Institutional distortions, economic freedom, and growth

This paper extends the investigation of the relationship between economic growth and freedom by distinguishing between the growth effects of political freedom versus economic freedom. The approach follows the method employed by Levine and Renelt (1992), a study that evaluated the robustness of various factors that appear to be correlated with growth. This paper evaluates the robustness of the often-used Gastil indices of political freedom and civil liberty and a relatively recent index of economic freedom. The analysis evaluates both the direct effect of the political and economic freedom measures on growth as well as their indirect effects on investment for a large sample of countries. The models investigate the possible interactions between growth, political freedom, and economic freedom. Finally, the findings regarding economic freedom are related to recent studies by Easterly (1993), Mauro (1995), and Knack and Keefer (1995) that examine specific policies and institutions that distort relative prices and resource allocation.