Linking labor productivity to economic freedom.

Nissan, Edward ; Niroomand, Farhang

I. INTRODUCTION

In the preface to New Economic Growth." New Factors and New Perspectives, the editors, Bahmani-Oskooee and Galindo Martin (2006), say that in recent decades economists have provided newer views of a better economic future where economic growth takes center stage. When economic growth is high, more jobs and greater income are available for distribution, paving the way for prosperity. They observe that the importance of growth is not new in economic discourse. Adam Smith (1776), Ricardo (1817) and Malthus (1820) had in mind economic growth to achieve economic progress, though they differed in the suggested tools. Added to these are newer theoretical versions which suggest science and technology as instruments for growth (endogenous technical progress). These ideas are lumped under the economic theoretical name classical, which was followed by the neoclassical exogenous economic growth, Post-Keynesian and endogenous growth models.

This paper provides (1) a review of literature dealing with the theories described above concerning economic growth and development, (2) an aim and methodology section which includes statistical tools for analysis, (3) a section providing results, followed by a concluding remarks section (4).

II. REVIEW OF LITERATURE

In a comprehensive look at classical economics, Reid (1989) sought to contrast two important growth themes presented by Adam Smith. The first was classical sectoral analysis and the second was classical aggregate growth. The sectoral takes a detailed look at the evolution of individual industries and, even perhaps, individual firms, which may give an account of the cumulative growth process. The aggregate growth model provides explicitly the growth path subject to technical change due to division of labor. The effect of division of labor transcends from firms to industries to countries, which is the basis of endogenous technological change.

Endogenous technological change, according to Salvatore (2007), arose from the new endogenous growth theory introduced by Romer (1986) and Lucas (1988). The theory postulates that lowering trade barriers makes it possible for economic growth to be speeded up in the long run. Mechanisms for expediting growth include the transfer of technology from developed to developing countries and the promotion of larger economies of scale in production. The new endogenous growth theory can explain how endogenous technological change can create externalities that can offset diminishing returns to capital as envisioned by the neoclassical growth theory. The neoclassical growth theory postulates that when more units of an input are used with fixed amounts of other inputs, the returns diminish.

Endogenous technological change, in turn, depends on the extent of markets which generally, but not always, leads to increasing returns by offsetting diminishing returns as explained earlier, an effect that is the basis of cumulative growth in an economy. The division of labor permits the emergence of scientific, technical and commercial specialization.

The consequence, in post-industrial society, is the emergence of specialist skills in such fields as communication, information handling and coordination, which facilitate the role of the entrepreneur. The entrepreneur discovers new ways of doing things and new things to do cheaply. A market is therefore formed and evolved with a consequence of market success or failure. Market failure necessitates the evolution of laws and institutions that govern market conduct where government plays an important role. In parallel to market failure is the government failure. Achieving improvements in both market and government is dealt with by comparative institutional analysis.

Chaudhuri (1989) defines economic growth as the increase in output of goods and services, total or per capita, measured in terms of value added on a continuous basis. An increase in total output is called "extensive," while an increase in per capita is "intensive," where the concern is the standard of living or the welfare of the population. Therefore, in measuring the growth of output, it is necessary to measure the qualitative phenomenon. The qualitative aspect of welfare is concerned with creating a better educated and healthier population. Chaudhuri suggests three reasons for the study of growth. The first is the understanding of historical processes which can explain why economic growth is confined to a small proportion of world population. The second reason concerns the increasing total availability of goods and services. Increasing the capacity to reach higher levels of material welfare, especially under conditions of population growth, increases consumption and makes some exhaustible resources scarce, creating a distribution problem. The third reason to study growth is for the formation of economic policy in the short and long runs. Monetary and fiscal policies could impact consumption and investment. Recognizing that economic surplus is a consequence of economic growth, the surplus, which is the difference between the value of output and cost production, can be used in alternative ways-increase in consumption or increase in investment.

Rich (1994) notes that emerging and underdeveloped countries must rely on international macroeconomics for aid and trade. What differentiates the two is that an emerging economy seeks a diversified export-market to obtain foreign currencies on its merits as a producer. Underdeveloped countries are characterized by stagnation and remain dependent on aid. Rich adds that post-industrial economies are beset with international competition manifested by industrialization with its consequences on employment. When industries become highly technical, it forces more competition at home and abroad, resulting in lower revenues and profits. When revenues and profits decline, the labor force in the affected industries also declines, with a ripple effect to auxiliary industries. The spread of unemployment in one post-industrial country generates negative effects on employment in all post-industrial societies, with a consequence of declining consumption and further unemployment. By Merritt's (1982) assessment, squabbling over markets for sales that make a difference between acceptable and mass unemployment that may threaten political instability could lead to wars.

