geography and economic freedom matthew e. brown. economic freedom how is it measured? 1.size of...
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Geography and Economic Freedom
Matthew E. Brown
Economic Freedom
How is it measured?1. Size of Government: Expenditures, Taxes, and
Enterprises
2. Legal Structure and Security of Property Rights
3. Access to Sound Money
4. Freedom to Exchange with Foreigners
5. Regulation of Credit, Labor, and Business
Economic Freedom and Income
$2,998$4,859
$10,360
$24,402
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
LeastFree
Quartile
3rdQuartile
2ndQuartile
MostFree
Quartile
GDP per capita, PPP2004 (constant 2000international $)
Economic Freedom and Growth
1.5 1.5
2.1
-0.2
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
LeastFree
Quartile
3rdQuartile
2ndQuartile
Most FreeQuartile
GDP per capita growth(annual %) 1990-2004
Does Size Matter?
• Why would it?– Theory
• Alesina, Bauer
• Size Measures – Land Area– Population
2004 Land Area v. Economic Freedom
5.6
5.8
6
6.2
6.4
6.6
6.8
7
Smallest LandArea
Third GreatestLand Area
Second GreatestLand Area
Greatest LandArea
Land Area
Ec
on
om
ic F
ree
do
m
R² - .000 Coefficient - -7E09P-Value – .869 Observations - 128
Source: CIA World Factbook
2004 Land Area v. Economic Freedom minus Outliers
5.405.605.806.006.206.406.606.80
Smallest LandArea
SecondSmallest
Third Smallest Largest LandArea
Land Area
Eco
no
mic
Fre
edo
m
Source: CIA World Factbook
R² - .090 Coefficient - -1.2E06P-Value – .002 Observations - 108
Economic Freedom by Population Quartiles
5.80
6.00
6.20
6.40
6.60
6.80
LeastPopulation
LowPopulation
HighPopulation
MostPopulation
Population Quartiles
20
04
Ec
on
om
ic F
ree
do
m
Series1
Source: World Bank Human Development Index
R² - .002 Coefficient - -3E10P-Value – .626 Observations - 129
Which Other Geographic Factors Matter?
Source: Diamond, Jared M. “Peeling the Chinese Onion.” Nature Vol. 391, pp. 433-434. January 29, 1998.
Other Geographic Variables
• Exitability (Total Boundaries/Total Area)
• Coastalness (Coastline/Total Area)
• Latitude (Control Variable)
Exitability
• (Total Boundaries/Total Area)
• Theory
R² - .055 Coefficient - -2E08P-Value – .015 Observations - 107
Economic Freedom by Exitability Quartiles
0.001.002.003.004.005.006.007.008.00
Least Exitable Third MostExitable
Second MostExitable
Most Exitable
(Land Boundaries + Coastline)/ Total Area
Eco
no
mic
Fre
edo
m
R² - .103 Coefficient - 3.688P-Value – .000 Observations - 128
Source: CIA World Factbook
Coastalness
• (Coastline/Total Area)
• Theory
2004 Coast/ Total Area v. Economic Freedom
012345678
Smallest Coast/Total Area
Third GreatestCoast/Total Area
Second GreatestCoast/Total Area
GreatestCoast/Total Area
Coast/Total Area
Ec
on
om
ic F
ree
do
m
R² - .094 Coefficient - 3.523P-Value – .000 Observations - 128
Economic Freedom by Coastalness Quartiles for Non-Landlocked Countries
5.00
5.50
6.00
6.50
7.00
7.50
LeastCoastal
LessCoastal
MoreCoastal
MostCoastal
Coastalness Quartiles
20
04
Ec
on
om
ic
Fre
ed
om
Series1
R² - .112 Coefficient - 3.346P-Value – .000 Observations - 105
Exitability for Landlocked Countries v. Economic Freedom
4.004.505.005.506.006.507.007.508.00
Smallest landBoundaries/Land
Area
Second Smallest Third Smallest Largest LandBoundaries/Land
Area
Land Boundaries/ Land Area
Ec
on
om
ic F
ree
do
m
Source: CIA World Factbook
R² - .167 Coefficient - 18.343P-Value – .052 Observations - 23
How does geography affect EFW sub-sectors?
• Sub-sectors1. Size of Government: Expenditures, Taxes, and
Enterprises
2. Legal Structure and Security of Property Rights
3. Access to Sound Money
4. Freedom to Exchange with Foreigners
5. Regulation of Credit, Labor, and Business
Land Area
p = 0.235
p = 0.039
p = 0.003
p = 0.051
p = 0.000
-0.000002
-0.0000018
-0.0000016
-0.0000014
-0.0000012
-0.000001
-0.0000008
-0.0000006
-0.0000004
-0.0000002
0
Area 1 Size ofGovernment
Area 2 LegalSystem and
Property Rights
Area 3 SoundMoney
Area 4 Free Trade Area 5 Regulation
Freedom Indices
Co
rrel
atio
n
Source: CIA World Factbook
Source: CIA World Factbook
Exitability
p = 0.082
p = 0.001
p = 0.067p = 0.008
p = 0.000
0
1
2
3
4
5
6
7
Area 1 Size ofGovernment
Area 2 Legal Systemand Property Rights
Area 3 Sound Money Area 4 Free Trade Area 5 Regulation
Freedom Indices
Co
rrel
atio
n
Source: CIA World Factbook
Coastalness
p = 0.034
p = 0.002
p = 0.123p = 0.018
p = 0.000
0
1
2
3
4
5
6
7
Area 1 Size ofGovernment
Area 2 Legal Systemand Property Rights
Area 3 Sound Money Area 4 Free Trade Area 5 Regulation
Freedom Indices
Co
rrel
atio
n
Relative Importance of Geographic Factors• Multiple Regression
– Land Area– Population– Exitability– Shape Factor– Percentage of Arable Land– Latitude
Table 1. Land Area1 2 3 4 5 6 7 8
Dependent Variable: 2004 Economic Freedom of the World
Land Area -5.632E-09 -1.059E-06 -1.11E-06 -7.8E-07 -7.24E-07 -7.7E-07 -5.69E-07 (LandArea) (-0.134) (-3.001)*** (-2.779)*** (-1.929)* (-1.837)* (-2.039)** (-1.800)*
Population 1.053E-09 1.095E-09 -1.17E-09 3.426E-09 -5.01E-10 (04Pop) (0.288) (0.309) (-0.328) (0.972) (-0.167)
Exitability 2.948 2.284 2.816 2.760 3.264 (Exitability) (2.874)*** (2.216)** (3.157)*** (3.103)*** (3.103)***
Shape Factor 1.687 0.180 0.374 (1-Total Shape Factor) (2.600)** (0.293) (0.644)
Percent Arable Land -2.063 -1.718 -1.487 (PercentArableLand) (-2.889)*** (-2.772)*** (-2.233)**
Latitude 0.031 0.030 0.0312791 (Latitude) (6.054)*** (5.981)*** (6.098)***
R -square 0.000 0.078 0.079 0.147 0.199 0.418 0.413 0.394Adj. R -square -0.008 0.07 0.061 0.122 0.168 0.383 0.384 0.364Observations 127 108 108 108 108 108 108 108FSig 0.8938205 0.0033595 0.0132814 0.0008596 0.0001201 3.35E-10 1.293E-10 5.887E-10Notes: Significance at the 1, 5, and 10 percent levels are denoted respectively by ***, **, and *.
Conclusion
• Geography affects Economic Freedom
• Economic Freedom affects Growth