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LINDSEY GIFFIN Economic Freedom and Its Impact on Standard of Living (Under the Direction of DR. DAVID B. MUSTARD) 1. INTRODUCTION: The disparate economic conditions of developed and developing nations have made foreign aid centrally important in today’s global economy. There is widespread debate concerning the effectiveness of financial aid to developing countries. Every year developed countries devote over $50 billion in aid to improve the standard of living in developing countries (Godoy 2002). Unfortunately this approach to aid does not induce institutional change and provides only a short-term solution to a fraction of citizens; the per capita income of a majority of the recipient countries of aid has actually dropped since receiving the funds (Eiras 2004). Years of futilely sending funds to developing countries without conditioning on the economic policies of the government has subsidized the poor governance of many nations and trapped their citizens in poverty (Fuelner 2004). A longer-term, more inclusive solution is needed. The key is not sending aid so that the government can provide for the citizens but rather opening up markets so that the citizens can provide for themselves. A nation needs to change its fundamental institutions to induce economic growth and improve the standard of living. In January 2004 the Bush administration introduced a promising new approach to foreign aid, the Millennium Challenge Account. This fund will support only governments that have initiated “growth-promoting governance and economic policies” (Powell 2004). Aid is conditional on the degree to which countries rule justly, invest in their citizens, and most importantly, promote economic freedom. Conditioning aid on improving economic freedom could be a substantial step toward alleviating the poverty that plagues billions. Kim Holmes 1 (2004) states “economic freedom is…as essential to economic growth as elections are to democracy.” Economic freedom measures the ability to conduct commerce in an environment where property rights are secured and there is minimal governmental interference (Gwartney and Lawson 2002). Past research shows a causal link between increased economic freedom and economic growth. This study examines whether increased economic freedom also improves standards of living. Economic freedom considers five aspects of a nation’s economic institutions: minimal government, secure property rights, access to sound money, freedom to trade internationally, and regulation of business, credit, and labor. Rather than study the effects of improved economic freedom in aggregate, it is important to investigate the effects of each individual aspect before advising change. Using empirical evidence from over 120 countries and over 20 years, this study examines the effects of each of the different aspects of economic freedom on a variety of standard of living variables, including measures of education, health, and access to modern technology. The analysis reveals that more secure property rights, more freedom to trade internationally, and less regulation of business, credit, and labor increase standard-of-living measures. However. a smaller government decreases the standard of living in all but one measure. Additionally. a sound legal system and secure property rights have the largest impact on improving the lives of a nation’s citizens. Using the results of this study and previous research, developed nations can construct effective foreign aid initiatives that improve the lives of citizens in developing nations by enhancing economic freedom. Section 2 explores the previous research relating economic freedom and growth prospects. Section 3 lays out the regression model, a detailed description of the data used, and a 2 predictive theory. The regression results and analysis follow in section 4, and finally concluding remarks sum up the findings. 2. REVIEW OF LITERATURE: Economic freedom allows individuals and firms to voluntarily exchange and produces mutually beneficial outcomes. In 1776, Adam Smith, a moral philosopher who is regarded by many as the father of economics, proposed that economic freedom causes economic growth and “the wealth of nations.” Many policymakers agreed with Smith’s premise and implemented policies consistent with this theory, until a series of events in the early part of the twentieth century, including two world wars and the Great Depression, changed the dominant theory of economic growth to one that called for active government intervention and increased protectionism; examples include wage and price controls and extensive regulation. However, there has been a recent trend back towards more free markets, as real-life experiments exhibited the prosperity of market-driven South Korea and West Germany compared to the devastation of centrally planned North Korea and East Germany. Additionally the fall of the communist Soviet Union demonstrated that government could not distribute resources more efficiently than the market. The pendulum of thinking has once again swung back toward the side of economic freedom (Holcombe 1998). Because