Economic Growth, Economic Freedom, and Corruption: Evidence from Panel Data

Abstract

Economic Freedom is considered to be conducive to growth while corruption is mostly found to be anti-growth. A related question could be whether Economic Freedom reduces the possible adverse effect of corruption on economic growth. Moreover, how are corruption and growth possibly affected by the major components of Economic Freedom? For example, a major element of economic freedom is Size of the Government which consists of taxes, among others. Income tax is considered as a levy on agent’s incentive to productive activity by reducing an agent’s property right. However, if revenue collected from taxes is used by the government in productive sectors then the adverse effect of taxes might decrease. On the other hand, negative effect of taxes on growth might be accentuated by higher degree of corruption. This paper examines the effects of corruption, economic freedom and its major components and their possible cross effects with corruption on economic growth. By using cross-country data and a panel estimation procedure it turned out that economic freedom was generally positively associated while corruption was negatively associated with growth though the result for the later is not robust. The influence on corruption seemed to decline in the presence of high degree of Economic Freedom. However, the findings were not as robust when components of Economic Freedom were considered separately.