An international assessment of the relative contribution of economic freedom and mathematical test scores to labour productivity

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Notes

¹ Barro (1997) provides an excellent overview of endogenous growth theory and related empirical work.

² Romer (1994, pp. 21–22) enumerates several endogenous determinants of growth, including ‘tax subsidies for private research, antitrust exemptions for research joint ventures, the activities of multinational firms, the effects of government procurement, the feedback between trade policy and innovation, the scope of protection for intellectual property rights, the links between private firms and selecting the research areas that receive public support, and the costs and benefits of an explicit government-led technology policy’.

³ One of the surprises revealed in this data is that the countries that seem to spend the most on education per student do not necessarily have the highest tests scores. If these test scores are an indication of the return to that investment, then many educational officials are likely to be dismayed and disappointed.

⁴ Hanushek and Kimko (2000, p. 1186) point out that ‘The concentration on mathematics and science corresponds to the theoretical importance of research and development activities as a source of growth [in endogenous growth models] …’

⁵ Data for the 2003 Heritage freedom index was obtained from: http://www.heritage.org/research/features/index/downloads/PastScores.xls

⁶ These eight grade international math test sores in 2003 were obtained from:http://nces.ed.gov/pubs2005/timss03/tables/table_03.asp. The data from eighth grade test scores and the year were chosen simply because it provides the largest sample size. Also, while the test scores of eighth graders in 2003 would not directly apply to labour productivity in 2003 since they are not in the labour force, the relative ranking of each country's test scores do not change significantly through time. Hanushek and Kimko (2000, p. 1186) point out that educational institutions evolve slowly through time.

⁷ A Spearman rank correlation is necessary to determine the relationship and strength between test scores and freedom because of the nonparametric nature of the freedom index. This is an alternative measure to a simple linear regression. The Spearman rank correlation coefficient ρ _s ranges between −1.0 and +1.0 and is interpretation is similar to the sample correlation coefficient. If ρ _s is positive and near 1.0, then that indicates a strong positive relationship between the two variables. If ρ _s is −1.0, then that indicates a strong negative relationship between the two variables. If ρ _s is zero, then that indicates a no relationship between the two variables. We can then test the significance of the rank through a simple hypothesis test. We will test that H ₀: ρ _s  = 0 (the rank of the two variables are independent), H ₁: ρ _s  ≠ 0 (the rank of the two variables are correlated) and this test follows a t distribution.

⁸ Socialism, defined as government ownership of the major means of production, is not necessarily inconsistent with a market-oriented system in which prices direct the allocation of resources. As a practical matter, however, so-called ‘market socialism’ does not exist. Easton and Walker (1997, p. 330) conclude that ‘there is a strong positive correlation between public ownership and market intervention. While this does not mean that it is impossible for such a model [of democratic socialism] to emerge, it does suggest that it is highly unlikely.’

⁹ It should be noted that Strum and de Hann (2001) find that the change toward freedom is strongly related to economic growth, but the level of freedom is not.

¹⁰ The Spearmen's rank correlation coefficient between the Heritage Foundation Freedom Index and the Gwartney's Freedom index is r_s  = −0.8897. This suggests that the two indices are strongly negatively correlated and significant at all possible levels. The reason for the negative is because the Heritage Freedom index indicates that the more freedom a country enjoys the lower the index value and the Gwartney index reveals that the more freedom a country has the higher the freedom index value.

¹¹ These categories are trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation and informal market activity.