negative effects on growth; the positive one works through higher productivity and the negative one is caused by inefficient provision and distortionary effects of public taxation.

As noted by Bayraktar and Moreno-Delson (2010) in their literature review, conflicting results on the impact of public spending on economic growth still continue to be found in most recent studies (Schaltegger and Torgler 2006, Agell, Ohlsson, and Thoursie 2006, Benos 2009, Ghosh and Gregoriou 2006). A positive relationship between public spending and economic growth seems to be found only under specific circumstances. For instance, Gupta and al. (2005) show that government expenditure, especially its capital component, has a positive impact on growth for low-income countries when it is combined with a lower budget deficit. Baldacci and al. (2008) also find that education and health spending support higher growth in developing countries when controlled for governance. Overall, recent empirical findings remain largely consistent with Barro’s initial insights. At the lower end, public spending (when properly prioritized) provides the necessary public goods to protect various forms of economic and civil and political freedoms. Beyond a certain threshold, public spending distorts individual choices and could even undermine economic freedom itself.

# **3. Data**

## **3.1 Sources**

The concepts of economic freedom, civil and political rights, and entitlements rights are notoriously difficult to quantify and attempts to grasp such complex subjects in one summary index can only be deceptive. Each concept is wide in scope (both breadth and depth) and impossible to summarize in one all-encompassing indicator. The best that can be done is to approach each concept through a combination of measurable indicators and proxies. The data used in this paper includes the index of Economic Freedom of the World of the Fraser Institute and the indices of Civil Rights and Political Liberties published by the Freedom House (Annex 1). These are among the few available databases that cover those concepts for a large sample of countries and a relatively long period of time in a comprehensive and consistent way.

The index of <u>economic freedom</u> _(EF)_ used in this paper is the simple average of four of the five areas of the Fraser Institute’s Economic Freedom of the World (EFW), namely the legal structure and security of property rights, access to sound money, the freedom to trade internationally, and the regulation of credit, labor and business.<sup>15</sup> In turn each area consists in a number of sub-indicators (Annex 1). The legal structure and security of property rights measures the degree of judicial independence, impartial courts, protection of property rights, military inference in rule of law and the political process, integrity of the legal system, legal enforcement of contracts, and regulatory restrictions on the sale of real property. Access to sound money measures the money growth, standard deviation of inflation, rate of inflation, and freedom to own foreign currency bank accounts. Freedom to trade internationally measures the taxes on international trade, regulatory trade barriers, the size of the trade sector relative to expected,

> 15 <u>http://www.freetheworld.com/</u>

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