Economic freedom also has a positive effect on the level of market capitalization. Reduced aggregate country risk has a positive effect on a country's saving rate and trade dependence, which together increase the level of per capita GDP. However, we note that economic freedom has a stronger effect than democracy on increasing the level of judicial independence. This finding is consistent with research by Barro (1997) and Zakaria (2003). While democracy has a positive effect on per capita income, strengthening the institutions that expand economic freedom may have an even stronger effect.
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Results for these estimating equations are shown in Table 3. As predicted, institutional variables have a significant influence on the level of per capita GDP. Strengthening democracy through greater civil liberties and political rights has a positive effect on judicial independence. In turn, greater judicial independence reduces the level of corruption and sequent lower corruption reduces the level of aggregate country risk. At the same time, strengthening property rights expands the level of economic freedom. Greater economic freedom also increases judicial independence in the same direction of the effects of democracy.