Hunt (1989) summarizes the classical view of growth to constitute expansion of market, saving and investment out of profits, and the determination of the capitalist to increase personal wealth. In contrast, Schumpeter (1976) breaks with the growth theories by drawing a distinction between economic growth and development. Economic growth refers to expansion of production by producing more of the same output with the same methods. Economic development is a disruptive process, where innovation is pervasive in methods of production, products and markets as well as industrial organization. In looking at the mobilization of credit by an entrepreneur as opposed to savings, the Schumpeter model is distinct from the classical economists. The importance of entrepreneurship in his model has great relevance in the Third World.

When dealing with economic growth, a leading contributor to the theory is Robert Solow. In the January 2006 ASSA/American Economic Association meetings in Boston, a special 50th anniversary session was devoted to celebrate Solow's (1956, 1957) works, considered to be the heart of modern growth theory. Solow (2007), recognizing the 50th anniversary celebration of his exogenous theory, explains that there were two major innovations during the past 50 years. The first was the endogenous growth theory pioneered by Romer (1986) and Lucas (1988) and the second is the drawing of inferences about the determinants of economic growth from international cross sections where Barro (1991) is the first protagonist.

The important agents for growth, as viewed by the authors discussed above, are the roles of capital (physical, and human), and the entrepreneur in a capitalist frame of reference. Recently, Baumol, Litan and Schramm (2007), henceforth (BLS), delved into the four prevalent forms of capitalism and their implications to economic growth. On one side, there is entrepreneurial capitalism where radical ideas of entrepreneurs meet the test of the market place. There are also the types where radical entrepreneurship is absent but championed by the government through big business as in Japan and many European countries; state-guided capitalism as a way to start growth in less developed countries; and, finally, corrupt leaders of government who tend to keep the spoil for themselves. A common feature to all four forms is the allowance of private property. The four types may be described simply as (i) entrepreneurial, (ii) big firm, (iii) state directed and (iv) oligarchic. BLS concludes first that incentives matter. Countries that reward activities that promote growth grow faster than other countries. Second, the contribution to growth by the entrepreneur must be substantial by way of big firms to mass produce and refine radical innovations. Countries that achieve a relatively high standard of living can maintain it only by getting rid of state guidance and adopting a blend of entrepreneurial and big-firm capitalism.

BLS lays out four conditions for big-firm capitalism to maximize growth. The first condition is ease of starting and growing business. This condition includes cost of business registration, bankruptcy protection and access to finances. The second condition is the rewards for productive entrepreneurial activity. This condition includes the role of law, property and contract rights; avoidance of onerous taxation; proper regulation (deregulation); rewarding new ideas; government-supported research and development (R&D); commercializing university invention; and rewarding imitation. The third condition relates to disincentives for unproductive activity and the fourth condition relates to keeping winners in the entrepreneurial game from rent seeking by promoting competition.

Friedman (2005) concurs with the opinion that countries with improved standards of living over long period of time will continue to seek open and tolerant societies and, at the same time, strive to broaden and strengthen their democratic institutions. However, when the majority of a country's citizens perceive that their income is stagnant and that they are not getting ahead, democracy weakens and society becomes rigid. In this case, public policy plays a vital role since actions by business are not geared toward benefiting society. The aim of business is to make profit. Left to itself, it will deliver too little economic growth. Government alone provides safety from external attacks and provides internal rule of law, as well as adequate infrastructure for transportation, all of which help the pursuit of economic initiatives. Government engages in sundry activities such as defense, highways, space exploration, crime prevention, border patrol, disease control, disaster relief, education assistance, food stamps, medical care for the indigent, and, of course, Social Security and Medicare.

According to Friedman, with a low rate of savings and a large deficit with the added promises to working citizens, it is almost impossible to maintain adequate capital formation. Without adequate investment, it could prove difficult to maintain trends of increased productivity and to improve the American standard of living in the foreseeable future. How, then, can the position of government be restored without draining the scarce savings? Friedman proffers four approaches (page 414): (1) economize on government spending apart from programs for the retired elderly, (2) raise taxes, (3) restructure Social Security and Medicare, and (4) increase what America saves so that the country can finance both adequate capital formation and a chronic government deficit. In Freidman's opinion, several of these routes are unpromising.

Friedman believes that in the twenty-first century, the problem in the United States is not unemployment but the slow advance in the living standards for the majority of citizens. This sense of stagnation does not arise from national income statistics, but from an awareness of the average citizen's experience. A rising standard of living has been the general norm in the United States in the past, but the country is not able to achieve that today. There is the need, therefore, to restore confidence in moving forward, which will require hard public policy choices. Friedman ends (page 1) in saying that, "Only with sustained economic growth, and the sense of confident progress that follows from the advance of living standards for most of its citizens, can even a great nation find the energy, the wherewithal, and most importantly the human attitudes that together sustain an open, tolerant, and democratic society."

