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 Consensusinspired 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 ofincome inequality, they do not benefit 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