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“Economic freedom” and economic growth: questioning the claim that freer markets make societies more prosperous

  • Cohen, Joseph N
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    A conventional reading of economic history implies that free market reforms rescued the world’s economies from stagnancy during the 1970s and 1980s. I reexamine a well-established econometric literature linking economic freedom to growth, and argue that their positive findings hinge on two problems: conceptual conflation and ahistoricity. When these criticisms are taken seriously, a very different view of the historical record emerges. There does not appear to be enduring relationship between economic liberalism and growth. Much of the observed relationship between these two variables involves a one-shot transition to freer markets around the Cold War’s end. Several concurrent changes took place in this historical context, and it is hasty to conclude that it was market liberalization alone that produced the economic turnaround of the 1990s and early-2000s. I also question market fundamentalists’ view that all forms of liberalization are helpful, arguing that the data show little to no benefit from reforms that did not attract foreign investment.

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    File URL: http://mpra.ub.uni-muenchen.de/33758/2/MPRA_paper_33758.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33758.

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    Date of creation: 27 Sep 2011
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    Handle: RePEc:pra:mprapa:33758
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    1. Cohen, Joseph N, 2009. "Is “economic freedom” strictly free market capitalism? A decompositional analysis of the Economic Freedom of the World index," MPRA Paper 22437, University Library of Munich, Germany.
    2. Nancy P. Marion & Robert P. Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers 98/130, International Monetary Fund.
    3. Hubert Janicki & Phanindra Wunnava, 2004. "Determinants of foreign direct investment: empirical evidence from EU accession candidates," Applied Economics, Taylor & Francis Journals, vol. 36(5), pages 505-509.
    4. Daniel Hoechle, 2007. "Robust standard errors for panel regressions with cross-sectional dependence," Stata Journal, StataCorp LP, vol. 7(3), pages 281-312, September.
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    6. William Easterly, 2002. "The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550423, June.
    7. David M. Drukker, 2003. "Testing for serial correlation in linear panel-data models," Stata Journal, StataCorp LP, vol. 3(2), pages 168-177, June.
    8. Stern, Charlotta & Klein, Daniel B., 2006. "Is There a Free-Market Economist in the House? The Policy Views of American Economic Association Members," Working Paper Series 6/2006, Swedish Institute for Social Research.
    9. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    10. Henry J. Bruton, 1998. "A Reconsideration of Import Substitution," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 903-936, June.
    11. Jakob de Haan & Susanna Lundstroem & Jan-Egbert Sturm, 2005. "Market oriented institutions and policies and economic growth: A critical survey," TWI Research Paper Series 5, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    12. Cohen, Joseph N. & Centeno, Miguel A., 2006. "Neoliberalism and patterns of economic performance: 1980 to 2000," MPRA Paper 22436, University Library of Munich, Germany.
    13. Robert J. Barro, 2007. "Milton Friedman: Perspectives, Particularly on Monetary Policy," Cato Journal, Cato Journal, Cato Institute, vol. 27(2), pages 127-134, Spring/Su.
    14. Rafael E. De Hoyos & Vasilis Sarafidis, 2006. "Testing for cross-sectional dependence in panel-data models," Stata Journal, StataCorp LP, vol. 6(4), pages 482-496, December.
    15. Kolodko, Grzegorz W., 2000. "From Shock to Therapy: The Political Economy of Postsocialist Transformation," OUP Catalogue, Oxford University Press, number 9780198297437, March.
    16. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    17. Bruton, H.J., 1998. "A Reconsideration of Import Substitution," Center for Development Economics 156, Department of Economics, Williams College.
    18. Noorbakhsh, Farhad & Paloni, Alberto & Youssef, Ali, 2001. "Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence," World Development, Elsevier, vol. 29(9), pages 1593-1610, September.
    19. Berggren, Niclas, 2003. "The Benefits of Economic Freedom: A Survey," Ratio Working Papers 4, The Ratio Institute.
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