Economic Growth, Ten Forms of Economic Freedom, and Political Stability: An Empirical Study Using Panel Data, 2003-2007

This study investigates the impact of the ten forms of economic freedom developed by the Heritage Foundation (2008), as well as a measure of political stability developed by the World Bank (2009), on economic growth in OECD nations. Both panel least squares estimations and panel two-stage least squares estimations find that the natural log of purchasing-power-parity adjusted per capita real GDP in OECD nations was positively impacted by monetary freedom, business freedom, investment freedom, labor freedom, fiscal freedom, property rights freedom, and freedom from corruption. Economic growth was also found to be positively impacted by political stability. Furthermore, economic growth was negatively impacted by higher long-term nominal interest rates. Thus, policies consistent with maintaining these economic freedoms and political stability should help promote economic expansion, especially when coupled with government policies that do not elevate long-term nominal interest rates. Interestingly, in estimating the model using the composite index of the level of economic freedom developed by Gwartney and Lawson (2008), it is shown that the latter results parallel those derived using the Heritage Foundation data, implying that both sets of economic freedom measures are potentially useful substitutes in demonstrating the role of economic freedom in real economic growth.