Freedoms and Economic Growth: Transitional and Permanent Components

John McMillan, Gordon C. Rausser, Stanley R. Johnson
October 1993  [93-WP 115]

This paper investigates the empirical foundation for policy reform prescriptions suggested by the institutional approach to economic growth. The focus is the relationship between institutional reforms, measured by changes in a country's political or civil rights, and economic growth. Empirical models previously estimated using cross-section data are extended by adding a temporal element. This allows an estimation of the timing of benefits following a reform. In addition to finding support for the idea that institutional reforms can cause increases in economic growth, five major implications emerge: (i) the economic benefits of freedom reforms are systematic and significant, (ii) economic benefits, in the form of increased growth, occur with a lag after the initiation of a reform in political rights or in civil liberties, (iii) reforms in civil liberties eventually require a reform in political rights in order to be sustained, (iv) changes in the capital-to-labor ratio have a larger effect on economic growth in the short run than in the long run, and (v) there remains significant and unexplained regional variation in the short-run effects of changes in the capital-to-labor ratio.

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