III. AIM AND METHODOLOGY

In the opinion of BLS, the United States stands out as the country most in tune to meet growth conditions. Because the conditions and their associated subconditions constitute a large array of indicator variables, a way to capture them is through an index. Dobeli and Kolasa (2007) constructed such indexes to compare growth performance of new EU countries. A useful index is provided by the Heritage Foundation (2004) called the Economic Freedom Index. The index score for a country is composed of 10 variables, each of which is made up of a number of subvariables. For simplification, the variables are denoted as [X.sub.1], [X.sub.2], ..., [X.sub.10] as follows:

[X.sub.1]: Trade Policy-tariff and non-tariff barriers, corruption

[X.sub.2]: Fiscal Burden-income and corporate taxes, government expenditures

[X.sub.3]: Government Intervention-government consumption and ownership

[X.sub.4]: Monetary Policy-average and current inflation

[X.sub.5]: Capital Flow and Foreign Investment-foreign investment code, restriction on foreign ownership and investment, legal equality between foreign and domestic companies

[X.sub.6]: Banking and Finance-government ownership and regulation, restriction on foreign banks

[X.sub.7]: Wage and Price Controls-minimum wage laws, government price controls, government subsidies that affect prices

[X.sub.8]: Property Rights-commercial code defining contracts, government expropriation of property, protection of private property, judicial delays, judicial corruption

[X.sub.9]: Regulation-licensing requirements; ease of obtaining licenses; environmental, consumer, and worker regulation; bureaucratic corruption

[X.sub.10]: Black Market--smuggling, size of black market activity

In lieu of simply averaging the ten components to rank countries, Nissan and Carter (2006) provide an index scheme based on the concept of distance. To treat variables equally in the construction of the index, raw data are transformed into standard scores by letting for country i,

[z.sub.ij] = ([x.sub.ij] - [[bar.x].sub.j] + 3[s.sub.j])/6[s.sub.j], (1)

where [[bar.x].sub.j] and [s.sub.j] are the means and the standard deviation of the observation of the factor j = 1, ..., 10. The [z.sub.ij] transforms an observation of country i for variable j into standardized units. The index is constructed as the k = 10 dimensional distance d([z.sub.ij], [z.sub.oj]) for observation [z.sub.ij] from a reference point [z.sub.oj] given by

d([z.sub.ij], [z.sub.oj]) [[[summation][([z.sub.ij] - [z.sub.oj]).sup.2]].sup.1/2], i = 1, ..., n (2)

where n = number of countries in the sample.

The index, d of equation (2), is the familiar Euclidean distance between two points ([z.sub.ij], [z.sub.oj]) in the 10-dimensional space. The reference points [z.sub.oj] are the transformations by equation (1) of the best value in the distribution. Note that the smaller the index score of a country, the closer the country is to the reference point and the higher is the rank of the country. Also note that the point of reference [z.sub.oj] is the best score rather than the mean.

This paper uses the computed index of Nissan and Carter (2006), which is available upon request, in a slightly different way. The computed index value for each country i is divided by the index value of the United States. The United States, therefore, will have a value d = 1, in line with BLS's proposition that the United States represents the optimum of desired big-firm capitalism.

A second index to be used in this paper is provided by Hummels and Klenow (2005), henceforth (HK). HK produced a large set of data for some 126 countries. The variables to be used in this research are:

Y = Country GDP relative to the rest of the world.

L = Country employment relative to the rest of the world.

Y/L = Country GDP per worker relative to the rest-of-the-world GDP per worker.

Again, in order to systemize the data, a country score is divided by the score of the United States, resulting for the United States scores of 1.00 for each of the three variables. This way, the scores for the economic freedom index "d" and the scores of the HK indexes on "Y," "L" and "Y/L" become comparable. In particular among the three HK variables, "Y/L" will receive special attention because it is an assessment of productivity.

The methodology employed is testing for equality of means between groups of countries as well as regression analysis. For purposes of comparisons, the countries will be grouped in two ways. The first grouping is by region as follows:

1. East Asia and Pacific

2. Europe and Central Asia

3. Latin America and the Caribbean

4. Middle East and North Africa

5. South Asia

6. Sub-Saharan Africa

7. High Income OECD

8. Other High Income

The second grouping is by income as follows:

1. Low Income

2. Middle Income

3. Upper-Middle Income

4. High Income

These classifications are in accordance with the World Bank (2005).

