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Economies 2017, 5(2), 18; doi:10.3390/economies5020018

Economic Freedom and Income Inequality: Does Political Regime Matter?

1
Faculty of Business Management, Universiti Teknologi MARA Malaysia, Arau Perlis 02600, Malaysia
2
Faculty of Economics, University of Cambridge, Sidgwick Avenue, Cambridge CB3 9DD, UK
Academic Editor: Ralf Fendel
Received: 15 November 2016 / Revised: 28 May 2017 / Accepted: 29 May 2017 / Published: 5 June 2017
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Abstract

There is a growing literature studying the effects of economic freedom and democracy on income inequality; nevertheless, the inequality-effects of both factors are apparently studied separately. This paper revisits the income inequality-economic freedom nexus and uncovers the role of political regime in explaining the relationship. Using the latest inequality data from Standardized World Income Inequality (SWIID) version 5.0 for a sample of countries up to 115 over 1970–2014 period, and via dynamic panel GMM estimation method, an inequality model that explicitly captures the interaction effect of economic freedom and democracy is estimated. The findings demonstrate that economic freedom has positive effect on income inequality. The estimated size of inequality-increasing effects of economic freedom is substantial, ranging between 0.3% and 0.5% per annum. Nevertheless, the findings show that the freedom-induced inequality is attenuated in the presence of a democratic regime in the countries under study. Furthermore, freedom of international trade and market deregulation are shown to be the two most consistently significant liberalization policies across the baseline estimations and various sensitivity tests. The paper is concluded with some policy implications. View Full-Text
Keywords: liberalization; economic freedom; democracy; income inequality; panel data liberalization; economic freedom; democracy; income inequality; panel data
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Ahmad, M. Economic Freedom and Income Inequality: Does Political Regime Matter? Economies 2017, 5, 18.

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