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.