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Is Economic Freedom One Dimensional? A Factor Analysis of Some Common Measures of Economic Freedom

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  • Steven B. Caudill

    (Department of Economics, Auburn University)

  • Fernando C. Zanella

    (Department of Economics and International Business, The University of Southern Mississippi)

  • Franklin G. Mixon, Jr.

    (Department of Economics and International Business, The University of Southern Mississippi)

Abstract

The present paper investigates whether popular measures of economic freedom used in regression analyses by development economists and others are one dimensional. Using the indices provided by the Fraser Institute, Heritage/Wall Street Journal, and Heritage and Freedom House, a principal component analysis indicates that all of the indices above perform about as well as the statistically best single index, and in every case the percentage of total variance explained could be improved by using several principal components. Because the components of the indices are orthogonal, this could be done without multicollinearity problems in regression equations. In sum, the results indicate that economic freedom is not one dimensional and that efforts to squeeze so much into a single index results in lost information and a mis-ranking of the economic freedom of many developing countries.

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Bibliographic Info

Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

Volume (Year): 25 (2000)
Issue (Month): 1 (June)
Pages: 17-40

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Handle: RePEc:jed:journl:v:25:y:2000:i:1:p:17-40

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  1. Smith, Adam, 1776. "An Inquiry into the Nature and Causes of the Wealth of Nations," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number smith1776.
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Cited by:
  1. Jac C. Heckelman, 2002. "On the Measurement of Comparative Economic Freedom across Nations," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 1(3), pages 251-261, December.
  2. Heckelman, Jac & Knack, Stephen, 2005. "Foreign aid and market-liberalizing reform," Policy Research Working Paper Series 3557, The World Bank.
  3. Cohen, Joseph N, 2009. "Is “economic freedom” strictly free market capitalism? A decompositional analysis of the Economic Freedom of the World index," MPRA Paper 22437, University Library of Munich, Germany.
  4. Berggren, Niclas, 2003. "The Benefits of Economic Freedom: A Survey," Ratio Working Papers 4, The Ratio Institute.
  5. Jac, Heckelman, 2009. "The connection between democratic freedoms and growth in transition economies," MPRA Paper 21533, University Library of Munich, Germany.
  6. Vatcharin Sirimaneetham, 2006. "What drives liberal policies in developing countries?," Bristol Economics Discussion Papers 06/587, Department of Economics, University of Bristol, UK.
  7. Heckelman, Jac C. & Stroup, Michael D., 2005. "A comparison of aggregation methods for measures of economic freedom," European Journal of Political Economy, Elsevier, vol. 21(4), pages 953-966, December.
  8. Heckelman, Jac C. & Powell, Benjamin, 2008. "Corruption and the Institutional Environment for Growth," Working Papers 2008-6, Suffolk University, Department of Economics.
  9. Richard Cebula & Franklin Mixon, 2012. "The Impact of Fiscal and Other Economic Freedoms on Economic Growth: An Empirical Analysis," International Advances in Economic Research, Springer, vol. 18(2), pages 139-149, May.
  10. Botero Degiovanni, Hernan, 2013. "The Effects of Drug Enforcement on Violence in Colombia 1999-2010: A Spatial Econometric Approach," MPRA Paper 49459, University Library of Munich, Germany.

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