Abstract:
Numerous studies have attempted to uncover the nature of the relationship between economic growth and various measures of legal, financial and political institutions. One of the fundamental questions is this: does economic freedom lead to economic growth? Skepticism about the economic performance of democratic institutions is as old as democracy itself. One school of thought argues that democracy can be a constraint on economic growth. According to this school, more political rights do not translate into growth (Robert Barro, 1997). The evidence from the literature has been mixed. A review paper by Gering et al. (2005) concludes that the net effect of democracy on growth performance cross-nationally over the last five decades is negative or null. A recent paper by Acemoglu et al. (2019) provides evidence that democracy has a positive effect on GDP per capita. Its baseline results show that democratizations increase GDP per captia by about 20% in the long run. Brik et al (2020) show that increases, but not the levels, in economic freedom are related to economic growth. Empirical studies on the effect of political institutions on GDP face several challenges such as the issue of measurement error and missing variables. This study contributes to the literature by using most recent data to examine the relationship between economic growth and economic freedom. It shows that improvement in economic freedom leads to positive economic growth.
