ALL ECONOMIC FREEDOM IS NOT CREATED EQUAL: EVIDENCE FROM A GRAVITY MODEL

I. INTRODUCTION The role institutions play in economic development is a well-trod path. In this context, the word "institution" takes many sundry forms, from informal cultural norms and subjective measures of values to more well-defined tangible legal and/or government organizations and easily identifiable entities such as religion or historic relationships. In this article, economic freedom represents a relatively objective measure of institutional differences across countries to investigate their impacts on trade in consumer goods and services. I take advantage of the Fraser Institute's Economic Freedom of the World freedom subindices to evaluate the disaggregated impacts of changes in freedom. This research provides a blueprint for an economy to follow by identifying which modifications to economic freedom will have the largest impact on trade flows and thus on overall economic welfare. Most literature on institutions and economic welfare relates to the growth literature, for example, Sala-I-Martin (1997), using economic growth or per capita real gross domestic product (GDP) as the dependent variable. The institutional variables considered include religion (Barro and McCleary 2003; McCleary 2008), language as human capital (Lee 2012), corruption (Mo 2001; Podobnik et al. 2008), war (Blomberg and Hess 2006), and so on. The general consensus is somewhat intuitive: countries with less autocratic rule, be it government or religious, less corruption, and less disruption have better economic performance than those that do. (1) Following the footsteps of Summary (1989) who used bilateral import and export flows between the United States and the rest of the world to investigate the existence of asymmetries in trade flows, Depken and Sonora (2005) used an overall freedom index to determine its impact on trade flows to analyze its asymmetric impact on exports, imports, and total trade volume. In a similar vein. Assane and Chiang (2012) demonstrate the positive effects of institutional reform on trade flows for 15 sub-Saharan African economies. More narrowly, Greenaway, Morgan, and Wright (2002) demonstrate the negative effects of trade restrictions on trade in a panel of developing countries. A conclusion that Sobel and Coyne (2011) reach is that the long-run cointegration between various institutions makes it "impossible to determine which of a country's many institutions is the one responsible for economic prosperity" (p. 22). However, if one such measure of prosperity is increased trade, reflecting an outward shift in the consumption possibilities frontier, the results presented can identify which institutional reform has the largest impact on economic welfare. This article extends the current literature in three meaningful ways. First, although Dep-ken and Sonora (2005) concentrated solely on an overall index of economic freedom, this article utilizes five subindices of freedom to identify the idiosyncratic responses of trade to different types of freedom, rather than artificially restricting them to be identical. Secondly, using subindices provides insight into which combination of freedom yields the best, and worst, results in terms of trade flows. Finally, it extends the sample period by 8 years which captures a variety of structural changes to world economies. Consideration is given to both the elements of freedom with the largest impact on trade as well as the magnitude of the effects on the direction of trade. The results can be briefly summarized as follows: alternative definitions of freedom do impact trade flows differently. Reduction in business regulations--for example liberalization of credit markets, labor regulations, red tape--all have the largest impact on all definitions of trade flows. Interestingly, changes in trade policy, while having a statistically significant impact on trade, do not have as large an impact as do changes in business regulation. …