HUMAN FREEDOM AND ECONOMIC DEVELOPMENT: A GRANGER CAUSALITY ANALYSIS OF PANEL DATA

Abstract

Vigorous empirical research has been done recently about the immense impact of institutions on economic prosperity. Numerous studies have provided valuable evidence that market-supportive institutions, which limit the power of the state and promote individual choice, self-ownership, rule of law and voluntary exchange, have a positive impact on economic development. Here, we would like to introduce and examine one relatively new measurement of the institutional environment – the human freedom index and its link to economic prosperity. Human freedom is an indexed co-published between the Cato Institute and the Fraser Institute. It presents the state of human freedom in the world by uniting the aspects of personal and economic freedoms. In the paper, we examine the relationship between human freedom and economic development using the Granger causality test of panel data. The general idea is to analyze if there is a causal relationship between human freedom and economic growth and to determine the direction of the relationship. Additionally, we examine the causality between these two variables among the different regions around the world. The results of the study can serve as an indication of whether supporting human freedom can accelerate economic growth.