the present time is characterized by global integration, it is more important than ever that developing countries understand how to take advantage of this global economic growth and translate it into increased standards of living for its citizens. Ian Vasquez (2002) asserts that “globalization holds the most promise for developing countries with respect to economic growth, poverty reduction, and the reversal of global inequality.” He suggests that developing countries follow the lead of historical examples such as Europe, which improved living standards threefold 3 in the nineteenth century, and the United States, which quadrupled them in this same period. Consistent with the institutional theory of growth (Gwartney and Lawson 2002), Vasquez (2002) contends that the West’s advancement and economic growth was not by luck, but by an environment that provided individuals and organizations freedom and incentives through protection of property rights. Aside from individual historical examples of successful market economies, comprehensive empirical studies also support the theory that increased freedom leads to economic growth. The most widely regarded study is the Fraser Institute’s Economic Freedom of the World (EFW). After indexing the economic freedom of over 120 different countries, the study charts a variety of factors of the different EFW index quintiles. The study finds that increased economic freedom is correlated with higher per-capita income, economic growth, life expectancy, income level of the poorest 10%, adult literacy, access to treated water, and political rights and civil liberties. On the other hand, it is correlated with lower infant mortality, percentage of children in the labor force, and corruption (Gwartney and Lawson 2002). In addition to empirical evidence, theoretical constructs show how economic freedom increases economic growth. Douglass North (1990) asserts institutions determine, in large part, the incentives of economy participants. When institutions promote the production of increased, valuable output, they promote economic growth. Niclas Berggren (2003) determines (or another synonym of “asserts”) several reasons why countries that are economically free promote a number of growth-enhancing incentives: They promote a high return on productive efforts through low taxation, an independent legal system, and the protection of private property; they enable talent to be allocated where it generates the highest value; they foster a dynamic, experimentally organized economy in which a large amount of business trial and error can take place and in which competition between different actors occurs because regulation and government 4 enterprises are few;…and they promote the flow of trade and capital investment to where preference satisfaction and returns are the highest. Most research looks at the effects of economic freedom in aggregate. It is important, however, not to generalize the effects of different aspects of economically free institutions. Fredrik Carlsson and Susanna Lundstrom (2002) studied the specific aspects of economic freedom that contribute to economic growth. They found that, although in aggregate a larger economic freedom index (as measured by an average EFW index from 1975-1995) led to economic growth, two categories, size of government and freedom to trade with foreigners, were negatively related to GDP growth. Also they found monetary policy and price stability to have an insignificant effect on economic growth. Unfortunately, the paper does not offer further theoretical support for these findings. Another area of research with regard to economic freedom and economic growth is establishing the causal link of freedom to growth. Manuel Vega-Gordilla and Jose Alvarez-Arce (2003) conducted a causality study examining the relationships between economic freedom, political freedom, and economic growth. The results showed that economic and political freedom enhanced economic growth. However, the effect of economic freedom was nearly double that of political freedom. More importantly the study did not find that economic growth was a predictor of economic freedom; this demonstrates that economic freedom causes growth and not vice versa. 3. EMPIRICAL MODEL, DATA, AND THEORY: To analyze the impact of changes in economic freedom on standards of living, I estimate the following regression for each of eight measures of standard of living: Yit = α + β EFit + δ Xit + τT t + ε it 5 The dependent variable is the standard of living measure, Yit, corresponding to country, i, and year, t. The term EFit is a vector of four economic freedom variables. The term Xit represents a vector of control variables including GDP per capita and GDP growth per capita. The term T t is vector of year fixed effects. By controlling for time fixed effects, I net out the effect that the passage of time and external environmental events have on the dependent variable.1 ε it is the error term that accounts for all other unobserved factors affecting the standard of living measure. To measure economic freedom, I used the Fraser Economic Freedom of the World Report. This publication is the collaborative