Economic freedom and growth specification debate: a retrospective

ABSTRACT

This article revisits a 2006 theoretical debate on the appropriate specifications for testing the relationship between economic outcomes and economic freedom. It provides out-of-sample empirical tests corresponding to each of the theoretical positions of the two sides of the debate. The two methods of testing the relationship essentially tie in their ability to predict out-of-sample, although neither model predicts very well for the decade following the debate.

KEYWORDS:

• Economic freedom
• economic institutions
• out-of-sample testing
• receiver operating characteristic

JEL CLASSIFICATION:

• O43
• P10
• C52

Disclosure statement

No potential conflict of interest was reported by the authors.

Supplemental data

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Notes

¹ See http://onlinelibrary.wiley.com/doi/10.1111/j.0950-0804.2006.00278.x/full (accessed 1 September 2017); and https://scholar.google.com/scholar?hl=en&q=Market-oriented+institutions+and+policies+and+economic+growth%3A+A+critical+survey (accessed 1 September 2017).

² These estimated models are similar to Models (5) and (2) reported in Table 6 of De Haan, Lundstrom, and Sturm (2006, 176). They used a different time period (1975–1990) and included a measure of human capital, which we do not as it is insignificant throughout. Their results are highly consistent with ours.