IV. RESULTS

Table 1 provides the transformed data where the scores of the countries were altered by making the scores of the United States serve as reference points for the variable Y (Country GDP), L (Country employment) and Y/L ( Country GDP per worker). Note that Y/L in essence could be referred to as productivity as provided by Hummels and Klenow (2005), and the economic freedom index "d" provided by Nissan and Carter (2005). Note that columns 1 and 2 in Table 1 denoted by C1 and C2 refer to classification of countries by region and income.

In Table 1, the scores for the United States are 1.00 for each of the four variables. The United States belongs to high income OECD (7 in C1) and high income (4 in C2). The United Kingdom was similarly situated in C 1 and C2 at 7 and 4, respectively. The GDP (Y) and employment (L) relative to the United States are 0.1243 and 0.2071, giving Y/L (productivity) of 0.5992. For economic freedom, the United Kingdom score is 0.9722, implying that the United Kingdom is closer to the reference points of the distance measure d described by equation (2). The only country that surpasses the United States for productivity is Luxembourg at 1.1820. China, on the other hand, has a GDP (Y) = 0.3936 and employment (L) = 7.4226, giving productivity Y/L = 0.0530 as compared to the United States with an economic freedom score of d = 1.9872. Remembering that the larger d implies farther distance from the best score in economic freedom, it seems that China is way out of step implementing desired conditions for economic freedom. Twelve countries out of 116 for the d index had scores lower than the United States, with the implication that these countries had better economic freedom practices. Hong Kong leads with a score d = 0.4541, followed by Ireland at d = 0.6643 and Singapore at d = 0.8201.

Table 2 provides descriptive statistics for country GDP per worker (Y/L) relative to United States, giving the mean, the standard deviation, the Coefficient of Variation CV and the minimum and maximum of the groups of countries classified by region (Panel A) and by income (Panel B). Not surprisingly, High Income OECD and Other High Income groups score well at averages 0.6550 and 0.5518; Latin America and the Caribbean follow at 0.2178. South Asia and Sub-Saharan Africa score last at 0.0818 and 0.0787, respectively. By income category, high-income countries are in the lead at 0.6350 followed by the middle-income group of countries at 0.2893. Of interest are the values of the Coefficient of Variation CV suggested as a measure of convergence (Friedman 1992, Drennan and Lobo 1999), which is relatively small for all the groups in Table 2, with the exception of Sub-Saharan Africa at CV = 1.2084. For all the countries, CV = 0.9237. The indication here is that the groups of countries grouped by region or income (as well as all countries) converge to their respective means for the factor Y/L.

Table 3 provides similar information as Table 2, this time for the economic freedom index d. The closest score to that of the United States is for Other High Income at 1.0600 and High Income OECD at 1.0962. The Coefficient of Variation for all the groups of countries as well as all countries is relatively small, again giving an impression of convergence.

The question is whether the averages by group of countries for Y/L in Table 2 and d in Table 3 differ significantly. The test is done by the method of analysis of variance and the results, shown in Table 4, indicate that a hypothesis of equality of means must be rejected at P-value = 0.000 in every case. Utilizing multiple comparisons procedures by way of confidence intervals, the means for High Income OECD and Other High Income groups of countries are way out as compared to the other groups, indicating substantial gaps, especially for productivity (Y/L) by income with F = 274.63. Again, this result is expected because the productivity level is what differentiates the poor countries from the rich countries.

Finally, by use of regression methodology, a relationship between productivity (Y/L) and economic freedom (d) is in order, with the assumption that the two variables are random variables with the expectation

E[Y/L|d] = [[mu].sub.1] + [rho]([[sigma].sub.1]/[[sigma].sub.2])(d - [[mu].sub.2]) (3)

where Y/L and d have the respective means and standard deviation ([[mu].sub.1], [[sigma].sub.1]) and ([[mu].sub.2], [[sigma].sub.2]) and [absolute of value of [rho] < 1 is the correlation coefficient. For simplicity, equation (3) is written as

E[Y/L|d] = [[mu].sub.1], + [beta](d - [[mu].sub.2]) (4)

estimated by least squares as

[([??]/L).sub.i] = [m.sub.1] + b([d.sub.i] - [m.sub.2]) (5)

which, after further simplifications, takes the form

[([??]/L).sub.i] = [b.sub.0] + [b.sub.1][d.sub.i]. (6)

It is expected that b1 in equation (6) will take on a negative sign, which is the case upon regressing the values (Y/L) on (d) in Table 1. The result, using all the 116 countries for which comparable data were available is

([??]/L) = 0.990 - 0.475d, (7)

where [b.sub.1] = -0.475 is statistically significant at P-value = 0.000 and correlation coefficient r = -0.714 with p-value = 0.000.

Remembering that Y/L and d operate inversely, the negative sign of d indicates that productivity and, by implication, growth are tied to the openness and freedom of the economies, giving credence to BLS's contentions that capitalism is the way to follow to generate economic growth.

