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Forced to Freedom? Empirical Relations between Aid and Economic Freedom

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  • Knedlik, Tobias
  • Kronthaler, Franz

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.

Suggested Citation

  • Knedlik, Tobias & Kronthaler, Franz, 2006. "Forced to Freedom? Empirical Relations between Aid and Economic Freedom," IWH Discussion Papers 8/2006, Halle Institute for Economic Research (IWH).
  • Handle: RePEc:zbw:iwhdps:iwh-8-06
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    References listed on IDEAS

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    More about this item

    Keywords

    Ökonomische Freiheit; Entwicklungshilfe; IMF-Kredite; wirtschaftliche Entwicklung; aid; economic freedom; IMF credit; economic development;

    JEL classification:

    • P10 - Economic Systems - - Capitalist Systems - - - General
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • F35 - International Economics - - International Finance - - - Foreign Aid

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