Economic Freedom and the Trade-off between Inequality and Growth
Table of Contents
The Link Between Economic Freedom and Economic Growth
"Increases in economic freedom are associated with increases in economic growth."
Economic freedom is the right of individuals to engage in economic activity free of government control and intervention. The best measure of economic freedom currently available is that provided by James Gwartney, Robert Lawson and Walter Block.8 They measure economic freedom on a scale from 0 (worst) to 10 (best). Economic growth is defined as the real growth rate in per capita gross domestic product (GDP) in U.S. dollars.
For the countries in the sample,9 the effect of a one-unit increase in economic freedom (say, from 5.0 to 6.0) is an increase in the economic growth rate of about one-quarter of a percentage point (for example, from 2.0 to 2.25 percent). Figure I shows the relationship between the index of economic freedom and the growth rate.
- The average growth rate among the countries in the sample is 2.3 percent, and the average value of the economic freedom index is 5.6.
- The range in the freedom measure among these countries is from 3.3 to 9.5, a spread of 6.2.
- This difference multiplied by a quarter of a percentage point in the growth rate yields a predicted spread in the per capita growth rates of 1.5 percentage points, which is a substantial difference.
"Increases in economic freedom are associated with less income inequality."
Thus, differences in economic freedom greatly affect the rate of economic progress among the nations of the developed world.