work of the Fraser Institute and members of the Economic Freedom Network. Data on economic freedom in 123 countries are reported for every five years dating back to 1970 and for 2001 and 2002. Another highly regarded measure of economic freedom published by the Heritage Foundation and The Wall Street Journal entitled the Index of Economic Freedom, is also widely used in research. However, because this index has data dating back only to 1995 it does not capture the significant, recent changes in economic freedom in Eastern Europe brought about by the collapse of the Soviet Union. Therefore, the Fraser report was a better resource for this paper. The Economic Freedom of the World Annual Report is broken down into five major categories and then further into numerous sub-components. Each sub-component is scored on a ten-point scale, with ten being the most economically free, and these ratings are averaged for each major category (Gwartney and Lawson 2002). I use this category average for four of the 1 To solve the problem of perfect multicollinearity it is necessary to exclude one of the years. I excluded y1980 from the equation. 6 five major categories of economic freedom2, which include size of government, legal structure and security of property rights, freedom to trade internationally, and regulation of credit, labor, and business. This study is expected to show that as people are granted more freedom to conduct economic activities, they allocate their resources in more productive ways to increase economic growth and the standard of living. A description of the components included in each measure of economic freedom follows. A. The Size of Government The size of government variable measures the extent to which economies are run by the market or by the government. The smaller the relative government size, the higher EFW rating a country receives for this measure; the measure is an inverse relationship. The larger the government the larger share of the economy it will control, interfering with individual choice and hindering the economic freedom of its citizens. Additionally, the relative size of transfers and subsidies are measured; the more transfers and subsidies a government imposes, the less it protects people’s rights to keep what they own. Government enterprise and investment is the third sub-component making up the size of government variable. The more goods and services are produced by the government rather than the private sector, the less of a role market forces play in the economy. Finally the top marginal tax rate rounds out the measure of size of government. As citizens are taxed more they lose their rights to keep what they earn and decide for themselves how they should allocate their resources (Gwartney and Lawson 2002). When government size is reduced, and smaller transfers, subsidies, and taxes enable people to keep more of their money, the standard of living goes up. However, there may be some instances when, due to the communal nature of certain goods and services, a smaller, more economically 2 I exclude one category, sound money, for both theoretical and empirical reasons. Theoretically, access to sound money is the measure most indirectly tied with standard-of-living variables. Empirically, other research has shown it to have little effect on the outcomes of interest (Carlsson and Lundstrom 2002). 7 free government size could actually decrease standard of living (Roll 2004). Examples of such public goods include education, national defense, and environmental protection (Carlsson and Lundstrom 2002). B. Legal Structure and Security of Property Rights The base of a successful economy is the assurance that the fruits of one’s labor will be protected and contracts will be enforced. Components that make up the legal structure and security of property rights category are judicial independence, impartial courts, protection of intellectual property, military interference, and integrity of the legal system. As it is difficult to measure these objectively, and quantitatively, the ratings for this category are based upon two surveys, The International Country Risk Guide and The Global Competitiveness Report. Secure property rights play an integral part in economic freedom; without it freedom to conduct commerce is difficult, as people will not transact without assurance that the legal system will protect what they earn (Gwartney and Lawson 2002). The standard of living increases when property rights are enforced through a secure legal system because people have incentives to work and create wealth. Additionally, the exchanges that private property rights facilitate communicate very valuable information, for example prices, allowing participants to make economically sound decisions concerning allocation of resources. C. Freedom to Trade Internationally True economic freedom is not only the ability to conduct commerce domestically but also the freedom to transact internationally. The freedom of a country to trade internationally is measured by the taxes on exports and imports in the form of tariffs, both overt and hidden trade barriers, the actual size of the trade sector relative to