Effects of Economic Freedom on Economic Growth and the Environment - The relevance of cross-country regressions

The purpose of this paper is to examine the relevance of cross-country analysis of the link between specific economic freedom categories and welfare, both in terms of economic growth and the environment. First, the quality and objectivity of the economic freedom data are discussed. Second, a number of empirical conditions are identified that are needed to be aware of for a fruitful analysis. It is a presentation of econometric issues that are especially important for cross-country regressions including different economic freedom categories, and issues that are often ignored in this context. This is done on the basis of theoretical discussions of the links between economic freedom and economic growth, and between economic freedom and the environment. The theoretical insights will prove to be crucial for the choice of empirical consideration to apply in practice. Moreover, sensitivity tests should play a central role in these kinds of cross-country regressions, since the complexity of the institutional questions makes it impossible to identify all relevant variables. Theoretically well-based and robust results of cross-country regression are important, but should mainly serve as an indication of where more country specific analysis, such as CGE modelling, time series analysis and case studies, should be directed.