V. CONCLUDING REMARKS

The focus of this paper is economic growth as it relates to capitalist form of economies. The review of literature suggests that economic freedom, as represented by the variables in the Economic Freedom Index, is the main engine for economic growth. Through the use of indexes reflecting productivity and economic freedom, the paper has shown that such a relationship is strong even though the gaps between groups of countries assembled by region and income for both variables remain significant.

BLS, recognizing that failure of governments and international agencies to help the two billion individuals who still live on less than $2 per day, has some suggestions and broad approaches to transform their economies. Particular attention is paid to economies that are run by government ministries or powerful oligarchies. BLS contends that regardless of level of development, less developed countries can benefit by promoting entrepreneurship of replicative (borrowed from abroad) and innovative types of technology. The second suggestion by BLS for the least developed countries is to introduce the principles of entrepreneurial capitalism "at the margin" or "incremental" policies.

For oligarchic economies where the gaps between the rich and the poor are large, the two options available for change mentioned by BLS are revolution from within or outside pressure from other countries. Foreign aid should be targeted for health systems, sanitation, roads and the like when it can be delivered in a constructive way. Finally, micro-credit financial institutions should be introduced where replicative small businesses can thrive.

Theories and data examined in this paper highlight the importance of economic policies that promote capitalism and competitive markets and encourage and support entrepreneurship and discourage greed and market failure through regulatory, tax and financial incentives and disincentives. Rajan and Marwah (1988), noting the broad consensus for countries to pursue market-oriented policies and economic liberalization to gain economic growth, observe that lack of credibility and durability of policy reforms in some countries could hinder foreign investors from entering their markets. In addition, Habib and Zurawicki (2002) point to corruption in host countries as a deterrent to attracting foreign direct investment, especially because of the intensification of contacts between less corrupt and more corrupt countries.

Kaushik (1996) presents India as a success story for a country that overcame lack of credibility and durability in policy reforms as well as corruption. India followed a hierarchy of liberalization for building confidence, which Kaushik depicts as a pyramid. At the base is credibility, consisting of policies that include deregulation, privatization, the creation of physical infrastructure, and an open trading and monetary system. The next stage in the pyramid is credit from external sources where foreign banks and international financial markets in the mid 1980s found India attractive for business because of its credibility and credit worthiness. This ushered in the third stage in the pyramid, capital inflows in the form of portfolio and direct investment. The fourth stage is the building of confidence, where India practices open trade, competition, open financial flow and linkage of capital markets. In other words, a market economy. Furthermore, Kaushik addresses the other lingering corruption problem that India strives to prevent by making politicians and the political processes accountable for their actions.

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Farhang Niroomand, The University of Southern Mississippi 118 College Drive # 5072 Hattiesburg, MS 39406 USA

Corresponding author: farhang.niroomand@usm.edu

TABLE 1.
Country GDP, Employment, and Productivity Relative to World
(U S. Reference)

