DOES GROWTH FURTHER IMPROVE ECONOMIC FREEDOM?

Miroslav Prokopijevic – March 2002
“…the reformer has enemies in all these who profit by the old order, and only lukewarm defenders in all those who would profit by the new”.
Machiavelli, The Prince, Ch. VI.

Abstract: Countries without natural resources or foreign aid can grow just if they do serious economic liberalization. Liberal reforms are first followed by a post-reform recession, and afterwards with growth, provided they create a well business environment, compared to alternatives. Economies growing because of liberalization just exceptionally undertake further reforms in order to enlarge gains – is the main finding of this study.

On the one side, reforms are costly, and after having paid once, people prefer to extract gains, instead to invest again. On the other side, reforms create seeds of their own destruction, by crating environment for a new wave of rent seeking. Other reasons for why countries do not liberalize again, after doing one move, are country-groups specific. After a brief introduction (I), the data indicating degree of liberalization and growth rates throughout the world in the period 1970-2002 are presented (II).

The scope of analysis is restricted to some four groups of countries (developed, recently developed from the Far East, transition and Latin American countries), and it is found that – beyond general reason – reform processes merely depend on just a few factors, like previous development, democracy, the rule of law, the conditions in tradable and non-tradable sectors, and the ruling team.(III) Final chapter is about concluding remarks (IV).