Plausibly exogenous causes of economic freedom

Abstract

A large literature has emerged investigating the origins of the institutions of economic freedom. While some literature has used impressive identification strategies to tackle this question, findings as a whole are typically circumscribed in their identification. This paper considers a series of variables that are reasonably thought of as exogenous, namely, legal origins and a series of environmental variables. It then compares their effects on economic freedom to the lagged relationships of education, democracy, and civil society with economic freedom. The historical prevalence of pathogens at first appears to be a strong determinant of economic freedom, but it is tentatively concluded that this occurs through the conduit of education, with lagged education having a strongly positive relationship with economic freedom. We also find that the natural log of the size of a country has a negative effect on economic freedom. We separately observe several other tertiary or less robust results in the course of the analysis found herein.

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Fig. 1

Notes

  1. 1.

    The prevalence of pathogens may not be “deeper” than this second set of environmental variables. It is more plausible that island geography causes the prevalence of pathogens than it is for the prevalence of pathogens to cause a country to be an island, for example. However, with respect to institutions, the important channel is whether underlying institutions cause a country to be (defined in terms of) an island (which is strained but somewhat plausible) versus whether underlying institutions caused the historical prevalence of pathogens.

  2. 2.

    Similar to the findings of Gohmann (2019), Bennett and Nikolaev (2016) reproduce the famous result of Sokoloff and Engermann (2000) by using factor endowments to explain the legal system and property right area of economic freedom, but do not relate it to the overall index. Results for the effect of the resource curse on economic freedom are similarly mixed, with Campbell and Snyder (2012) and March et al. (2017) finding a resource curse and Brown (2014) and O’Reilly and Murphy (2017) finding no resource curse. While we will not be returning to considering either the Engermann-Sokoloff hypothesis or the resource curse, these too are aspects of the literature on the environment and economic freedom.

  3. 3.

    For an imperfect comparison, see Nunn and Puga (2012).

  4. 4.

    Nattinger and Hall (2012) consider the different states in the United States and which European state first colonized them. It then uses the legal origins of the European state to predict economic freedom.

  5. 5.

    The point of O’Reilly and Murphy (2017) was that the discovery of especially large oil fields is essentially exogenous and could be used as a means of identification. However, this panel data is not presently structured such to allow a straightforward, one-to-one inclusion with the data I will be using.

  6. 6.

    Note that this is due to a decline in country size, not the inclusion of executive constraint and civil society data. This is shown in Regression 19a which removes the 23 countries which are present in Regression 19 but not in Regression 22.

  7. 7.

    The performance of education in comparison to executive constraint, can be thought of in terms of Glaeser et al. (2004).

  8. 8.

    Myanmar is kept in these regressions because we are not considering legal origins.

  9. 9.

    The relevant test statistics are included in Table 7. The tests fail to reject that the variables used as instruments are exogenous, while rejecting the hypothesis that the instruments are weak (using an F-statistic of 10 as a point of comparison when there is only one endogenous variable, as given by Stock et al. 2002). For Regression 30, the standard tests fail to reject the hypothesis that the instruments are valid.

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Murphy, R.H. Plausibly exogenous causes of economic freedom. J Bioecon (2021). https://doi.org/10.1007/s10818-021-09308-w

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Keywords

  • Institutions
  • Economic freedom
  • Environment
  • Legal origins
  • Parasite-stress theory
  • Education

JEL Codes

  • Q56
  • P10
  • K00
  • O43