EXAMINING THE RELATIONSHIP BETWEEN ECONOMIC FREEDOM, INCOME AND ENTREPRENEURSHIP IN SOUTH AFRICA: A VECM APPROACH

Abstract

Entrepreneurship is an integral part of change and development, contributing positively to employment, poverty reduction and income growth. It flourishes in an institutional context of freedom rather than suppression. This paper examines the relationship between economic freedom, income and entrepreneurship in South Africa, using (1994–2019) time-series data. Economic freedom was measured by the Economic Freedom Index (FREE) as a proxy. Income and early-stage entrepreneurship were proxied by gross domestic product per capita (GDPC) and total entrepreneurial activity (TEA), respectively. Johansen cointegration tests and a vector error correction model (VECM) were used to estimate the short- and long-run associations between the variables. The results indicate a bi-directional short- and long-run cointegrating relationship between freedom and entrepreneurship; freedom is also found to be a significant predictor of GDPC in South Africa. Thus, improvements in real per capita GDP and economic freedom tend to enhance early-stage entrepreneurship, providing greater scope for business formations. Hence, a mindset change from radical economic transformation to pro-economic freedom might help in stimulating entrepreneurship.