Economic freedom and growth across German districts

Abstract

In this paper, we revisit the relationship between economic freedom and growth across 407 German districts (Kreise). We build six indicators of economic freedom and cluster them into categories reflecting tax rates and size of the government and public sector. Exploiting the variation in the constructed indices of economic freedom, the evidence suggests less indebted districts with a lower share of taxes and a relatively smaller public sector achieve consistently higher growth rates and income levels. The beneficial effect of economic freedom on growth is robust to the variety of specification checks and does not appear to be driven by sample selection. The evidence does not indicate a lower level of economic freedom in former East German districts or greater economic freedom in West German districts but unveils a persistent north–south divide in the post-unification period. In the counterfactual scenario, a transition to the 90th percentile of economic freedom is associated with large income and growth gains. Such a transition would yield higher income levels and growth rates with a notable decrease in regional economic inequality within Germany.

When Does Economic Freedom Promote Well Being? On the Moderating Role of Long-Term Orientation

“…Organizations such as the Fraser Institute annually publish indexes of economic freedom, distinguishing aspects such as low government spending, protection of property rights, sound money, free trade, and low regulatory stringency. Various studies have argued that free markets and competition stimulate income per capita or economic growth and have found a positive relationship (De Haan et al 2006;Justesen 2008;Graafland and Compen 2015;Faria et al 2016;Murphy 2016;Murphy and O'Reilly 2018;Spruk and Kešeljević 2018). Other studies have argued that economic freedom stimulates life satisfaction and have shown that a positive relationship exists between them (Veenhoven 2000;Ovaska and Takashima 2006;Gropper et al 2011;Gehring 2013;Graafland and Compen 2015) as well as with (several dimensions of) emotional well being .…”

“…The concept has been analyzed in more than 400 scientific articles (Hall and Lawson 2014). Previous research has shown that economic freedom is positively related to income per capita or economic growth (De Haan et al 2006;Justesen 2008;Faria et al 2016;Murphy 2016;Murphy and O'Reilly 2018;Spruk and Kešeljević 2018). Other studies have shown 1 3 that economic freedom also correlates with life satisfaction (Veenhoven 2000;Ovaska and Takashima 2006;Gropper et al 2011;Graafland and Compen 2015).…”

Contingencies in the relationship between economic freedom and human development: the role of generalized trust

“…Government regulation may take insufficient account of economic dynamics and cause market rigidity (Friedman, 1999). Various empirical studies have indeed shown economic freedom is positively related to economic growth or GDP per capita (Azman-Saini et al , 2010; Bennett et al , 2017; De Haan et al , 2006; Farhadi et al , 2015; Hall et al , 2010; Justesen, 2008; Murphy, 2016; Spruk and Kešeljević, 2018).…”

“…Economic freedom refers to the degree of personal choice, voluntary exchange, freedom of competition, and protection of privately owned property afforded by society (Gwartney et al , 2017). An extensive volume of studies has shown that economic freedom is related to GDP per capita or economic growth (Azman-Saini et al , 2010; Bennett et al , 2017; De Haan et al , 2006; Farhadi et al , 2015; Hall and Lawson, 2014; Hall et al , 2010; Justesen, 2008; Murphy, 2016; Spruk and Kešeljević, 2018). Other studies have found that economic freedom is positively related to education (Aixalá and Fabro, 2009; Feldmann, 2017; King et al , 2012; Schofer and Meyer, 2005) and health (Stroup, 2007).…”

Free-Market, Perfect Market and Welfare State Perspectives on “Good” Markets: an Empirical Test

“…Pro-market institutions have been found to be important formal institutions for economic development Justesen, 2008;Murphy, 2016;Spruk & Kešeljević, 2018) as well as for broader dimensions of development as comprised by the human development index (Özcan & Bjørnskov, 2011), including education (Aixalá & Fabro, 2009;Feldmann, 2017;King et al, 2012), health (Stroup, 2007), and the OECD better life index (Nikolaev, 2014). This type of empirical analyses can be theoretically embedded in the pro-market literature that is aligned to the neoliberal free-market perspective.…”