its expected size, the official versus the 8 black market exchange rate, and the government-imposed restrictions on capital markets. The data reflected in the ratings for this category are a combination of survey data from the Global Competitiveness Report and quantitative, objective measures. The higher the costs to trade internationally due to protective, restrictive trade policies and interference in foreign capital markets the less economically free a country is (Gwartney and Lawson 2002). Lower trade barriers and an environment conducive to trade allow countries to benefit from mutual gains and efficiently allocate resources to their most productive uses, increasing consumption possibilities for these nations and their citizens. D. Regulation of Credit, Labor, and Business The final category of economic freedom used in my study is regulation of credit, labor, and business. Like the measure of government size, this measure is also inversely related to the amount of regulation. The less regulation of the economy, the higher EFW rating the country receives. The more regulation a government imposes the less market forces are allowed to work to drive the economy to the most mutually beneficial outcomes. Freedom from regulation in the credit industry requires that private banks supply credit to those who desire it at marketdetermined interest rates. A free labor market creates an environment with incentives to work hard such as low unemployment benefits and flexible labor laws. Finally it is important that business activities be free from regulation. Prices should be market determined, and barriers to entry and other regulations should be low or nonexistent, allowing competitive practices to create efficient markets. Since the effects of many regulations cannot be concretely measured, almost two-thirds of the ratings in this category are based on survey data (Gwartney and Lawson 2002). It is anticipated that as regulation on business, credit, and labor markets decreases, standard of 9 living will increase because individuals and organizations are enabled to work unhindered, eliminating the economic waste produced by bureaucracy and prohibitive standards. The World Bank’s 2003 World Development Indicators provided data for measures of economic well-being and standard of living. This is the World Bank’s annual report of development around the globe. The study encompasses 208 countries and reports over five hundred indices annually from 1960 to 2001. To account for overall differences in the economic status of the countries on the standard of living, I incorporated GDP per capita and annual percentage GDP growth per capita as control variables in my study. GDP per capita measures the gross domestic product of a country divided by its mid-year population in constant 1995 US dollars. The percentage annual growth rate of GDP per capita is based on constant local currency of the respective country (World Bank 2003). Unlike many studies that use GDP and GDP growth as the dependent variables regressed onto economic freedom indices, I incorporate these as additional independent variables to net out their effects on the standard of living. To measure the standard of living I chose eight variables encompassing a range of different aspects of well-being. Incompleteness of data prohibited me from using a number of measures that could have more accurately depicted the standard of living in the respective countries, such as poverty headcounts, unemployment rates, improved water sources, and education levels of labor force. Using the most complete data possible, I chose literacy rate,3 percentage gross school enrollment in primary, secondary, and tertiary schools, immunization rate, life expectancy at birth, abundance of telephone mainlines, and electricity production. The literacy rate measures the percentage of citizens over fifteen years old who can read and write on a simple base level. Percentage gross school enrollment in primary, secondary, and tertiary 3 To maintain uniformity is the interpretation of the coefficient estimate, I converted reported illiteracy rate into literacy rate. Therefore a positive coefficient estimate is interpreted as more economic freedom and growth contribute to a higher standard of living as measured by literacy. 10 schools is a ratio of the total school enrollment to the total number of children in the population that correspond to the official age group of the respective school level. The United Nations Educational, Scientific, and Cultural Organization provides all these education data. The immunization rate is measured as the percent of children under the age of one who received one dose of vaccine for the measles as reported by the World Health Organization. Additionally, total years of life expectancy at birth indicate the health of a nation. To measure citizens’ access to modern technology I looked at the number of telephone mainlines, or lines connecting an individual’s telephone to the public telephone network, per one thousand people. This information is provided by the International Telecommunications Union. Additionally, the number of kilowatt hours of electricity