Well-Being and Economic Freedoms in OECD

  • Irina Georgescu The Bucharest University of Economic Studies, Romania
  • Jani Kinnunen Åbo Akademi University, Turku, Finland
Keywords: Better-life index, composite index, economic freedom, multiple correspondence analysis, OECD, regression analysis, well-being

Abstract

OECD countries represent advanced market economies. Well-being in OECD countries can be measured by Better Life Index (BLI). In this paper, firstly, two composite indices are built for BLI and Freedom Index (FI) based on principal component analyses of the 24 individual well-being variables and 10 economic freedom variables for 2013-2016. The purpose is to study the effect of the composite FI and the individual economic freedoms on the composite BLI. This is done by linear regressions between the indices and, separately, between individual freedoms and the BLI. Also, GDP per capita is included into regressions. Then, multiple correspondence analysis (MCA) is conducted on categorized 2016 data for further insights. The approach leads to several findings: countries in higher quartiles measured by BLI are related to higher freedom index; while GDP per capita explains about 51% (R2) of BLI using a univariate regression, the freedom index explains as much as 69%. Multiple correspondence analysis shows that countries belonging to the two highest quartiles, measured by BLI, are very similar and they are related to very high and high levels of freedoms and GDP, while the countries belonging to lowest and second lowest BLI quartiles form both clearly separate groups and are related to low freedoms and GDP and medium-level freedoms and GDP, respectively. Freedoms related to monetary and fiscal policies were not found significant in line with earlier literature suggesting that the policies can create well-being.

References

Altman M. How much economic freedom is necessary for economic growth? Theory and evidence. Economics Bulletin. 2008;15(2):1-20.

Andrei AM, Galupa A, Georgescu I. Measuring the Influence of Economic and Social Inequality on Growth. Empirical Evidences for Central and Eastern Europe. The 16th International Conference on Informatics in Economy IE 2017, Bucharest, Romania, pp. 463-469.

Cebula RJ, Clark JR, Mixon Jr FG. The Impact of Economic Freedom on Per Capita Real GDP: A Study of OECD Nations. The Journal of Regional Analysis & Policy. 43(1):34-41, 2013.

CORE Team. The economy: Economics for the changing world. Oxford University Press, September 2017. Internet: http://www.core-econ.org/the-economy/book/text/0-3-contents.html

Georgescu I, Androniceanu A, Kinnunen J. A Computational Analysis of Economic Freedom Indicators and GDP in EU States. The 17th International Conference on Informatics in Economy IE 2018, Iasi, Romania, pp. 461-468.

Gwartney J, Lawson R, Hall J, Murphy R. Economic Freedom of the World. Fraser Institute 2018 Annual Report, 2018.

Hussain ME, Haque M. Impact of Economic Freedom on the Growth Rate: A Panel Data Analysis. Economies. 2016;4(5):1-15.

Joliffe I. Principal Component Analysis. Wiley Online Library. 2005.

Justesen MK. The effect of economic freedom on growth revisited: New evidence on causality from a panel of countries 1970–1999. European Journal of Political Economy. 2008;24:642-660.

Kassambara A. Practical Guide to Principal Component Methods in R. factoextra. 2017.

Kinnunen J, Androniceanu A, Georgescu, I. Impact of Economic and Political Systems on Human Development Index: A Computational Evaluation. The 18th International Conference on Informatics in Economy IE 2019, Bucharest, Romania, pp. 459-466.

Kinnunen J, Georgescu I, Tamminen L. Do Economic Freedoms Create National Wealth? Clustering and Principal Component Analyses of Freedom Variables and GDP. The Real Options Workshop, 3-4 October 2017, Lappeenranta, Finland, pp. 13-16.

Miller T, Kim AB. Index of Economic Freedom: Promoting Economic Opportunity and Prosperity. The Heritage Foundation and Dow Jones & Company, Inc, Jan 2017.

OECD 2008. Handbook of Constructing Composite Indicators: Methodology and User Quide. Internet: https://www.oecd.org/sdd/42495745.pdf

OECD 2011. Compendium of OECD well-being indicators. OECD Better Life Initiative. Internet: http://www.oecd.org/std/47917288.pdf

OECD 2017: How's Life? 2017: Measuring Well-being. [Internet]: https://read.oecd-ilibrary.org/economics/how-s-life-2017_how_life-2017-en#page1

OECD 2019: How's Life in the Digital Age? Opportunities and Risks of the Digital Transformation for People's Well-being. [Internet]: https://read.oecd-ilibrary.org/science-and-technology/how-s-life-in-the-digital-age_9789264311800-en#page6

Osberg L, Sharpe A. An Index of Economic Well-Being for Selected OECD Countries. Review of Income and Wealth. Series 48, Number 3, 2002: 291-316.

Procházka P, Čermáková K. Influence of Selected Institutional Factors on the Economic Growth: Case Open Markets. Procedia Economics and Finance. 2005;30:702-709.

Vega-Gordillo M, Alvarez-Arce JL. Economic Growth and Freedom: A Causality Study. Cato Journal. 2003;23(2):199-215.

Published
2019-10-08