Economic Freedom and Growth: A Panel Cointegration Approach

Abstract

This study uses three-country group panel data from 1993 to 2011 in examining the long-run effect of tax burdens (fiscal freedom index) and government regulations of business (business freedom index) on economic growth. The outcome of the panel cointegration approach suggests that the variables have a long-run relationship with economic growth. The study finds all the signs of the variables used to be consistent with theoretical expectations. Regarding the variables of interest, it is also found that the fiscal freedom has a positive and significant effect on economic growth for all three-country groups. In addition, the business freedom has a positive and significant effect for only two-country groups. The study finds that tax burdens and government regulations play an important role on economic growth for most countries in the sample. To harness economic growth prospects, the study offers recommendations for policy makers to consider.

Key words: Business freedom, Fiscal freedom, Tax burden, Economic growth, Panel cointegration.
JEL: E02, E44, F41, H10, P12.