The relationship between economic freedoms and income inequality: The case of selected countries

The study analyzes the relationship between economic freedoms and income distribution for countries in different income groups. Countries are grouped as low, lower-middle, upper-middle and high income. These country groups are examined using the panel data analysis method. While the Gini coefficient is used as the dependent variable in measuring income inequality, the Economic Freedom Index organized by the Heritage Foundation is used as the independent variable in measuring economic freedom. The control variables used in the study are determined as per capita national income, inflation, public education expenditures and domestic trademark registrations. In addition, four dummy variables were used to show the increases and decreases in countries' income groups and economic freedom classes. The findings of the study reveal that economic freedom, and its sub-components have an effect on income inequality and that this effect varies according to the income level of the countries. While economic freedom increases income inequality in low-income countries, business freedom and monetary freedom have a reducing effect on income inequality. Trade freedom and investment freedom have reducing effect on inequality in lower-middle-income countries. The increase in economic freedoms increases income inequality in upper-middle-income countries. While the trade and investment freedom components have an inequality-reducing effect, public spending and business freedom have an inequality-increasing effect. The overall effect of economic freedoms in high-income countries was not found to be statistically significant. However, the trade, investment and financial freedom components have an income inequality-reducing effect. The results of the study indicate that economic freedom policies should be organized and implemented within the framework of the countries' own social and economic conditions. It has been revealed that in reducing income inequality, focus should be placed on the sub-components of economic freedoms and social policies. It has been determined that efficient and fair use of public spending, effective use of education spending, ensuring macroeconomic stability, increasing trade freedom and policies that support the participation of low-income groups in economic activities play an important role in reducing income inequality.