., Zingales L., (2004), Does Local Financial Development Mat¬ter? Quarterly Journal of Economics 119, 929-969.

26. Gurgul H., Lach Ł., (2011), The role of coal consumption in the economic growth of the Polish economy in transition, Energy Policy 39, 2088-2099.

27. Gurgul H., Lach Ł., (2012), The electricity consumption versus economic growth of the Polish economy, Energy Economics 34(2), 500-510.

28. Gwartney J.D., Holcombe R.G., Lawson R.A., (2006), Institutions and the Impact of Investment on Growth, Kyklos 59(2), 255–276.

29. Gwartney J.D., Lawson R.A., Hall J., (2011), Economic Freedom of the World: 2011 Annual Report. Fraser Institute.

30. Hacker S.R., Hatemi–J A., (2006), Tests for causality between integrated variables using asymptotic and bootstrap distributions: theory and application, Applied Economics 38, 1489–1500.

31. Harvey D.I., Leybourne S.J., Newbold P., (1998), Tests for Forecast Encompassing, Journal of Business & Economic Statistics 16(2), 254-259.

32. Heckelman J.C., (2000), Economic freedom and economic growth: A short-run causal investigation, Journal of Applied Economics 3, 71–91.

33. Heckelman J.C., Stroup M.D., (2000), Which Economic Freedoms Contribute to Growth? Kyklos 53, 527-544.

34. Horowitz J.L., (1995), Bootstrap methods in econometrics: Theory and numerical performance, [in:] Advances in Economics and Econometrics: Theory and Applications, [eds.:] Kreps D.M., Wallis K.F., Cambridge University Press, Cambridge, 188–232.

35. La Porta R., Lopez de Silanes F., Shleifer A., Vishny R.W., (1997), Legal Determi¬nants of External Finance, Journal of Finance 52, 1131-1150.

36. La Porta R., Lopez de Silanes F., Shleifer A., Vishny R.W., (1998), Law and Finance, Journal of Political Economy 106, 1113-1155.

37. Lawson R.A., (2006), On Testing the Connection Between Economic Freedom and Growth, Econ Journal Watch 3, 398-406.

38. Liu R.Y., (1988), Bootstrap procedure under some non-i.i.d. models, Annals of Statistics16, 1696-1708.

39. Lütkepohl H., (1993), Introduction to Multiple Time Series Analysis, Springer–Verlag, New York.

40. Mansfield E., (1991), Microeconomics: Theory and Application, Norton & Company, Inc., New York.

41. Newey W.K., West K.D., (1987), A Simple Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix, Econometrica 55, 703–708.

42. OECD (2009), Policy brief: Keeping markets open at times of economic crisis, Paris, France.

43. Pérez-Moreno S., (2009), An Assessment of the Causal Relationship between Growth and Inequality in Spanish Provinces, European Planning Studies 17, 389-400.

44. Phillips P.C.B., (1986), Understanding the spurious regression in econometrics, Journal of Econometrics 33, 311–340.

45. Phillips P.C.B., (1998), Impulse Response and Forecast Error Variance Asymptotics in Nonstationary VAR, Journal of Econometrics 83, 21–56.

46. Pitlik H., Wirth S., (2003), Do crises promote the extent of economic liberalization? An empirical test, European Journal of Political Economy 19(3), 565–581.

47. Robinson G.K., (1991), That BLUP is a good thing: The estimation of random effects (with discussion), Statistical Science 6, 15–51.

48. Stroup M.D., (2007), Economic freedom, democracy, and the quality of life, World Development 35(1), 52-66.

49. Takayama A., (1985), Mathematical Economics, Cambridge University Press, Cambridge.

50. Vilasuso J., (2001), Causality tests and conditional heteroskedasticity: Monte Carlo evidence, Journal of Econometrics 101(1), 25–35.

51. Weinhold D., Reis E., (2001), Model evaluation and testing for causality in short panels: The case of infrastructure provision and population growth in the Brazilian Amazon, Journal of Regional Science 41, 639-657.

52. White H., (1980), A heteroskedasticity consistent covariance matrix estimator and a direct test for heteroskedasticity, Econometrica 48, 817–838.

53. World Bank (2009). Governance Matters. http://info.worldbank.org/governance/wgi/pdf/WBI_GovInd.pdf (Accessed 06.12.2011).

54. Wu C., (2011), Economic Freedom, Economic Growth, and China, The Chinese Economy 44, 104-119.