Several studies show a positive and significant link between economic freedom and economic growth. Based on this result many economists recommend an abrupt and total disengagement of the State from the economic activity. Our objective in this paper is double. Initially, we show that the use of an aggregate index of economic freedom can mask the specificity of the link between the latter and the growth. In a second time, we use the Hansen (2000) method to demonstrate the presence of threshold variables rejecting the linearity of the relation between variables on the entire sample. The GDP per capita and the initial enrollment rate in secondary school divide the sample in two groups of countries characterized by different relations. One of our principal results is that the reduction of the size of the government is not effective in countries having an initial GDP per capita and an enrollment rate in 1990 higher than the thresholds values. This enables us to put into perspective the need for a reduction of the size of the government and to insist on the effectiveness of economic policies in developing countries.
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Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number
2008-3.
Find related papers by JEL classification: C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models H10 - Public Economics - - Structure and Scope of Government - - - General H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government H50 - Public Economics - - National Government Expenditures and Related Policies - - - General O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General
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