Robert A. Lawson

Institutions and the Impact of Investment on Growth

The literature on institutions and economic growth shows a close relationship between the quality of institutions and prosperity. This paper examines the impact of institutions on investment, and the resulting impact of investment on growth. The private investment rate of countries with better institutional quality is higher, and the productivity of any given level of investment is greater in countries with better institutions. Models that include various indicators of institutional quality along with inputs such as physical and human capital will generally underestimate the impact of institutional quality on growth because they do not account for the indirect impact of institutions on investment, as is done here. The paper also examines the direction of causality to show that higher institutional quality causes more investment, rather than the other way around. Further, future institutional improvements are more likely to occur against a background of poor economic performance than one of sustained growth.

The concept and measurement of economic freedom

Abstract Since 1996, the Economic Freedom of the World (EFW) reports have presented an index that measures the consistency of a nations policies and institutions with economic freedom. The key ingredients of economic freedom are personal choice, voluntary exchange, freedom to compete, and protection of person and property. Earlier versions of the EFW index have been based almost exclusively on objective quantifiable data. However, some important elements of economic freedom, particularly those dealing with property rights and regulatory restraints, are difficult to capture with objective measures. This paper integrates survey data on legal structure and government regulation into the EFW index and uses it to develop a more comprehensive measure of economic freedom.

Economic Freedom of the World: An Accounting of the Literature

The Economic Freedom of the World (EFW) index was first produced by Gwartney, Block, and Lawson (Economic Freedom of the World: 1975–1995; 1996) and has been updated annually since. During this period, the EFW index has been cited in hundreds of academic articles. Here, we provide an accounting and description of this literature. Of 402 articles citing the EFW index, 198 used the index as an independent variable in an empirical study. Over two‐thirds of these studies found economic freedom to correspond to a “good” outcome such as faster growth, better living standards, more happiness, etc. Less than 4% of the sample found economic freedom to be associated with a “bad” outcome such as increased income inequality. The balance of evidence is overwhelming that economic freedom corresponds with a wide variety of positive outcomes with almost no negative tradeoffs.

From Abba to Zeppelin, Led: Using Music to Teach Economics

The From ABBA to Zeppelin Weblog offers a variety of songs and lyrics that economics instructors might find useful. Song selections range from country to rock to rap. Each post includes a selection from the song (and a link to the full lyrics) and a brief assignment for students. JEL codes are provided so that instructors may assign certain songs based on the course content. This Weblog was created to facilitate the use of music in the economics classroom. In the interests of moving away from “chalk and talk,” we decided to join several recent educators who have developed approaches to teaching economics concepts that involve using popular music to engage their classes (Harter 2003; Kane 1999; Tinari and Khandke 2000). Our approach is detailed in the paper “From ABBA to Zeppelin: Using Popular Music to Teach Economics,” which is available on the Website. In our opinion, this Weblog complements all such attempts to use music in the classroom by providing additional examples that can be integrated into the curriculum.

Economic freedom and sovereign credit ratings and default risk

Purpose – The purpose of this paper is to show that economic policy impacts sovereign debt risk in addition to economic performance.Design/methodology/approach – Regression analysis was employed to determine the factors that contribute to sovereign bond ratings and bond spreads for a sample of 93 countries from 2000 to 2006.Findings – After controlling for common factors like per capita gross domestic production, growth, and political regime, the results suggest that a two unit (or a 2.4 standard deviation) drop in the economic freedom index represents approximately a 50 percent higher cost of borrowing for a country.Originality/value – The paper contributes to the empirical literature on sovereign credit risk by identifying factors found to be the most significant in determining sovereign credit ratings and bond spreads.

THE IMPACT OF TAX POLICY ON ECONOMIC GROWTH, INCOME DISTRIBUTION, AND ALLOCATION OF TAXES

There is considerable disagreement about how taxes, especially high marginal tax rates on those with high incomes, influence economic performance and the distribution of income. This essay uses cross-country data on changes in marginal tax rates since 1980 to examine this topic. Section II uses economic theory to analyze the linkage between marginal tax rates and economic performance and considers a number of factors that complicate the measurement of that impact. Section III presents data on the top marginal tax rates during 1980–2002 for seventy-seven countries with a personal income tax and analyzes how changes in these rates influenced economic growth during 1990–2002. Section IV focuses on how reductions in marginal tax rates, particularly the highest rates, influence income inequality and the share of the personal income tax paid by various income groups. The final section summarizes the findings of this study.

Capitalism and Labor Shares: A Cross-Country Panel Study

We examine the empirical relationship between the institutions of economic freedom and labor shares in a panel of up to 93 countries covering 1970 through 2009. We find that a standard deviation increase in the Fraser Institutes Economic Freedom of the World (EFW) score is associated with about a 1/3 standard deviation increase in a countrys labor share. Starting from the sample mean labor share in our panel, this amounts to about 4.26percentage points. This relationship is robust to considering OECD and non-OECD samples separately. It is also (both qualitatively and quantitatively) robust to controlling for differences in human capital levels, labor productivity, trade union density, and international economic flows. Breaking the EFW into its individual component areas, the regulation of credit, business and labor appears to be the most important source of the positive EFW–labor share relationship.

The relationship between income, economic freedom, and BMI

OBJECTIVES What explains increases in BMI (and obesity) over time and across countries? Although many microeconomic forces are likely explanations, increasingly scholars are arguing that macroeconomic forces such as market liberalism and globalization are root causes of the obesity epidemic. The purpose of this paper is to examine the impact of economic freedom on obesity conditional on the level of income and other factors. STUDY DESIGN We use an unbalanced pooled cross section of up to 135 countries for 1995 and 2000-2009. METHODS Our statistical model specifications include pooled OLS and fixed effects. RESULTS First, we find that controlling for fixed effects siphons off much of the relationship previously documented between economic freedom and BMI. Second, economic freedom is associated with slightly higher BMIs but only for men in developing nations. Lastly, we show that economic freedom increases life expectancy for both men and women in developing countries. CONCLUSION Therefore, policies aimed at reducing obesity that limit economic liberalism may come at the expense of life expectancy in the developing world.

Is human trafficking the dark side of economic freedom

Economic freedom has increased living standards worldwide. Concurrent with such gains are rising concerns about potential human costs associated with free markets. This paper uses data on human trafficking and anti-trafficking policies, in conjunction with a measure of economic freedom, to examine whether free markets exacerbate or attenuate the incidence of human trafficking and policies designed to combat it. We do not find evidence suggesting that economic freedom is associated with human trafficking. In addition, our results suggest that economically free countries are more likely to enact and enforce policies to fight human trafficking.

Clusters of economic freedom

This article uses K-means clustering to group countries using the information from the five areas of the Economic Freedom of the World (EFW) index. The resulting clusters of countries are similar but not identical to quartile groupings found using the overall EFW index. Simple comparisons of socio-economic outcomes along the one-dimensional EFW index yield different results compared with the multidimensional-based country clusters. In particular, social democratic market economies appear to outperform liberal market economies using these simple comparisons.