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

Author

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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.

Suggested Citation

  • Steven B. Caudill & Fernando C. Zanella & Franklin G. Mixon, Jr., 2000. "Is Economic Freedom One Dimensional? A Factor Analysis of Some Common Measures of Economic Freedom," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 25(1), pages 17-40, June.
    • Handle: RePEc:jed:journl:v:25:y:2000:i:1:p:17-40
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    References listed on IDEAS

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    3. 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:

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    2. Jac C. Heckelman & Stephen Knack, 2008. "Foreign Aid and Market‐Liberalizing Reform," Economica, London School of Economics and Political Science, vol. 75(299), pages 524-548, August.
    3. Lina Escobar Rangel & François Lévêque, 2012. "Revisiting the cost escalation curse of nuclear power: New lessons from the French experience," Working Papers hal-00780566, HAL.
    4. Ajit Pratap Singh & Makrand Wagale & Kunal Dhadse & Anjaney Singh, 2022. "Socioeconomic impacts of low-volume roads using a GIS-based multidimensional impact assessment approach," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(5), pages 6676-6701, May.
    5. 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.
    6. Noha Emara (a) and Loreto Reyes Rebolledo (b), 2021. "Economic Freedom and Economic Performance: Does Good Governance Matter? The Case of APAC and OECD Countries," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 46(1), pages 1-32, March.
    7. Vatcharin Sirimaneetham, 2006. "What drives liberal policies in developing countries?," Bristol Economics Discussion Papers 06/587, School of Economics, University of Bristol, UK.
    8. 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.
    9. Jac C Heckelman & Benjamin Powell, 2010. "Corruption and the Institutional Environment for Growth," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 52(3), pages 351-378, September.
    10. Berggren, Niclas, 2003. "The Benefits of Economic Freedom: A Survey," Ratio Working Papers 4, The Ratio Institute.
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    12. Cebula, Richard J. & Clark, J.R. & Mixon, Franklin G., Jr., 2013. "The Impact of Economic Freedom on Per Capita Real GDP: A Study of OECD Nations," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 43(1).
    13. Ryan H. Murphy, 2022. "On Whether the Size of Government Belongs in Economic Freedom Indices," Econ Journal Watch, Econ Journal Watch, vol. 19(1), pages 1-47–57, March.
    14. Scott Beaulier & Robert Elder & Cheryl Han & Joshua C. Hall, 2016. "An ordinal ranking of economic institutions," Applied Economics, Taylor & Francis Journals, vol. 48(26), pages 2482-2490, June.
    15. Damiana Giuseppina Costanzo & Damiano Bruno Silipo & Marianna Succurro, 2013. "Over-Indebtedness And Innovation: Some Preliminary Results," Working Papers 201304, Università della Calabria, Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF.
    16. Olusegun Ayodele Akanbi, 2019. "State Institutions and Tax Capacity: An Empirical Investigation of Causality," IMF Working Papers 2019/177, International Monetary Fund.
    17. 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;International Atlantic Economic Society, vol. 18(2), pages 139-149, May.
    18. Jac C. Heckelman, 2010. "The Connection between Democratic Freedoms and Growth in Transition Economies," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 56(2), pages 121-146.
    19. Judit Kapás & Pál Czeglédi, 2017. "Institutions and policies of economic freedom: different effects on income and growth," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 34(2), pages 259-282, August.
    20. Jac C. Heckelman, 2002. "On the Measurement of Comparative Economic Freedom across Nations," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 1(3), pages 251-261, December.
    21. C. Cosculluela-Martínez & R. Ibar-Alonso & G. J. D. Hewings, 2019. "Life Expectancy Index: Age Structure of Population and Environment Evolution," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 142(2), pages 507-522, April.
    22. Eric Crampton, 2002. "You Get What You Vote For : Voter Preferences and Economic Freedom," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 18(Fall 2002), pages 29-56.
    23. Lina Escobar Rangel and Francois Leveque, 2015. "Revisiting the Cost Escalation Curse of Nuclear Power: New Lessons from the French Experience," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    24. Pandey, Vivek & Steigner, Tanja & Sutton, Ninon K., 2023. "The value of economic freedom in cross-border mergers," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 540-563.

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