The freedom factor: Is economic freedom key to reducing internal conflict and state fragility? – An empirical study of 92 developing countries

This study examines the effects of the Fraser Institute’s Economic Freedom of the World index on state fragility and internal conflict, including civil war/coups, terrorism, and civil disorder, in 92 developing countries from 1985 to 2020. The findings are robust across alternative controls, multiple econometric frameworks (e.g., ordinary least squares, fixed and random effects, generalized method of moments, feasible generalized least squares, and method of moments quantile regression), and different temporal specifications (annual versus multi-year intervals), strongly supporting capitalist peace theory by showing that economic freedom reduces internal conflict and state fragility. Yet, the study finds the effects of economic freedom can vary across conflict types. For civil war and coups, economic freedom’s moderating role is weaker and may be overshadowed by cultural, ideological, and power struggles. In the case of terrorism and political violence, economic freedom appears to increase terrorism and political violence in more peaceful settings, is insignificant at moderate levels, but becomes a stabilizing force when terrorism and political violence is high. Notably, economic freedom consistently moderates civil disorder across most models, suggesting that expanded opportunities reduce incentives for protest, unlike democratic freedoms, which, by protecting rights such as assembly and free expression, may inadvertently enable more civil disorder. Among the five dimensions of economic freedom, legal system and property rights, sound money, and freedom to trade internationally have the strongest and most consistent conflict and fragility-reducing effects, particularly in severe conflict and fragility settings. By contrast, smaller government increase state fragility by weakening state capacity, and deregulation exacerbates state fragility by eroding protections and fueling grievances. Importantly, quantile analysis reveals that economic freedom has a greater conflict/fragility reducing effects in high-conflict/fragility environments, underscoring its critical role in promoting stability and economic development in vulnerable states.