produced in a country as provided by the International Energy Agency reflects the modernity of a nation.4 I examine education, health, and technology-related measures to get a broader picture of the standard of living in each country. My study evaluated all countries included in both the World Bank and Fraser data sets; since Fraser was the smaller data set, it was the main determinate of the countries selected. Only two of those included in the Fraser set were not included in the World Bank data;5 consequently, my study contains repeated cross sections of 121 countries6 in 1980, 1985, 1990, 1995, 2000, and 2001. By incorporating a span of over 20 years, I capture the effects of changes in economic freedom rather than simply differences in static scores across countries. Only measures from every five years are studied because the Fraser data set only reports measures for every five years up until 2001. I chose 1980 as the start date for my study because 1980 marks the start of the 4 To convert this measure to one that can be used in comparisons across countries of different populations, I divided it by population to get electricity production per capita. 5 South Korea and Taiwan were included in the Fraser data set but not the World Bank data set. 6 See the Appendix for all the countries contained in the sample. 11 current wave of globalization. Unlike the previous wave of globalization between 1950 and 1980 that integrated developed nations into a global market, the present wave has also integrated developing nations into this market (Collier and Dollar 2002). Additionally this start date allows me to capture the dramatic changes in economic freedom in Eastern Europe in the late 1980’s and early 1990’s brought about by the fall of the Soviet Union. The effects of increased economic freedom on standard of living can be seen most overtly in these nations. 4. RESULTS: A. Educational Outcomes Table 1, found in the appendix, provides the results of the regression for educational outcomes. Varying degrees of economic freedom have substantial effects on education rates. For every one-point increase in the rating of freedom to trade, the literacy rate increases by approximately 3.2 percentage points. Increased property rights have effects similar in scale to those of free trade on educational variables. The literacy rate is predicted to increase by 2.7 percentage points for every one-point increase in the legal structure and security of property rights rating. Government size, however, does not have a statistically significant effect on literacy rate. The final measure of economic freedom, regulation of credit, labor, and business, has no statistically significant effect on literacy either. As would be intuitively predicted, the level of GDP per capita has both a statistically and economically significant effect on the literacy rate of a nation. For every one-thousand-dollar increase in GDP per capita literacy increases by one percentage point. GDP growth per capita, however, does not have a statistically significant effect on literacy. Similar to free trade’s effect on literacy, a one-point increase in this measure increases primary-school enrollment by 2.38 percentage points. Unlike the other educational measures, 12 increased property rights do not have a statistically significant effect on primary-school enrollment in this study. On the other hand, the government size measure has a statistically significant but negative effect on school enrollment. As government size decreases, primaryschool enrollment decreases by 1.09 percentage points. As regulation of credit, labor and business decreases, primary-school enrollment increases by 1.8 percentage points. An increase in the growth of GDP per capita by one percentage point raises enrollment by .70 percentage points, but GDP per capita alone does not have a statistically significant effect on primary school enrollment. The results on secondary-school enrollment vary somewhat from those on primary-school enrollment. A one-point increase in a country’s free trade measure increases secondary-school enrollment by 2.52 percentage points. Unlike primary-school enrollment, secondary-school enrollment is positively and statistically significantly affected by more secure property rights. An increase of the property rights variable increases enrollment by over 3.6 percentage points. Government size once again has a negative effect on school enrollment that is both economically and statistically significant. Conversely, regulation of credit, labor, and business affects secondary-school enrollment on the same scale but in the opposite direction. A one-point increase in the regulation rating of a nation increases secondary-school enrollment by 3.8 percentage points. As for the control variables, every thousand-dollar increase in GDP per capita increases secondary-school enrollment by 1.16 percentage points; however, GDP growth per capita has no statistically significant effect. Unlike all the other educational measures, free trade does not have a statistically significant effect on tertiary-school enrollment. More secure property rights do have a positive and significant effect on tertiary-school enrollment with an estimated coefficient of 3.66. 