Free market capitalism and societal inequities: Assessing the effects of economic freedom on income inequality and the equity of access to opportunity, 1990–2017

Abstract

Some blame free-market capitalism for increasing income inequality, arguing that richer classes could block access to others for maintaining their privileges. By manipulating the degree of political rights and resources available to others, the rich could reduce opportunities for others. Others argue that growth-promoting free markets raise all incomes, increasing aggregate welfare. We argue that governments more dependent on free markets are likely to focus on increasing access to human capital, thereby narrowing the gap between the rich and poor by increasing opportunities, even if income inequality rises with high growth. We assess the issue by examining the effects of an Index of Economic Freedom on income inequality measured by the standardized GINI and measures of the equity of access to quality schooling, health, and justice covering 128 developing countries during the 1990–2017 period. Our results show that, even if economic freedom is associated with higher income inequality, it also associates robustly with access to opportunity. Our results are robust to alternative models, sample size, and testing methods, including instrumental variables analyzes addressing potential endogeneity bias. Our results, taken together, do not suggest that growth-promoting economic freedoms hamper future progress by raising inequalities—on the contrary, economic freedoms promote equity of access to opportunities—findings inconsistent with the view that governments under free-market conditions are easily captured by the wealthy, who then block equitable access to public goods.

Does economic freedom foster education in Sub‐Saharan Africa?

“…It stands as one of the most widely used indices of economic freedom worldwide. For instance, it has been extensively utilized by researchers such as Stroup (2007), Farhadi et al (2015), Apergis and Cooray (2015), Angulo‐Guerrero et al (2017), Bennett et al (2017), Feldmann (2017, 2021), de Soysa and Vadlamannati (2021), Marson et al (2021), Graafland and de Jong (2022), and Atangana Ondoa and Mveng (2023). In contrast, according to Miller and Kim (2016), the Index of Economic Freedom published by the Heritage Foundation and the Wall Street Journal is partly based on subjective assessments by in‐house experts.…”

The Impact of Financial Liberalization Policies on Income Inequality

“…Additionally, labor market dynamics play a significant role in the relationship between financial liberalization and income inequality (Ni andLiu, 2019 andAli, 2022). Le et al (2021) andDe Soysa andVadlamannati (2021) argue that financial liberalization affects income inequality by influencing the demand and supply of different types of labor. They suggest that financial reforms may favor skilled workers and exacerbate wage disparities, contributing to income inequality.…”

A multidimensional free market and income inequality in developing Asia: How does the quality of governance matter?

“…A free market proxied by EF potentially affects income inequality via three channels including: (i) its impact on income‐growth rates of the rich and the poor, (ii) the redistribution system (Berggren, 1999; Clark, 2008; Scully, 2002) and (iii) the access to opportunities (De Soysa and Vadlamannati, 2021). In the first channel , if the income‐increasing effect of EF on the poor is bigger than that on the rich, income inequality falls.…”