Economic Freedom and Economic Performance: Does Good Governance Matter? The Case of APAC and OECD Countries

Emara, Noha and Reyes, Loreto (2020): Economic Freedom and Economic Performance: Does Good Governance Matter? The Case of APAC and OECD Countries.

Abstract

Economic freedom is an important determinant of economic growth and income distribution, which are key factors in facilitating economic development. The paper empirically investigates the relationship between economic freedom and economic performance in the APAC and OECD countries. A panel model with fixed effects technique is employed on yearly data for the period 1980-2017, using a number of measures of economic freedom covering the size of government, property rights, monetary policy, access to international trade, and regulation of credit labor, and businesses. The study also investigates the role of governance in affecting the impact of economic freedom on economic performance. The results of the study indicate that economic freedom positively affects economic performance in the selected countries after controlling for country-and time- fixed-effects. Additionally, the study finds that this positive impact is higher for the APAC than for the OECD countries. For APAC countries, a country’s size of government, expansionary monetary policy, and less regulation has a positive and statistically significant impact on its output per worker. Finally, the study finds that governance is a pre-condition for economic freedom, where the impact of economic freedom on economic performance is amplified by about five folds in the presence of better governance including the freedom of a country’s citizens in selecting governments and expressing their political views, political stability, enhanced quality of public services, and control of corruption.

• Item Type: MPRA Paper
• Language: English
• Keywords: APAC; OECD; Economic Freedom; Panel Models; Governance
• Subjects: N - Economic History > N2 - Financial Markets and Institutions; N - Economic History > N2 - Financial Markets and Institutions > N20 - General, International, or Comparative; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth

References

Akcay, S. (2006). Corruption and human development, Cato Journal, 25 (1), pp. 25-27.

Altman, M. (2008). How much Economic Freedom is Necessary for Economic Growth? Theory and Evidence. Economics Buletin, 15(2), 1-20.

Brito-Bigott, O., Faria, H.J., Rodriguez, J.M., & Sanchez, A. (2008). Corruption and complex business rules, Journal of Private Enterprise, 24 (1), pp. 1-15.

Alexandrakis, Constantine and Livanis, Grigorios. (2013). Economic Freedom and Economic Performance in Latin America: A Panel Data Analysis. Review of Development Economics, 17(1): 34-48.

Barro, R.J. (1997). Determinants of economic growth: a cross-country empirical study, Cambridge, MA, M.I.T. Press.

Barkhordari, S., Fattahi, M., Azimi, N.A. (2019), The Impact of Knowledge-Based Economy on Growth Performance: Evidence from MENA Countries. Journal of the Knowledge Economy, 10, 1168-1182. https://doi.org/10.1007/s13132-018-0522-4.

Berggren, N. (2003). The Benefits of Economic Freedom: A Survey. The Independent Review, 8(2), 193-211.

Bjørnskov, Christian (2008). The growth-inequality association: Government ideology matters. Journal of Development Economics, 87, 300-38.

Boockmann, B. and A. Dreher (2002). The contribution of the IMF and the World Bank to economic freedom. European Journal of Political Economy, 19, 633-649.

Caudill, S., Zanella, F., and Mixon, F. (2000). Is Economic Freedom One Dimensional ? A Factor Analysis of Some Common Measures of Economic Freedom, Journal of Economic Development, 25(1), 17-40.

Cebula , Richard J. (2011). Economic Growth, Ten Forms of Economic Freedom and Political Stability: An Empirical Study Using Panel Data, 2003-2007. The Journal of Private Enterprise, 26(2), 61-81.

Chhaochharia V., Grinstein Y., Grullon G. and Michaely R. 2013. “Product Market Competition and Internal Governance: Evidence from the Sarbanes Oxley Act”, working paper. DOI:10.1287/mnsc.2015.2409.

Corbi, Raphael B (2007). The Components of Economic Freedom, Income, and Growth: An Empirial Analysis. Estudos Econômicos (São Paulo), 37(3), 515-545.

Cebula, Richard J., Clark J.R., and Mixon Franklin G. (2012). The Impact of Economic Freedom on Per Capital Real GDP: A Study of OECD Nations. The Journal of Regional Analysis and Policy, 43(1), 34-41.

D’Agostino, Giorgio, Dunne J. Paul, and Pieroni Luca (2016). Government Spending, Corruption and Economic Growth. World Development, 84, 190-205.

De Haan, J., & Siermann, C.L.J. (1998). Further evidence on the relationship between economic freedom and economic growth, Public Choice, 95 (4), pp. 363-380.

De Haan, J., & Sturm, J.E. (2000). On the relationship between economic freedom and economic growth, European Journal of Political Economy, 16 (2), pp. 215-241.

Emara, Noha (2012). Inflation Volatility, Institutions, and Economic Growth, Global Journal of Emerging Market Economies, 4(1): 29–53.