13 Consistent with the other levels of schooling, an increase in the rating of government size has a negative effect on enrollment. Reduction of regulation of credit, labor and business increases tertiary school enrollment by about 1.8 percentage points. Also for every thousand dollar increase in GDP, tertiary-school enrollment goes up by .5 percentage points. Once again GDP growth per capita is statistically insignificant. In summary, the effects of increased economic freedom are largely as anticipated. The more economic freedom a nation has, the higher its education rates. The only exception is the negative effect that a decrease in government size has on school enrollment; however, upon further study, these results make sense. In past research, government expenditure has been positively correlated with wealth. Although too much government interference can be a hindrance to developed economies, a threshold of government involvement is necessary to establish the basic infrastructure of society, especially concerning public goods such as transportation and education systems (Roll 2004). As government size decreases, the number of public schools and educational resources would also decrease, decreasing total school enrollment. B. Health Outcomes Table 2 in the appendix shows the effects of economic freedom on the health of a country as measured by immunization rate and life expectancy at birth. As countries obtain more freedom to trade internationally, as measured by a one-rating-point increase, the immunization rate increases by almost two percentage points, which is statistically significant to the ninety-five percent confidence level. The effects of increased property rights are also statistically significant for immunization, where a one-point increase leads to an immunization rate of four percentage points higher. The size of government and regulation of credit, labor, and business measures 14 have no significant impact on the immunization rate of the nation. GDP per capita has a statistically significant but economically small effect on the immunization rate. Oddly, as GDP per capita increases by one thousand dollars the immunization rate decreases by .18 percentage points; although this effect is very small, it is still counterintuitive. Finally as GDP per capita growth increases by one percent, the immunization rate increases by one-third of a percentage point. Freedom to trade internationally also positively affects life expectancy at birth. As the measure increases by one point, life expectancy increases by about one and a half years. Like the estimate of free trade on immunization, this estimate is also statistically significant to the ninetyfive percent confidence level. Similar to the effect of increased freedom to trade, increased property rights lead to about a one-and-a-half-year addition to life expectancy for the citizens of the country. A decrease in the size of government also leads to a significant increase in life expectancy of .8 years. Regulation of credit, labor, and business is the only variable that has no statistically significant effect on life expectancy. Increased GDP per capita does have a statistically significant, positive effect on life expectancy but the effect is small; as GDP per capita increases by one thousand dollars, life expectancy increases by .3 years. Similarly, life expectancy increases by about one-third of a year, as GDP per capita growth increases by one percent. Property rights have the most significant positive effect on health variables. I theorize that a contributing factor to this relationship is the intellectual property protection component of this measure. Alex Rosenberg states, “A market economy without patent rights will not provide the optimum amount of welfare” (2003). Due to exorbitant research and development costs, pharmaceutical companies incur high fixed costs to initially produce a drug but low marginal 15 costs to produce additional doses. Often pharmaceutical companies will make these drugs available to developing nations at reduced prices in an attempt to recover a small portion of the fixed cost; it is a win-win situation for both the company and developing nations (Tabarrok 2000). However, if nations do not respect the intellectual property of the companies, they will ignore the needs of these nations and shift their research and investment to other concerns. Put simply, by honoring patent rights countries are not only improving their access to current lifesaving drugs but also are providing incentives for the creation of drugs beneficial to them in the future (Rosenberg 2003). C. Technology Outcomes As shown in table 3 in the appendix, with the exception of government size, increased economic freedom increases citizens’ access to modern technology as measured by availability of telephone lines and production of electricity. An increase of one point on the free trade index is correlated with nearly six additional telephone lines per one thousand people. Increased property rights have the largest impact on telephone lines; a one-point increase