The effects of economic freedom components on economic growth: an analysis with a threshold model

Rami Abdelkafi and Hatem Derbel ()
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Hatem Derbel: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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Abstract: Several studies show a positive and significant link between economic freedom and economic growth. Based on this result many economists recommend an abrupt and total disengagement of the State from the economic activity. Our objective in this paper is double. Initially, we show that the use of an aggregate index of economic freedom can mask the specificity of the link between the latter and the growth. In a second time, we use the Hansen (2000) method to demonstrate the presence of threshold variables rejecting the linearity of the relation between variables on the entire sample. The GDP per capita and the initial enrollment rate in secondary school divide the sample in two groups of countries characterized by different relations. One of our principal results is that the reduction of the size of the government is not effective in countries having an initial GDP per capita and an enrollment rate in 1990 higher than the thresholds values. This enables us to put into perspective the need for a reduction of the size of the government and to insist on the effectiveness of economic policies in developing countries.

Keywords: Size of the government; economic freedom; economic growth; threshold model (search for similar items in EconPapers)
Date: 2008
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