Document Type : Original Article
Author
Assistant professor of Economics, Shiraz University
Abstract
Extended abstract
1- INTRODUCTION
The Heritage Foundation has developed the Economic Freedom Index since 1995. Over the past 25 years, the global average score of this index has grown by 2.3, and many countries worldwide have joined the group of free countries on average. Many countries abundance of natural resources has become a curse due to their weak institutional structure. The high revenues from the sale of resources have led to rent-seeking, corrupt and repressive governments. Evidence shows that economic freedom in these countries is not in a good situation. In this regard, we test the following two hypotheses: First, Corruption undermines economic freedom. Second, in addition to directly impacting economic freedom. Corruption can also affect the impact of natural resource income on economic freedom so that the impact of natural income on economic freedom is different at any level of corruption. for this purpose, using the data of forty-nine selected countries with abundant resources during the period 2002-2017, the effect of corruption on the impact of natural income on the economic freedom of these countries has been studied.
2- THEORETICAL FRAMEWORK
Countries with natural resources create corruption and rent-seeking. One of the measures taken by the rentier government to solve problems in the manufacturing sector and protect investors is to keep bank interest rates low. Since this interest rate is usually lower than the market equilibrium rate, it creates an excess demand for loans, and the government is forced to either implement the credit quota or subsidize the production sector. The implementation of any of these policies is defined in the context of financial repression. Another feature of resource-rich countries is subsidies and price suppression. Suppression of prices is one of the factors reducing economic freedom through the component of monetary freedom. Monetary freedom is a measure of price stability combined with price control assessments. Both inflation and price control disrupt the market; price stability without economic interference (at the micro-level) is ideal for the free market. From the entrepreneur to the consumer, all economic factors need a stable and reliable currency to use as a means of exchange, a unit of counting and storing value. Without monetary freedom, it will not be easy to create long-term value for capital. Inflationary policies destroy the wealth of individuals in society and act as an invisible tax. In addition, distorting prices leads to inadequate resource allocation and increases business costs. Although no single monetary policy can be recommended for all countries, most monetary theories support low inflation and central bank independence. It is also accepted that price control disrupts market efficiency and leads to surplus or shortage. Therefore, natural income can hurt economic freedom.
3- METHODOLOGY
The data used in the present study are the economic freedom index, natural resources revenue as a percentage of GDP, the index of corruption perception, and the index of political stability. Regarding the corruption perceptions index, it should be added that this index shows corruption in the public sector of one country compared to other countries and is ranked between 0 and 100. the higher the rank of a country, the less corruption there is in that country. Samti et al. (2006), Graeff and Mehlkop (2003), Jichi and Cabro (2019), and Alsarhan (2019) have also shown that economic freedom affects Corruption. Therefore, due to the possibility of endogenous problems in the model, the framework of the dynamic panel model is used. However, in some cases, the regression function may not be the same for the whole observation, and the regression can be divided into different parts based on a specific threshold value. In this regard, Hansen (1999) has proposed a threshold non-dynamic panel model. However, in this model, the endogenous bias between the dependent and independent variables is not considered. In order to consider endogeny, Caner and Hansen (2004) developed Hansen (1999) model by adding endogenous variables and exogenous threshold variables. Nevertheless, the model proposed by these researchers also cannot be used for dynamic panels. Finally, a model that can be used in a dynamic panel model is introduced by Kremer et al. (2013).
4- RESULTS & DISCUSSION
The results of the study show that corruption hurts economic freedom. This result is consistent with the results of studies by Emerson (2006), Apergis et al. (2012), Yamarik and Redmon (2017) and Jichi, and Cabro (2019). In addition, the second hypothesis of the research is also confirmed; The results show that if the corruption perception index is less than 32, the income from the sale of natural resources hurts economic freedom. However, for countries with a corruption perception index above the threshold (countries with a lower level of Corruption), natural income cannot significantly affect economic freedom. countries with abundant resources have a very favorable ground for the formation of corruption and rent-seeking activities.
5- CONCLUSIONS & SUGGESTIONS
The present study results suggest that if a resource-rich country has Corruption above the threshold, natural income will be spent on repressive economic policies and reduce economic freedom. However, if the level of Corruption is controlled to some extent, the negative and positive effects of the abundance of resources on economic freedom will neutralize each other. In general, the effect of natural income on economic freedom will be insignificant. Overall, the results indicate that the improvement of the weak economic freedom of selected countries with abundant resources depends on the improvement of Corruption in these countries. However, many of these countries have a long way to reach the Corruption Perceptions Index threshold level. Thus, the policy recommendation for these countries is to strengthen the regulatory components, both on the activities of the government and those who have a key role in the resource management system, to provide the basis for accountability of these actors and thus, the formation of corruption restricted.
Keywords
)
Send comment about this article