The relationship between income, economic freedom, and political freedom is often examined over the long-run but recently, there is increased interest in the short-run. From a review of the literature, I develop possible short-run relationships between a country’s income per capita, economic freedom, political rights, and civil liberties while taking into consideration broad institutional differences across countries. The empirical strategy is to estimate a structural panel vector autoregression where each equation is estimated using the dynamic panel general method of moments procedure of Arellano and Bover (1995). I then estimate impulse responses for the full sample of 128 countries between 1994-2009 as well as key sub-samples. From this relatively a theoretical approach, results indicate that improvements in economic freedom benefit more developed countries relative to less developed countries, as do improvements in income per capita. Improvements in political rights improve economic freedom in highly developed countries and low developed countries but improve income the most in countries with medium development. Improvements in civil liberties have somewhat the opposite effect as political rights. Implications of these results are discussed with an eye toward their practical relevance for business as well as policymakers.
Saturday, 25 February 2012
A relationship between income and freedom
There is a new working paper by Derek Stimel out on The Short-Run Relationship between Income and Freedom: Evidence from 128 Countries. The abstract reads: