Does economic freedom affect the growth rate? : Evidence from middle-income countries

Despite half a century of aid programs, many countries have not shown a sufficient degree of economic development, leaving their population in poverty. The varying level of productivity has contributed to these dissimilarities and many economists argue that the degree of freedom experienced by citizens is the underlying source of differences in productivity, as it influences the freedom to perform economic activity. In this study, I examine the effect economic freedom has on the growth rate in middle-income countries. Liberal economists are arguing that higher degree of freedom surrounding economic activities is fundamental for economic growth. This point of view is largely adopted by a major lender to less developed countries; the IMF. Common conditions for loans provided by the IMF is to decrease the size of government, privatize public companies, and open up the nation to international trade. I my analysis, including 48 middle-income countries, I test whether these variables affect the economic growth though regression analysis during the years of 2000 to 2014. My results show that economic freedom is an important factor for economic growth, but that the components of economic freedom have different effects on the growth rate. Furthermore, the results differ greatly when comparing the richer and the poorer sections of middle-income countries. I find no evidence that the conditions of the IMF is a good model for development, rather that the countries have different characteristics and are affected differently. The legal system and respect for property rights is shown to have a positive effect on growth, as well as regulating the product, capital, and labor market, while high inflation is associated with low economic growth