Number Country C1 C2 Y L

1 ALBANIA 2 2 0.0010 0.0101
2 ANGOLA 6 1 0.0014 0.0370
3 ARGENTINA 3 3 0.0377 0.1027
4 AUSTRALIA 7 4 0.0426 0.0640
5 AUSTRIA 7 4 0.0178 0.0269
6 BANGLADESH 5 1 0.0184 0.2071
7 BARBADOS 3 3 0.0004 0.0017
8 BELGIUM 7 4 0.0223 0.0303
9 BELIZE 3 3 0.0001 0.0000
10 BENIN 6 1 0.0006 0.0185
11 BOLIVIA 3 2 0.0020 0.0202
12 BOTSWANA 6 3 0.0009 0.0034
13 BRAZIL 3 2 0.1164 0.4226
14 BULGARIA 2 2 0.0059 0.0286
15 BURKINA FASO 6 1 0.0009 0.0337
16 CAMEROON 6 1 0.0026 0.0455
17 CANADA 7 4 0.0718 0.1061
18 CAPE VERDE IS. 6 2 0.0001 0.0017
19 CENTRAL AFR.R. 6 1 0.0004 0.0118
20 CHAD 6 1 0.0006 0.0168
21 CHILE 3 2 0.0127 0.0387
22 CHINA 1 2 0.3936 7.4226
23 COLOMBIA 3 2 0.0222 0.1246
24 COMOROS 6 1 0.0001 0.0017
25 CONGO 6 1 0.0005 0.0084
26 COSTA RICA 3 3 0.0019 0.0084
27 CYPRUS 8 4 0.0012 0.0017
28 DENMARK 7 4 0.0130 0.0202
29 DOMINICA 3 3 0.0000 0.0000
30 DOMINICAN REP. 3 2 0.0030 0.0168
31 ECUADOR 3 2 0.0046 0.0253
32 EGYPT 4 2 0.0221 0.1212
33 EL SALVADOR 3 2 0.0025 0.0118
34 ETHIOPIA 6 1 0.0031 0.1751
35 FIJI 1 2 0.0004 0.0017
36 FINLAND 7 4 0.0100 0.0185
37 FRANCE 7 4 0.1293 0.1902
38 GABON 6 3 0.0010 0.0034
39 GAMBIA 6 1 0.0001 0.0034
40 GERMANY 7 4 0.1890 0.2912
41 GHANA 6 1 0.0023 0.0589
42 GREECE 7 4 0.0137 0.0303
43 GRENADA 3 3 0.0000 0.0000
44 GUATEMALA 3 2 0.0039 0.0202
45 GUINEA 6 1 0.0018 0.0219
46 GUINEA-BISS 6 1 0.0001 0.0034
47 GUYANA 6 2 0.0002 0.0017
48 HAITI 3 1 0.0011 0.0219
49 HONDURAS 3 2 0.0012 0.0118
50 HONG KONG 8 4 0.0166 0.0219
51 HUNGARY 2 3 0.0093 0.0286
52 ICELAND 7 4 0.0006 0.0017
53 INDIA 5 1 0.2032 3.0337
54 INDONESIA 1 2 0.0754 0.5572
55 IRAN 4 2 0.0311 0.1246
56 IRELAND 7 4 0.0065 0.0101
57 ISRAEL 8 4 0.0094 0.0152
58 ITALY 7 4 0.1258 0.1650
59 IVORY COAST 6 1 0.0027 0.0370
60 JAMAICA 3 2 0.0010 0.0084
61 JAPAN 7 4 0.3341 0.5825
62 JORDAN 4 2 0.0016 0.0067
63 KENYA 6 1 0.0036 0.0943
64 LESOTHO 6 1 0.0003 0.0067
65 LUXEMBOURG 7 4 0.0015 0.0017
66 MACEDONIA 2 2 0.0009 0.0067
67 MADAGASCAR 6 1 0.0011 0.0404
68 MALAWI 6 1 0.0007 0.0303
69 MALAYSIA 1 3 0.0188 0.0522
70 MALI 6 1 0.0008 0.0337
71 MALTA 8 4 0.0005 0.0017
72 MAURITANIA 6 1 0.0003 0.0084
73 MAURITIUS 6 3 0.0013 0.0034
74 MEXICO 3 3 0.0695 0.2239
75 MOROCCO 4 2 0.0095 0.0589
76 MOZAMBIQUE 6 1 0.0013 0.0556
77 MYANMAR 1 1 0.0004 0.0219
78 NAMIBIA 6 2 0.0007 0.0034
79 NEPAL 5 1 0.0028 0.0623
80 NETHERLANDS 7 4 0.0341 0.0505
81 NEW ZEALAND 7 4 0.0067 0.0118
82 NICARAGUA 3 1 0.0001 0.0101
83 NIGER 6 1 0.0008 0.0320
84 NIGERIA 6 1 0.0108 0.3855
85 NORWAY 7 4 0.0109 0.0152
86 PAKISTAN 5 1 0.0245 0.2458
87 PANAMA 3 3 0.0015 0.0067
88 PAPUA NEW GUINEA 1 1 0.0016 0.0152
89 PARAGUAY 3 2 0.0027 0.0152
90 PERU 3 2 0.0109 0.0724
91 PHILIPPINES 1 2 0.0224 0.2020
92 POLAND 2 3 0.0296 0.1229
93 PORTUGAL 7 4 0.0135 0.0320
94 ROMANIA 2 2 0.0113 0.0808
95 RUSSIA 2 2 0.1147 0.5320
96 RWANDA 6 1 0.0005 0.0219
97 SENEGAL 6 1 0.0013 0.0286
98 SEYCHELLES 6 3 0.0001 0.0000
99 SIERRA LEONE 6 1 0.0004 0.0118
100 SINGAPORE 7 4 0.0084 0.0152
101 SLOVAK REPUBLIC 2 3 0.0053 0.0185
102 SLOVENIA 8 4 0.0026 0.0067
103 SOUTH AFRICA 6 2 0.0298 0.0943
104 SOUTH KOREA 7 4 0.0651 0.1347
105 SPAIN 7 4 0.0682 0.1111
106 SRI LANKA 5 2 0.0058 0.0539
107 ST. VINCENT & GRE 3 3 0.0001 0.0000
108 SWEDEN 7 4 0.0192 0.0320
109 SWITZERLAND 7 4 0.0182 0.0269
110 SYRIA 4 2 0.0058 0.0253
I11 TAIWAN 8 4 0.0331 0.0657
112 TANZANIA 6 1 0.0014 0.0993
113 THAILAND 1 2 0.0425 0.2256
114 TOGO 6 1 0.0004 0.0118
115 TRINIDAD & TOBAGO 3 3 0.0012 0.0034
116 TUNISIA 4 2 0.0052 0.0202
117 TURKEY 2 2 0.0398 0.1919
118 UNITED KINGDOM 7 4 0.1243 0.2071
119 UNITED STATES 7 4 1.0000 1.0000
120 UGANDA 6 1 0.0016 0.0657
121 URUGUAY 3 3 0.0030 0.0101
122 VENEZUELA 3 3 0.0163 0.0539
123 YEMEN 4 1 0.0014 0.0269
124 ZAIRE 6 1 0.0015 0.1532
125 ZAMBIA 6 1 0.0008 0.0219
126 ZIMBABWE 6 1 0.0030 0.0370

