Freedoms and Economic Growth: Transitional and Permanent Components

This paper investigates the empirical foundation for policy reform prescriptions suggested by the institutional approach to economic growth. The focus is the relationship between institutional reforms, measured by changes in a country's political or civil rights, and economic growth. Empirical models previously estimated using cross-section data are extended by adding a temporal element. This allows an estimation of the timing of benefits following a reform. In addition to finding support for the idea that institutional reforms can cause increases in economic growth, five major implications emerge: (i) the economic benefits of freedom reforms are systematic and significant, (ii) economic benefits, in the form of increased growth, occur with a lag after the initiation of a reform in political rights or in civil liberties, (iii) reforms in civil liberties eventually require a reform in political rights in order to be sustained, (iv) changes in the capital-to-labor ratio have a larger effect on economic growth in the short run than in the long run, and (v) there remains significant and unexplained regional variation in the short-run effects of changes in the capital-to-labor ratio.