The relationship between economic freedom and poverty rates: cross country evidence by Colin Duran
For decades, economists have suggested that sustained economic growth is not possible without the crucial pillars of economic freedom and personal liberty. Colin Doran and Thomas Stratmann of the Mercatus Center, in their groundbreaking research study, The Relationship between Economic Freedom and Poverty Rates: Cross Country Evidence, sought to analyze this claim. By applying modern economic statistical methods to three different income thresholds and certain components of freedom over twenty years, Doran and Stratmann have proven that economic freedom is essential to reducing poverty worldwide.
Over the span of 20 years (1995-2015), Doran and Stratmann measured the correlation between components of the Heritage Foundation’s Index of Economic Freedom as applied to three different income thresholds; $1.90 a day, $3.20 a day, and $5.50 a day (at 2011 purchasing power parity). To test the theory that increasing economic freedom in a country leads to lower poverty rates worldwide, the experiment’s data is drawn from 151 countries and over 1,000 observations.
By studying how involved each government is in the economic marketplace, Doran and Stratmann concluded that a country’s market, public policy, integrity, and regulatory efficiency can help bring down poverty rates. For example, public policy that is associated with increasing the country's integrity or government transparency, i.e. policy that reduces corruption and political bribery, correlate with lower poverty rates. According to their research, “a 10% increase in a country’s government integrity score is correlated with a 0.8% to 1.6% reduction in poverty rate depending on the poverty threshold used” (The Relationship between Economic Freedom and Poverty Rates: Cross Country Evidence).
Policies that lead to more freedom in the market also show a statistical negative correlation with poverty. Thus, “lower non-tariff barriers and lower tariff rates” lead to lower poverty levels in all three income thresholds. Furthermore, reductions in certain government controls of the financial industry are associated with lower poverty rates because banks are more free to extend credit and accept deposits (The Relationship Between Economic Freedom and Poverty Rates: Cross Country Evidence).
The Relationship between Economic Freedom and Poverty Rates: Cross Country Evidence is a cutting-edge study that provides definitive, quantifiable proof that economic freedom is integral to the economic growth of a country and the best antidote to poverty.