in the index leads to an additional 24 telephone lines (per one thousand people). Similar to the results of government size on school enrollment, this regression finds government size to have a statistically significant negative effect on telephone lines. As the size of government decreases, the number of telephone lines per one thousand people decreases by nearly 9. Regulation has a very similar impact on telephone access in the opposite direction. As government regulation decreases, telephone lines increase by about 9 per one thousand people. As is expected, the higher the GDP per capita, the more accessibility to telephone lines. For every one-thousanddollar increase in GDP per capita, telephone lines increase by about 12 per one thousand people. GDP growth does not have a statistically significant effect on telephone lines. 16 Free trade’s effect on electricity production is not statistically significant. Similar to telephone lines, increased property rights have the largest impact on electricity production; a one-point increase in the property rights rating leads to an additional 516 kilowatt hours of electricity produced per capita. Again government size has a statistically significant negative effect on electricity. As the size of government decreases, electricity produced drops by 325 kilowatt hours per person. As the amount of government regulation decreases, electricity production increases by 344 kilowatt hours per capita. Again, the higher the GDP per capita, the more electricity a nation produces. Electricity production goes up by about 209 kilowatt hours per person, for every one-thousand-dollar increase in GDP per capita. Finally, GDP growth does not have a statistically significant effect on electricity production either. 5. CONCLUSION: Table 4 in the appendix contains a summary of the results of this study. The theory that increased economic freedom leads to a higher standard of living holds in relation to property rights, freedom to trade internationally, and regulation of business, credit, and labor. As countries permit more free trade, the standard of living rises in all measures but tertiary-school enrollment and electricity production. As countries establish a more secure legal system and protection of property rights, all variables but primary-school enrollment are positively affected. Less regulation of business, credit, and labor also improve the quality of life, but it does not have a significant effect on literacy or health variables. However, increased economic freedom as measured by a decrease in government size actually has a negative effect on all standard-ofliving variables in which it is statistically significant except for life expectancy. This likely results from the fact that there are certain welfare-improving public goods government provides that the free market does not. 17 A secure legal system and protection of property rights prove to have the most dramatic effects on standard of living. Hernando de Soto (2004) describes the rule of law as the “bedrock” of capitalism and the property system as “the hidden architecture that organizes the market economy.” Without property rights and a system to enforce them, capital, the fuel of a market economy, cannot be created. Secure property rights, upheld contracts, and impartially enforced laws are critical factors in attracting investment, fostering private ownership, and allowing mutually beneficial exchange (DeSoto 2004). An empirical study showed that countries with an average economic freedom rating of seven or above for legal structure and security of property rights experienced an average GDP growth rate of 2.5% per capita from 1980 to 2000 compared with an average growth rate of .33% for those countries with a average legal rating less than four (Gwartney and Lawson 2002). This study, along with previous research in the field, provides evidence that in a majority of aspects, increased economic freedom improves the lives of citizens in the country where it is implemented. With today’s rapid improvements in technology and communications and the increased globalization of commerce, the potential for economic growth is tremendous. Economically free institutions are needed to take advantage of this growth. A recent article in the Wall Street Journal stated the findings of this paper concisely: “Put simply, misery has a cure and its name is economic freedom” (O’Grady 2004). It is important, however, not to make generalizations concerning economic freedom as a whole so that the most precise information can be disseminated to developing countries to assist them in achieving higher standards of living. This information has important public policy implications. How should developed nations allocate resources to best promote the quality of life of citizens in developing nations? 