Political Freedom and Growth

The relationship between political freedom and economic growth is considered very critical in political economics. On the one hand, political freedom is found to be positively correlated with economic growth (Lipset 1993; Przeworski and Limongi 1993; Barro 1997; Minier 1998; and Przeworski 2004). On the other hand, a number of high growing countries experienced low political rights such as: China, Saudi Arabia, and the United Arab Emirates. Besides, several democratic countries faced low economic growth such as: Greece and Spain (Arat 1988; Vanhanen 1990; Heo and Tan 2001). This study aims at examining the impact of political freedom on economic growth. Since, the literature covered three contradictory findings regarding the main driver of economic growth, an unbalanced panel of dataset running from 1970 to 2012 and spanning 92 (high and low income countries) was adopted to address our research question. The data was retrieved from the World Bank's World Development Indicators (WDI) and the Global Development Finance (GDF) databases. Furthermore, classification of countries political freedom was derived from the Transparency International. This study considered the following factors as the main determinants of growth: population growth rate, mortality rate, fertility rate, human capital, government expenditures, foreign direct investment, culture and political risk. In addition, the significance of the adopted variables was compared between two models: Model 1 (high political rights) and Model 2 (low political rights). Through comparing results based on income level, it is revealed that there are more differences between countries. Countries with high political rights (even with different income levels) show that all factors have similar effect on economic growth except the fertility rate. Conversely, countries with low political rights show different results. The growth rate of population is statistically significant in high income countries but not significant in low income ones. In contrast, mortality rate is not significant in high income countries but highly significant in low income countries. Likewise, the fertility rate is statistically significant in countries with high income but not significant in countries with low income. Finally, fiscal policy (government expenditures) does not seem to be effective in both groups. In summary, regardless of the income level, the lack of political rights makes both the fiscal policy and the foreign direct investment invaluable for economic growth. Contrary to Prescott (2014), Taylor (2014), and Summers (2014), this paper concludes that foreign investors prefer high political freedom over internal policies within a country.