New working paper: Economic Freedom Matters A Lot More for Economic Development Than You Think!

I have a new working paper available. It is co-authored with Sean P. Alvarez and Macy Scheck (both of the awesome Political Economic Research Institute at Middle Tennessee State University). In the paper, we use revised GDP data that correct for the lies that dictators tell about their economies. We show that this biases the estimated relationship between economic freedom and economic development. We conclude that the generally used GDP data forces us to strongly underestimate the importance of economic freedom to development.

The paper is here on SSRN and the abstract is below:

The literature connecting economic freedom indexes to income levels and growth generally points in the direction of a positive association. In this paper, we argue that this finding is a highly conservative as the data is heavily biased against finding any effects. The bias emerges as a result of the tendency of dictatorial regimes to overstate their GDP level. Dictatorships also tend to have lower scores of economic freedom. This downwardly biases any estimations of the relation between income and economic freedom. In this paper, we use recent corrections to GDP numbers — based on nighttime light intensity — to estimate the bias. We find that the true effects of economic freedom at its component on income levels are between 1.1 and 1.33 times greater than commonly estimated. For economic growth, the bias is far smaller and only appears to be relevant for some individual components such as size of government and property rights.


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