THE IMPORTANCE OF GEOGRAPHICAL FACTORS, LEVEL OF DEVELOPMENT AND CULTURE IN THE EFFECTIVENESS OF ECONOMIC FREEDOM

THE IMPORTANCE OF GEOGRAPHICAL FACTORS, LEVEL OF DEVELOPMENT AND CULTURE IN THE EFFECTIVENESS OF ECONOMIC FREEDOM

Adkham Jaynakov Rustam o`g`li

Student, United States, TCU- Texas Christian University,

USA, Texas

ABSTRACT

There is a wealth of research on the role of economic freedom in creating an environment conducive to economic growth. Most of the recommendations in this area are based on observations from highly developed countries. But is it reasonable to extend these findings to other countries, regardless of their conditions? There is now a growing number of studies being carried out for countries outside the world's frontiers. The results are different - some elements of economic freedom seem unconditionally effective, others give different results. The purpose of the article is to consider the role of such factors as the stage of economic development, geographical location and culture in the context of the effectiveness of economic freedom. The study was conducted using regression models for panel data and based on indicators related to economic freedom and economic growth.

Keywords: economic freedom; institutions; economic development; geopolitics; culture.

Introduction

The debate about the optimal level of government regulation has a long history among economists. Many researchers point to economic freedom as an important determinant of achieving a high level of well-being. But not all studies bring the same results - the question of what elements of economic freedom are important and whether economic freedom is needed in all areas of the economy and whether it works for every country is still open. Most studies tend to be based on highly developed countries. However, the Western world has its own specifics, due to history, culture, geographical conditions, etc. One may ask whether the results that are true for Western developed countries are also true for the rest of the world. The purpose of the article is not set so broadly. The study is focused on diversifying the results of the analysis of the impact of economic freedom on GDP per capita, taking into account the level of domestic product, geographical location and culture.

Literature Review

Economic freedom is one of the aspects considered as a resource of social and economic well-being. Studies of the possibility of providing the most effective solutions by the market mechanism have accompanied economics from the very beginning, but advocates of state intervention occupy an important place in the history of economic thought. We can talk about a market mechanism when there are established rules for exchange, communication, transfer of property rights, and establishment of means of payment. Otherwise, rational decision making would be impossible. On the other hand, the state is considered responsible for establishing the institutional order (Stankiewicz, 2005). Both regulators - the market mechanism and the state - are burdened with imperfections, and the optimal level of state regulation is still in the field of view of economists.

Method of the Research

The study was conducted for 178 countries based on the Index of Economic Freedom (IEF) developed by the Heritage Foundation and data published by the International Monetary Fund and the World Bank. The analysis covers 1995–2015 (the period when the data were available). The assessment of economic performance (to measure the effects of economic freedom) was based on GDP per capita. The purpose of the study was to test whether the relationship between different areas of economic freedom and income level (in terms of its direction and significance) depends on factors related to the level of GDP, geographical location and culture. To do this, countries were first analyzed together (to check for common relationships) and then divided into groups based on the following criteria:

- the level of GDP per capita;

- the continent on which the country is located;

- culture (using the Huntington classification).

The analyzes carried out for groups of countries focused on the adequacy of the models (to test whether the variability of characteristics really explains the variability in the level of GDP when the factors listed above are taken into account), the statistical significance of the variables, and the direction of the relationship. The data were analyzed using linear fixed effect regression models:

Y_it = βX_it + α_i + ε_it, i = 1,…,n,

where:

Y_it – explained variables (GDP per capita),

β – vector parameter,

X_it – matrix of explanatory variables (ten components of IEF),

α_i – time-invariant component,

ε_it - idiosyncratic error,

n – number of countries.

The fixed effect allows you to remove the influence of assumed stationary characteristics from the predictor variables and estimate the net effect of the predictors, when each entity (in this case, the country) has its own individual characteristics that can influence the predictor variables (Cameron and Trivedi, 2010, p. 237-238). The choice between models with random and fixed effects was made on the basis of the Hausman criterion.

The GDP used in the study is GDP based on purchasing power parity per capita in the current international dollar published by the IMF. It is important to note that in the case of poorer countries, the quality of the data is always in doubt (often GDP is not calculated exactly, but only estimated by the government or statistical agencies), so there is a risk of bias in the results.

Table 1.

Construction of Index of Economic Freedom

Additional explanations are needed in the case of government spending. This component is based on the level of government spending (including consumption and transfers) as a percentage of GDP and is inverted, so a higher level of government spending results in a lower level of the index. However, zero does not mean that there is no private consumption in the economy, since expenditures (EP) are adjusted according to the formula: GEi = 100 – α (Expendituresi)², where α is a coefficient to control for variation among scores (set by Heritage Foundation at 0,03). Therefore GS = 0 means that government expenditures exceeded the level of about 57 percentage of GDP (Heritage Foundation, 2015).

IEF was chosen due to its complexity (it contains 10 areas of economic freedom), relatively long period of calculations (index is available since 1995), and availability for many countries (nowadays it is published for  186 countries; not for all of them GDP was available, so number of coun- tries in the research is 178).

Conclusions

The study conducted in the article does not allow us to abandon the hypothesis that when analyzing the impact of economic freedom on the economic performance of countries, it is also necessary to take into account factors such as geographical, cultural and development-related circumstances. - es. When countries are analyzed in the sections related to these factors, models based solely on the components of the Economic Freedom Index often do a poor job of explaining the volatility of countries' economic performance. Some elements of economic freedom seem to work regardless of countries' circumstances - freedom related to trade, fiscal policy, and control of corruption. But the results for other areas of economic freedom are mixed. Such results are consistent with the observations of other researchers, who point out the importance of a number of components when choosing a model of state regulation. The study presented in the article is preliminary. Institutional changes often take effect many years after implementation, which requires an analysis of the lag effect. This will be considered in future studies. Future research will also be expanded to include other aspects related to the impact on the effects of changes in the level of economic freedom.

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