Economic freedom, as measured by, for example, Fraser Institute EF Index is strongly correlated with GDP per capita. Alvarez, Geloso and Scheck show that once we take into account that dictators lie, the correlation is even higher!
SSRN: The literature linking indices of economic freedom to income levels and growth is generally consistent with a positive association. In this article, we argue that this result is very conservative, because the data are heavily biased and fail to find effects. This bias results from the tendency of dictatorial regimes to overestimate the level of their GDP. Dictatorships also tend to have lower scores on economic freedom. This biases downward any estimate of the relationship between income and economic freedom. In this article, we use recent corrections to GDP figures – based on nighttime light intensity – to estimate the bias. We find that the real effects of economic freedom in its components on income levels are between 1.1 and 1.33 times greater than those generally estimated. For economic growth, the bias is much smaller and only seems relevant for certain individual components such as government size and property rights.