18 There is currently widespread debate concerning whether aid induces economic growth or if it tends to breed corruption and inhibit economic reforms (Tupy 2004). Craig Burnside and David Dollar (1997) conclude that the fiscal, monetary and trade policies of a nation are key determinants of the effectiveness of development aid in enhancing growth. The growing evidence that strong property rights, freedom to trade, and freedom from regulation promote many broad measures of wellbeing can be used by developed nations to construct more effective foreign aid initiatives. Reliant on the link established in this study between improvements in economic freedom of nations and a rise in their standard of living, foreign aid conditional on nations establishing free economic institutions is an effective means of reducing poverty. This study could be improved with future research. Further examination into different forms of the model could reveal more information concerning the link between economic freedom and standard of living; each category of economic freedom is uniquely related to the dependent variables. By augmenting these findings with additional standard-of-living variables, one could gain a better insight into economic freedom’s effects on the total welfare of citizens. Finally, a more expansive study over a longer period would allow one to hold time as well as country fixed effects constant. By controlling for differences across countries, more of the variation in the dependent variables could be explained, and one could gain a more precise picture of the true effects of changes in economic freedom. 19 APPENDIX Table 1: Economic Freedom Variables’ Effect on Educational Outcomes Variable Literacy Rate Primary-School Enrollment Secondary-School Enrollment Tertiary-School Enrollment 3.20** 2.38** 2.52** 0.778 (0.79) (0.78) (0.89) (0.57) 2.71** 0.87 3.66** 2.34** (0.73) (0.77) (0.87) (0.56) 0.062 -1.09* -3.44** -1.26** (0.63) (0.63) (0.72) (0.47) 8.66 1.80* 3.81** 1.77** (1.07) (1.08) (1.24) (0.81) GDP per Capita 0.95** -0.17 1.16** 0.50** (thousands) (0.20) (0.12) (0.14) (0.09) GDP Growth per Capita 0.20 0.70** 0.28 -0.12 (0.19) (0.20) (0.23) (0.15) Year Fixed Effects Yes Yes Yes Yes Adjusted R2 0.31 0.10 0.59 0.48 Number of Observations 486 469 455 435 Economic Freedom Variables Free Trade Property Rights Government Size Regulation Control Variables Notes: 1. Standard errors are in parentheses 2. ** and * denote significance at .05 and .10 levels respectively 20 Table 2: Economic Freedom Variables’ Effect on Health Outcomes Variable Immunization Rate Life Expectancy 1.94** 1.58** (0.72) (0.32) 4.01** 1.55** (0.68) (0.31) -0.23 0.81** (0.58) (0.25) 0.34 -0.40 (0.98) (0.45) GDP per Capita -0.18* 0.33** (thousands) (0.11) (0.05) GDP Growth per Capita 0.33* 0.23** (0.19) (0.85) Year Fixed Effects Yes Yes Adjusted R2 0.42 0.45 Number of Observations 552 616 Economic Freedom Variables Free Trade Property Rights Government Size Regulation Control Variables Notes: 1. Standard errors are in parentheses 2. ** and * denote significance at .05 and .10 levels respectively 21 Table 3: Economic Freedom Variables’ Effect on Technology Outcomes Variable Telephone Electricity per capita 5.76* -28.97 (3.21) (154.61) 24.10** 515.82** (3.06) (143.68) -8.75** -325.21** (2.52) (119.17) 8.58* 344.27* (4.44) (211.30) GDP per Capita 12.11** 208.82** (thousands) (0.48) (23.32) GDP Growth per Capita 0.91 -54.05 (0.83) (42.39) Year Fixed Effects Yes Yes Adjusted R2 0.84 0.50 Number of Observations 611 434 Economic Freedom Variables Free Trade Property Rights Government Size Regulation Control Variables Notes: 1. Standard errors are in parentheses 2. ** and * denote significance at .05 and .10 levels respectively 22 Table 4: Summary of Effects of Economic Freedom Measures on Standard of Living Measures Variables Literacy Free Trade + Property Rights + Government Size 0 Regulation 0 Primary-School Enrollment + 0 - + Secondary-School Enrollment + + - + Tertiary-School Enrollment 0 + - + Immunization + + 0 0 Life Expectancy + + + 0 Telephone + + - + Electricity 0 + - + 23 121 Countries Included in Study: Albania Algeria Argentina Australia Austria Bahamas, The Bahrain Bangladesh Barbados Belgium Belize Benin Bolivia Botswana Brazil Bulgaria Burundi Cameroon Canada Central African Republic Chad Chile China Colombia Congo, Dem. Rep. Congo, Rep. Costa Rica Cote d'Ivoire Croatia Cyprus Czech Republic Denmark Dominican Republic Ecuador Egypt, Arab Rep. El Salvador Estonia Fiji Finland France Gabon Germany Ghana Greece Guatemala Guinea-Bissau Guyana Haiti Honduras Hong Kong, China Hungary Kuwait Latvia Lithuania Luxembourg Madagascar Malawi Malaysia Mali Malta Mauritius Mexico Morocco Myanmar Namibia Nepal Netherlands New Zealand Nicaragua Niger Nigeria Russian Federation Rwanda Senegal Sierra Leone Singapore Slovak Republic Slovenia South Africa Spain Sri Lanka Sweden Switzerland Syrian Arab Republic Tanzania Thailand Togo Trinidad and Tobago Tunisia Turkey Uganda Iceland India Indonesia Iran, Islamic Rep. Ireland Israel Italy Jamaica Japan Jordan Kenya Norway Oman Pakistan Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Romania Ukraine United Arab Emirates United Kingdom United States Uruguay Venezuela, RB Zambia Zimbabwe 24 References Berggren, Niclas. 2003. The Benefits of Economic Freedom: A Survey. The Independent Review 8, no. 2: 193-211. Burnside, Craig, and David Dollar. 1997. Aid, Policies and Growth. 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