The Contribution of the IMF and the World Bank to Economic Freedom

Many countries have liberalised their economies over the past decade, but the driving forces which led to this process are still only poorly understood. In this paper, we investigate whether policies of the World Bank and International Monetary Fund (IMF) contribute to the development of economic freedom. As a dependent variable, we use the economic freedom indicator conceived by Gwartney et al. (2000). The Gwartney index is based on a number of quantifiable measures relating to the various dimensions of economic freedom. Seven subgroups of variables, relating to the size of government, the structure of the economy, the freedom to trade and others, are aggregated into the comprehensive index. The different components of the index are presented below.1 Economic freedom has frequently been used as an independent variable in order to explain country-specific growth rates (de Haan and Sturm 2000; Dawson 1998; de Haan and Sierman 1998; Heckelman and Stroup 2000; de Vanssay and Spindler 1994; Przeworski and Limongi 1993). A smaller number of papers attempt to explain the emergence of economic freedom. Lal (1987), Dawson (1998) and de Haan and Sturm (2001) investigate the political preconditions under which economic reforms become viable. There is some similarity to the question of which are the determinants of political liberty (see Feng and Zak 1999). Farr et al. (1998) explicitly address the issue of dual causality between economic well-being and economic freedom, using tests for Granger causality. So far, however, the impact of international organisations on economic freedom has not been addressed in this literature. This provides a main motivation of the paper.download