Heterogeneity In Economic Freedom: Free Clusters Or Free Countries

Abstract

How heterogeneous are countries with respect to economic freedom? This is an interesting empirical question since, if we can discover different groups of countries according to their economic freedom indicators, we will be able to identify which steps are required to foster convenient institutional changes. To come up with an answer to this question, we apply a hybrid clustering method - HOPACH - to two sets of components of economic freedom. These two datasets, which account for heterogeneity among countries, are built on the same information framework but with different degrees of aggregation. Specifically, we work on both the 38 variables and the five major areas of the Fraser Institute's Economic Freedom of the World Index. In both cases, HOPACH produces a segmentation and an ordered list of countries. Our results suggest that the classification of countries based on an overall economic freedom index may take us to misleading conclusions due to multidimensional sources of heterogeneity and the uncertainty about the number of segments in the distribution of the index.