Free to escape? Economic freedoms, growth and poverty traps

• Published date: 01 August 2022
• Author: Donatella Saccone,Matteo Migheli
• Date: 01 August 2022
• DOI: http://doi.org/10.1111/rode.12868

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         Rev Dev Econ. 2022;26:1518–1554.

wileyonlinelibrary.com/journal/rode

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INTRODUCTION

Solow (1956) theorized the possibility that some poor countries would have fallen into a so- called 

poverty trap. Their lower savings rates would indeed have led them to steady states characterized 

by less  capital and  lower income per capita than those of affluent  countries.1 Of  course,  coun-

tries should avoid poverty traps, which economists and policy- makers see as a highly undesirable 

Received: 28 January 2021 

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  Revised: 22 July 2021 

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  Accepted: 11 January 2022

DOI: 10.1111/rode.12868  

REGULAR ARTICLE

Free to escape? Economic freedoms, growth and

poverty traps

DonatellaSaccone1,2

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MatteoMigheli2,3

This is an open access article under the terms of the Creative Commons Attribution- NonCommercial License, which permits use, 

distribution and reproduction in any medium, provided the original work is properly cited and is not used for commercial purposes.

© 2022 The Authors. Review of Development Economics published by John Wiley & Sons Ltd.

1University of Gastronomic Sciences, Bra 

(CN), Italy

2OEET- Turin Centre on Emerging 

Economies, Torino (TO), Italy

3Department of Economics and Statistics 

“Cognetti de Martiis”, University of 

Turin, Torino (TO), Italy

Correspondence

Matteo Migheli, Department of 

Economics and Statistics “Cognetti de 

Martiis”, University of Turin, Lungo Dora 

Siena 100, I- 10153 Torino (TO), Italy.

Email: matteo.migheli@unito.it

Abstract

New  evidence  on  the  relationships  between  eco-

nomic  freedoms  and  poverty  traps  is  provided. 

Methodologically, a  new  way to  classify  countries into 

clusters is  used,  which  stresses the  relative  position  of 

economies with respect to each  other. The paper inves-

tigates whether economic freedoms have any impact on 

shifts from one cluster to another, towards either better 

or worse situations. Moreover, it analyzes the contribu-

tion of economic freedoms to avoid falling into a poverty 

trap. The  impacts of  the five  macro- components  of the 

index are studied separately. The results show that eco-

nomic freedoms  help  economies  to  grow  and to avoid 

poverty traps.

KEYWORDS

economic freedom, economic growth, poverty traps, transitions

JEL CLASSIFICATION

I32; O43; O47

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outcome; consequently, many different economic policies have been designed and implemented 

over time for countries to escape from  or elude such  traps (Kraay & McKenzie,  2014). Both na-

tional governments  and  international financial  organizations  such as  the World  Bank and  the 

International  Monetary  Fund  have  therefore pursued  policies  aimed  at  promoting  economic 

growth, especially in developing and (since the 1990s) transitioning countries.

Starting from the early 1980s, the so- called Washington Consensus inspired most of the policies 

which, grounded  in liberal  and neoliberal  theories, suggested  liberalizing economies  to render 

them as close as possible to perfect market economies set on the best path to fast and sustainable 

economic growth  (Sachs  et al., 2004).  Implicitly, following  this  recipe  would  have minimized 

the risk of falling into poverty traps. In the wake of such a policy orientation, some research and 

policy- evaluation institutions  developed indices to  measure the degree  of economic  freedom of 

a country, with the aim of  assessing both  the performance of  economies in this  respect and the 

effects of the  latter on economic growth. Although different  indices measuring the level of  eco-

nomic freedom of  countries  now exist, their  representation of  the  phenomenon generally does 

not vary  significantly: Doucouliagos  and Ulubasoglu  (2006)  prove that  the effects  of  economic 

freedom on economic  growth do  not vary  with the  index used.  Eichengreen et al.(2013)  show 

that the existence of  traps depends  on the  definition of  categories (i.e. low- , middle- , and high- 

income countries):  the  adoption  of  a  relative  rather  than an  absolute  definition  of  thresholds 

between these categories leads to different results and conclusions about the existence of and the 

escape from poverty traps.

Starting from the latter  conclusion, this paper  contributes to the  extant literature on the  im-

pact of  economic freedom on  economic growth (measured as  the growth of  income per  capita) 

by adopting a new classification of  economies, based on a measure  that stresses relativity in the 

positioning, to define  poverty traps; and  by applying  such a relative  classification to  study how 

economic freedom is associated to  the transition of  countries from one  category to another and 

focusing in particular on  recessions and advancements. The reason for  highlighting relativity is 

that, while  absolute thresholds  either  need continuous  updates to  keep reflecting  the  evolving 

situation  or  risk  of  representing  states  that  progressively  lose  adherence with  reality, relative 

measures update  automatically, as  they  follow the same  processes  that  govern the  underlying 

variables. In  particular, this paper  adopts  the classification  of  economies  proposed by  Saccone 

and Deaglio  (2020),  where countries  are  clustered into  four  groups: poor,  emerging, booming, 

and affluent. The methodology  considers the  relative position of  countries with  respect to both 

the world average  per- capita  income and  the world  mean of  its growth  rate. The simultaneous 

comparison of  each country  against these means  allows us  to evaluate them  according to  their 

relative status (level of income per capita) and dynamics of per- capita income (growth rate); such 

a strategy  therefore combines  the  two variables  that  the literature  has  traditionally used  sepa-

rately. The third section of the paper discusses this procedure in more detail.