Number Y/L d

1 0.0983 1.5033
2 0.0387 *
3 0.3669 1.7048
4 0.6748 0.9630
5 0.6670 1.1671
6 0.0893 2.0213
7 0.4145 1.3697
8 0.7438 1.3001
9 0.2782 1.2558
10 0.0325 1.8716
11 0.0979 1.3015
12 0.2585 1.2437
13 0.2748 1.4508
14 0.2062 1.4372
15 0.0266 1.7102
16 0.0555 1.9601
17 0.6738 0.9480
18 0.1221 1.4331
19 0.0339 1.8140
20 0.0380 1.8568
21 0.3251 0.8373
22 0.0530 1.9872
23 0.1780 1.5883
24 0.0551 *
25 0.0529 2.1846
26 0.2035 1.1936
27 0.5118 0.8263
28 0.6565 1.0506
29 0.2331 *
30 0.1749 1.8109
31 0.1879 1.7495
32 0.1821 1.7640
33 0.1978 1.0298
34 0.0178 1.7403
35 0.2277 1.5886
36 0.5649 0.9910
37 0.6793 1.5436
38 0.2682 1.9118
39 0.0341 1.8968
40 0.6499 1.0881
41 0.0389 1.6895
42 0.4534 1.4113
43 0.1605 *
44 0.1947 1.5877
45 0.0806 1.7809
46 0.0249 2.0695
47 0.1058 1.6040
48 0.0515 1.9805
49 0.0982 1.7901
50 0.7562 0.4541
51 0.3160 1.1887
52 0.5531 0.9324
53 0.0670 1.8308
54 0.1354 1.9610
55 0.2491 2.3360
56 0.6622 0.6643
57 0.6355 1.3209
58 0.7660 1.1650
59 0.0721 1.6931
60 0.1136 1.4084
61 0.5732 1.3720
62 0.2400 1.3923
63 0.0377 1.6493
64 0.0426 1.7710
65 1.1820 0.9942
66 0.1548 1.4752
67 0.0279 1.5843
68 0.0233 1.7543
69 0.3670 1.6714
70 0.0249 1.7604
71 0.5062 1.3440
72 0.0388 1.4408
73 0.3700 1.5557
74 0.3112 1.4480
75 0.1593 1.4925
76 0.0243 1.6527
77 0.0197 *
78 0.2176 1.4768
79 0.0438 1.8628
80 0.6652 1.2305
81 0.5463 0.9695
82 0.0863 1.4592
83 0.0252 1.8421
84 0.0281 2.0124
85 0.7127 1.3314
86 0.1000 1.7773
87 0.2242 1.4454
88 0.1113 *
89 0.1807 1.6747
90 0.1508 1.4252
91 0.1111 1.5440
92 0.2420 1.3687
93 0.4287 1.1487
94 0.1404 1.8038
95 0.2154 1.6731
96 0.0222 1.8647
97 0.0450 1.6391
98 0.3159 *
99 0.0362 2.0761
100 0.5794 0.8201
101 0.2976 1.0942
102 0.4000 1.2518
103 0.3159 1.3404
104 0.4853 *
105 0.6126 1.1594
106 0.1087 1.4637
107 0.2181 *
108 0.5897 1.1329
109 0.6562 0.9531
110 0.2360 2.1271
I11 0.5011 1.1647
112 0.0145 1.7177
113 0.1882 1.4038
114 0.0321 2.0268
115 0.3478 1.2098
116 0.2479 1.5057
117 0.2082 1.7009
118 0.5992 0.9722
119 1.0000 1.0000
120 0.0245 1.3316
121 0.2905 1.1718
122 0.3018 2.2219
123 0.0525 1.9129
124 0.0096 *
125 0.0359 1.7688
126 0.0805 2.4409

Notes: C1 Classification of Economies by Region:
1-East Asia and Pacific, 2-Europe and Central Asia, 3-Latin
America and Caribbean, 4-Middle East and North Africa,
5-South Asia,6-Sub-Saharan Africa, 7-High Income
OECD, 8-Other High Income

C2 Classification of Economies by Income: 1-Low Income,
2-Middle Income, 3-Upper-Middle Income, 4-High Income

Y = Country GDP relative to the rest of the world (U.S. Reference).

