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Economic Freedom and Income Inequality: Does Political Regime Matter?

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  • Mahyudin Ahmad

    (Faculty of Business Management, Universiti Teknologi MARA Malaysia, Arau Perlis 02600, Malaysia
    Faculty of Economics, University of Cambridge, Sidgwick Avenue, Cambridge CB3 9DD, UK)

Abstract

There is a growing literature studying the effects of economic freedom and democracy on income inequality; nevertheless, the inequality-effects of both factors are apparently studied separately. This paper revisits the income inequality-economic freedom nexus and uncovers the role of political regime in explaining the relationship. Using the latest inequality data from Standardized World Income Inequality (SWIID) version 5.0 for a sample of countries up to 115 over 1970–2014 period, and via dynamic panel GMM estimation method, an inequality model that explicitly captures the interaction effect of economic freedom and democracy is estimated. The findings demonstrate that economic freedom has positive effect on income inequality. The estimated size of inequality-increasing effects of economic freedom is substantial, ranging between 0.3% and 0.5% per annum. Nevertheless, the findings show that the freedom-induced inequality is attenuated in the presence of a democratic regime in the countries under study. Furthermore, freedom of international trade and market deregulation are shown to be the two most consistently significant liberalization policies across the baseline estimations and various sensitivity tests. The paper is concluded with some policy implications.

Suggested Citation

  • Mahyudin Ahmad, 2017. "Economic Freedom and Income Inequality: Does Political Regime Matter?," Economies, MDPI, vol. 5(2), pages 1-28, June.
    • Handle: RePEc:gam:jecomi:v:5:y:2017:i:2:p:18-:d:100556
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    Cited by:

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    3. Vanessa Arce & Freddy Naula, 2025. "Does Economic Freedom Influence Economic Growth? Evidence from Latin America," JRFM, MDPI, vol. 18(6), pages 1-13, June.
    4. Rutar, Tibor & Rutar, Minea, 2025. "Liberalizing reforms do not cause suicide: Causal estimation using matching, 1980–2019," Journal of Comparative Economics, Elsevier, vol. 53(1), pages 272-289.
    5. Callais, Justin T. & Young, Andrew T., 2023. "A rising tide that lifts all boats: An analysis of economic freedom and inequality using matching methods," Journal of Comparative Economics, Elsevier, vol. 51(3), pages 744-777.
    6. Bruno Emmanuel Ongo Nkoa & Jacques Simon Song, 2022. "Does Institutional Quality increase inequalities in Africa?," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(3), pages 1896-1927, September.
    7. Olalekan Charles Okunlola & Anthony E. Akinlo, 2021. "Does economic freedom enhance quality of life in Africa?," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 68(3), pages 357-387, September.
    8. Khadijah Iddrisu, 2024. "Foreign bank presence and income inequality in Africa: What role does economic freedom play?," Future Business Journal, Springer, vol. 10(1), pages 1-14, December.
    9. Meiryani & Shi Ming Huang & Gatot Soepriyanto & Jessica & Mochammad Fahlevi & Sandra Grabowska & Mohammed Aljuaid, 2023. "The effect of voluntary disclosure on financial performance: Empirical study on manufacturing industry in Indonesia," PLOS ONE, Public Library of Science, vol. 18(6), pages 1-27, June.
    10. Huynh, Cong Minh & Le, Quoc Nha, 2022. "A multi-dimensional free market and income inequality in developing Asia: How does the quality of governance matter?," MPRA Paper 112013, University Library of Munich, Germany.
    11. Ali Sarkhosh-Sara & Khadije Nasrollahi & Karim Azarbayjani & Rasul Bakhshi Dastjerdi, 2020. "Comparative analysis of the effects of institutional factors and Piketty’s Hypothesis on inequality: evidence from a panel of countries," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 9(1), pages 1-28, December.
    12. Szczepaniak, Małgorzata & Geise, Andrzej & Bariyah, Nurul, 2022. "Impact of institutional determinants on income inequalities in Indonesia during the Era Reformasi," Journal of Asian Economics, Elsevier, vol. 82(C).
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    14. Umut Uzar, 2023. "Income Inequality, Institutions, and Freedom of the Press: Potential Mechanisms and Evidence," Sustainability, MDPI, vol. 15(17), pages 1-23, August.

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