The main aim of the paper is not to classify countries into the four categories individuated by 

such a procedure nor to study the impact of economic freedom on the position of each country in 

a cluster. In fact, Saccone and Deaglio (2020), who originally proposed the classification, already 

presented an econometric analysis of  the factors determining why a country belongs to one cat-

egory rather than to another at specific periods of time. However, they only marginally explored 

the factors driving the transitions of  countries across categories  over time through a simple  sta-

tistical analysis of  frequencies and means for selected cases, also considering the  role played by 

economic freedom, and concluded  by calling for  a more sophisticated investigation of  the tran-

sition patterns. The present paper answers such a  call and, more specifically, aims to study how 

economic freedom is associated with the transition of countries from one category to another by 

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focusing in  particular on  recessions and advancements.  The purpose  is to  understand whether 

economic freedom allows economies to avoid poverty and to follow virtuous growth paths, using 

the aforementioned clustering strategy.

Following Carlsson and Lundström (2002) and Berggren (2003), the analysis presented in the 

paper will consider not only an aggregate index of  economic freedom (namely, that provided by 

the Fraser Institute) but also its components. Indices of  economic freedom, indeed, include sets 

of indicators  ranging from law enforcement to inflation  stability: the literature  (see Carlsson & 

Lundström, 2002; Ott, 2018) clearly shows that different components of these indices have differ-

ent effects on  economic growth, from  negative to positive. The  inclusion of  the synthetic  index 

in empirical analysis is important, as it  allows for assessing the overall weighed impact of all its 

components. Therefore, on the one  hand, the aggregate measure answers  the question whether 

economic freedom (generally speaking) enhances growth; on the  other hand, its decomposition 

allows us to understand which aspects are beneficial and which are not, allowing for precise pol-

icy recommendations. Given the composite nature of the indices of economic freedom, through-

out the paper the plural “economic freedoms” will be preferred to its singular form.

The results of  the  analysis set out  in this  paper show  that economic freedom  is in  general a 

positive ingredient  for  transitioning to  higher  clusters  and allows  poverty  traps  to be  avoided. 

However, some caveats are in order: on the one hand, when economies are characterized by high 

levels of   income inequality, they  do  not benef it from  economic  freedoms;  on  the  other hand, 

some components of  the index seem to  have a rather negative effect on  countries with incomes 

per capita below the world average, while the opposite holds for those above such a threshold. In 

other words,  economic freedoms  should be  implemented cautiously  and policy- makers should 

try to follow optimal sequencing of reforms.

The rest of  the paper is structured as  follows. Section2 provides a  general review of  theoret-

ical  and  empirical  studies  on  the  relationships between  growth,  poverty  traps,  and  economic 

freedom. Section3 presents the  methodology and data used  in the empirical analysis. Section 4 

reports and discusses the main findings. Section5 concludes.

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LITERATURE REVIEW

This section  presents  and  critically  discusses some  of  the  most  relevant works  that  assess  the 

existence of poverty traps, their causes and solutions. The second part of the  section surveys the 

works on measures of economic freedoms and their relationships with growth and poverty traps.

The literature  on  growth  and development  in  economics  has  often inquired  into  the  prob-

lem of so- called poverty traps (Nurske,1953; Azariadis & Stachurski, 2006), situations such that 

poor countries are condemned  to poverty by  their own characteristics,  which endogenously re- 

create poverty.2 Solow  (1956) and  Swan (1956)  are examples  of  theoretical models  that predict 

the existence  of  poverty  traps  for countries,  whose  savings  rate is  insufficient  to  allow  capital 

to accumulate  enough to  bring  the country  to  an affluent  steady  state. Phillips  and  Sul (2009) 

propose an econometric strategy that  allows for clustering countries into  five groups, according 

to their  per- capita income  in 1970  and  2003.  The authors  show  that  the majority  of  countries 

remained in the  initial group  (including that  of  poor economies) over  the 34 years considered; 

nevertheless, a few countries were able to leave their club  to transition to another characterized 

by higher income. In other words, the authors suggest both the existence of poverty and middle- 

income traps and the possibility of leaving them for affluence. Brasington etal.(2010) propose a 

theoretical model based on human  capital accumulation and technological progress: they  show