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Forced to Freedom? Empirical relations between aid and economic freedom

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Author Info
Tobias Knedlik
Franz Kronthaler

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Abstract

The paper explores the relationships between economic freedom on the one side and development aid and IMF credit as approximation for conditional aid on the other side. After a short review of current literature on the issue of economic development, economic freedom, aid, and IMF credit, the paper develops a simple panel regression model to evaluate the relationship between “economic freedom” as dependent variable and “aid” and “IMF credit” as independent variables. The estimation is based upon data taken from the World Bank’s World Development Indicators and the Heritage Index of Economic Freedom. In contrast to previous research, our results allow the rejection of the hypothesis that IMF credit increases economic freedom and that aid is not contributing to economic freedom. The estimation results suggest that, firstly, aid is positively correlated with economic freedom, and secondly, that IMF credit is negatively correlated with economic freedom. Taking IMF credit as proxy for conditional aid, we conclude that for the period of observation it could not be shown that countries can be forced to economic freedom by aid conditions.

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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 8-06.

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Date of creation: May 2006
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Handle: RePEc:iwh:dispap:8-06

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Related research
Keywords: aid; economic freedom; IMF credit; economic development;

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Find related papers by JEL classification:
F35 - International Economics - - International Finance - - - Foreign Aid
O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
P10 - Economic Systems - - Capitalist Systems - - - General

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  1. de Haan, Jakob, 2003. "Economic freedom: editor's introduction," European Journal of Political Economy, Elsevier, vol. 19(3), pages 395-403, September. [Downloadable!] (restricted)
  2. Paul Collier & David Dollar, 2004. "Development effectiveness: what have we learnt?," Economic Journal, Royal Economic Society, vol. 114(496), pages F244-F271, 06. [Downloadable!] (restricted)
  3. De Vanssay, Xavier & Spindler, Z A, 1994. " Freedom and Growth: Do Constitutions Matter?," Public Choice, Springer, vol. 78(3-4), pages 359-72, March.
  4. John Hudson, 2004. "Introduction: Aid and Development," Economic Journal, Royal Economic Society, vol. 114(496), pages F185-F190, 06. [Downloadable!] (restricted)
  5. Stephen Knack, 2001. "Aid Dependence and the Quality of Governance: Cross-Country Empirical Tests," Southern Economic Journal, Southern Economic Association, vol. 68(2), pages 310-329, October.
  6. de Haan, Jakob & Sturm, Jan-Egbert, 2003. "Does more democracy lead to greater economic freedom? New evidence for developing countries," European Journal of Political Economy, Elsevier, vol. 19(3), pages 547-563, September. [Downloadable!] (restricted)
  7. Boockmann, Bernhard & Dreher, Axel, 2003. "The contribution of the IMF and the World Bank to economic freedom," European Journal of Political Economy, Elsevier, vol. 19(3), pages 633-649, September. [Downloadable!] (restricted)
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  8. Heckelman, Jac C & Stroup, Michael D, 2000. "Which Economic Freedoms Contribute to Growth?," Kyklos, Blackwell Publishing, vol. 53(4), pages 527-44.
  9. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February. [Downloadable!] (restricted)
  10. Simeon Djankov & Jose Montalvo & Marta Reynal-Querol, 2008. "The curse of aid," Journal of Economic Growth, Springer, vol. 13(3), pages 169-194, September. [Downloadable!] (restricted)
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  11. de Haan, Jakob & Sturm, Jan-Egbert, 2000. "On the relationship between economic freedom and economic growth," European Journal of Political Economy, Elsevier, vol. 16(2), pages 215-241, June. [Downloadable!] (restricted)
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