Economic Freedom and Growth: Decomposing the Effects

Most studies of the relation between economic freedom andgrowth of GDP have found a positive relation. One problem inthis area is the choice of economic freedom measure. A singlemeasure does not reflect the complex economic environment anda highly aggregated index makes it difficult to draw policyconclusions. In this paper we investigate what specific typesof economic freedom measures that are important for growth.The robustness of the results is carefully analysed since thepotential problem with multicollinearity is one of thenegative effects of decomposing an index. The results showthat economic freedom does matter for growth. This does notmean that increasing economic freedom, defined in generalterms, is good for economic growth since some of thecategories in the index are insignificant and some of thesignificant variables have negative effects.