Total Factor Productivity and Economic Freedom in Former Socialistic Countries

Abstract

Total Factor Productivity (TFP) is the portion of the country's output not explained by the amount of inputs used in production. The main goal of the present paper is to estimate the Total Factor Productivity levels and then determine the long-term impact of Economic freedom on the TFP in ten former socialistic countries, which are full EU members since 2000. To estimate the TFP we have applied the fixed effect panel on standard Cobb-Douglas production function in per capita terms. In the second iteration we have used PMG ARDL model to estimate the long-term impact of economic freedom on the TFP. This research has proven that higher level of economic freedom, which is used as a proxy of the quality of the institutions and institutional framework, caused higher level of total factor productivity in the period 2000-2018 in the case of ten former socialistic countries which are full EU members since 2000. The obtained results enable us an insight in policies which are important for efficiency increase and economic performance. Our finding could be very useful for policymakers, stressing which policies are contributing to efficiency, and which are not. So that policymakers could intervene in the way to increase the quality of institutional framework and economic institutions. Many other studies investigate the TFP and growth, or growth and institutional framework for the countries of Central and East Europe. Our survey is among the first to investigate the long-term impact of the institutional framework and economic institutions on the countries efficiency for this countries. Our survey enables us an insight into the mechanism through which the institutions can positively impact the TFP through increasing the predictability and reducing the uncertainty for CE countries.