Emara, Noha (2014). Quantitative Evaluation of the Struggle of Economic Performance: The Case of MENA Countries, Topics in Middle Eastern and African Economies, 16(2): 184-190.

Emara, N. (2016). Economic Freedom and Economic Performance: The Case MENA Countries. The Journal of Middle East North Africa Sciences, 2(2), 1-15.

Emara, N., & Chiu, I. (2016). The Impact of Governance Environment on Economic Growth: The Case of Middle Eastern and North African Countries, 2016, Journal of Economics Library, 3(1), 24–37.

Emara, N., and El Said, A. (2020). Financial Inclusion and Economic Growth: The Role of Governance in Selected MENA Countries, MPRA Paper 99257, University Library of Munich, Germany.

Emara, N., & Jhonsa, E. (2014). Governance and Economic Growth: The Case of Middle East and North African Countries, 2014, Journal of Development and Economic Policies, 16(1), 47–71.

Emara, N., and Moheildin, M. (2020). Financial Inclusion and Extreme Poverty: The Role of Governance: A Gap Analysis Approach. Review of Economics and Political Science, 5(2).

Emara, N. and Rebolledo, L. (2019). On the Relationship Between Economic Freedom and Output Per Worker: The Case of Asia-Pacific Countries, International Journal of Economics and Financial Issues, 9(6), 184-194.

Frankel, J.A., and D. Romer. 1999. Does trade cause growth? American Economic Review 89 (3): 379-399.

Fraser Institute. Economic Freedom Index 1980-2018. Retrieved from this link.

Giroud X. and Mueller H. 2010. “Does Corporate Governance Matter in Competitive Industries?” Journal of Financial Economics 95, 312-331.

Groot, H., Linders, G., and Rietveld, P. (2009). Institutions, Governance and International Trade: Opening the Black Box of OECD and GDP per Capita Effects in Gravity Equations, IATSS Research, Volume 29, Issue 2, 2005, Pages 22-29

Gwartney, J., Holcombe, R., and Lawson, R. (2004). Economic Freedom, Institutional Quality, and Cross-Country Differences in Income and Growth, CATO Journal, 24(3), 205-233.

Haan Jakob D. and Sturm, Jan-Egbert. (1999). On the relationship between Economic Freedom and Economic Growth. University of Groningen. s.n. Retrieved from this link.

Hall, Robert and Jones, Charles I. (1999). Why Do Some Countries Produce So Much More Output Per Worker Than Others? Quarterly Journal of Economics, 114: 83-116.

Heckelman, Jac C. and Stroup Michael D. (2000). Which Economic Freedoms Contribute to Growth? KYKLOS, 53(4), 527-544.

Heckelman, Jac C. (2000). Economic Freedom and Economic Growth: A Short-run Causal Intestigation. Journal of Applied Economics, 3(1), 71-91.

Irwin, D.A., and M. Terviö. 2002. Does trade raise income? Evidence from the twentieth century. Journal of International Economics 58 (1), 1-18.

Karuna, C. 2007. “Industry Product Market Competition and Managerial Incentives”, Journal of Accounting and Economics 43, 275-297.

Kadyrzhanova D. and Rhodes-Kropf M. 2011. “Concentrating on Governance”, Journal of Finance 66, 1649-1685.

Lajili, O. and Gilles, P. (2018). Financial liberalization, political openness and growth in developing countries: Relationship and transmission channels, Journal of Economic Development, 43(1), 1-27.

Lee, H.Y., L.A. Ricci, and R. Rigobon. 2004. Once again, is openness good for growth? Journal of Development Economics 75: 451-472.

Li, Pei, Lu Yi, and Wang Jin (2016). Does flattening government improve economic performance? Evidence from China, Journal of Development Economics 123: 18-37.

Miller, T. and A.B. Kim (2017). 2017 Index of Economic Freedom. The Heritage Foundation. Retrieved from this link.

Moral, E., Gan, V. (2018) Economic freedom, good governance and the dynamics of development, Journal of Applied Economics, 21 (1), 44-66.

Romer, Christina D. and David H. Romer, A New Measure of Monetary Shocks: Derivation and Implications, American Economic Review, 94 (2004):1055–84.


Santacreu, A. M. (2017). How Does U.S. Income Inequality Compare Worldwide? Federal Reserve Bank of St.Louis. Retrieved from this link.

Yilmazkuday, H. (2019). Inflation and Growth: The Role of Institutions. Available at SSRN: https://ssrn.com/abstract=3503569 or http://dx.doi.org/10.2139/ssrn.3503569.

The International Monetary Fund (IMF) (2020). Retrieved from this link.

The Organisation for Economic Co-operation and Development (OECD) (2020). Retrieved from this link.

The World Bank (2020). What We Do. Retrieved from this link.

World Bank (1993). The East Asian Miracle. Policy Research Report. ISSN 1020-0851.