Facultad de Ciencias Económicas y EmpresarialesUniversidad de Navarra

Working Paper nº 08/05

Heterogeneity In Economic Freedom: Free

Clusters Or Free Countries?

José Luis Álvarez-Arce and Manuel Vega-Gordillo

Facultad de Ciencias Económicas y EmpresarialesUniversidad de Navarra

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Heterogeneity In Economic Freedom: Free Clusters Or FreeCountries?José Luis Álvarez-Arce and Manuel Vega-GordilloWorking Paper No.08/05January 2005JEL No. C10, O17, P51

ABSTRACTHow heterogeneous are countries with respect to economic freedom?This is an interesting empirical question since, if we candiscover different groups of countries according to theireconomic freedom indicators, we will be able to identify whichsteps are required to foster convenient institutional changes. Tocome up with an answer to this question, we apply a hybridclustering method - HOPACH - to two sets of components ofeconomic freedom. These two datasets, which account forheterogeneity among countries, are built on the same informationframework but with different degrees of aggregation.Specifically, we work on both the 38 variables and the five majorareas of the Fraser Institute's Economic Freedom of the WorldIndex. In both cases, HOPACH produces a segmentation and anordered list of countries. Our results suggest that theclassification of countries based on an overall economic freedomindex may take us to misleading conclusions due tomultidimensional sources of heterogeneity and the uncertaintyabout the number of segments in the distribution of the index.

José Luis Álvarez-ArceUniversidad de NavarraDepartamento de EconomíaCampus Universitario31080 Pamplonajlalvarez@unav.es