L = Country employment relative to the rest of the world
(U.S. Reference)

Y/L = Country GDP per worker relative to rest-of-world GDP per worker
(U.S. Reference).

d = Economic Freedom Index (U.S. Reference).

Sources: Hummels and Klenow (2005) and Nissan and Carter (2006).

TABLE 2.
Descriptive Statistics
Country GDP per Worker Relative to World (Y/L)
(U.S. Reference)

Panel A: Region n Mean Std CV Min

East Asia & Pacific 8 0.1517 0.1096 0.7225 0.0197
Europe & Central Asia 9 0.2088 0.0710 0.3400 0.0983
Latin America & Caribbean 26 0.2178 0.0931 0.4275 0.0515
Middle East & N. Africa 7 0.1953 0.0721 0.3692 0.0525
South Asia 5 0.0818 0.0263 0.3215 0.0438
Sub-Saharan Africa 40 0.0787 0.0951 1.2084 0.0096
High Income OECD 25 0.6550 0.1574 0.2403 0.4287
Other High Income 6 0.5518 0.1250 0.2265 0.4000
All Countries 126 0.2648 0.2446 0.9237 0.0096

Panel B: Income n Mean Std CV Min

Low 41 0.0438 0.0243 0.5548 0.0096
Middle 34 0.1793 0.0643 0.3586 0.0530
Upper Middle 20 0.2893 0.0649 0.2243 0.1605
High 31 0.6350 0.1554 0.2447 0.4000
All Countries 126 0.2648 0.2446 0.9237 0.0096


Panel A: Region Max

East Asia & Pacific 0.3670
Europe & Central Asia 0.3160
Latin America & Caribbean 0.4145
Middle East & N. Africa 0.2491
South Asia 0.1087
Sub-Saharan Africa 0.3700
High Income OECD 1.1820
Other High Income 0.7562
All Countries 0.4541

Panel B: Income Max

Low 0.1113
Middle 0.3251
Upper Middle 0.4145
High 1.1820
All Countries 0.4541

Source: Hummels and Klenow (2005).

TABLE 3.
Descriptive Statistics
Economic Freedom Index (d)
(U.S. Reference)

Panel A: Region n Mean Std CV MW

East Asia & Pacific 6 1.6927 0.2348 0.1387 1.4038
Europe & Central Asia 9 1.4717 0.2342 0.1591 1.0942
Latin America & Caribbean 23 1.4833 0.3135 0.2113 0.8373
Middle East & N. Africa 7 1.7900 0.3550 0.1983 1.3920
South Asia 5 1.7912 0.2044 0.1141 1.4637
Sub-Saharan Africa 36 1.7546 0.2486 0.1417 1.2437
High Income OECD 24 1.0962 0.2003 0.1827 0.6643
Other High Income 6 1.0600 0.3520 0.3321 0.4541
All Countries 116 1.5072 0.3748 0.2487 0.4541

Panel B: Income n Mean Std CV Min

Low 36 1.9483 0.2119 0.1088 1.3316
Middle 34 1.7531 0.2833 0.1616 0.8373
Upper Middle 16 1.6425 0.3079 0.1875 1.0942
High 30 1.2638 0.2309 0.1827 0.4541
All Countries 116 1.5072 0.3748 0.2487 0.4541

Panel A: Region Max

East Asia & Pacific 1.9872
Europe & Central Asia 1.8038
Latin America & Caribbean 2.2219
Middle East & N. Africa 2.3360
South Asia 2.0213
Sub-Saharan Africa 2.4409
High Income OECD 1.5436
Other High Income 1.3440
All Countries 2.4409

Panel B: Income Max

Low 2.4409
Middle 2.3360
Upper Middle 2.2219
High 1.5436
All Countries 2.4409

Source: Hummels and Klenow (2005) and Nissan and Carter (2006).

TABLE 4.
F-Tests for Equality of Means

 F P-value

Y/L by Region 73.11 0.000
Y/L by Income 274.63 0.000
d by Region 17.79 0.000
d by Income 45.56 0.000

Note: Y/L = Country GDP per worker relative to world
(U.S. reference), d = economic freedom index.

Source: Hummels and Klenow (2005) and Nissan and
Carter (2006).