Economic Freedom and Economic Performance in Latin America: A Panel Data Analysis

Abstract

This paper performs panel regressions of output per worker, capital intensity, human capital, and total factor productivity in Latin America on measures of economic freedom in five policy areas. Results show that a smaller government raises output per worker in Latin America but not in the OECD. Stronger property rights and a tighter monetary policy also raise output per worker, but greater freedom to trade internationally does not, despite doing so in the OECD. Deregulation lowers output per worker in both Latin America and the OECD. Finally, a tighter monetary policy raises total factor productivity (TFP) but reduces capital intensity in Latin America, while deregulation raises capital intensity but lowers TFP in both sets of countries.* Alexandrakis (corresponding author):

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

“…More specifically, a ten percent increase in a country's sound of money sub-index leads to a decrease in output per worker by about 0.29% mainly derived from lowering capital intensity and human capital accumulation by about 0.12% and 0.16%, respectively. These results goes in line with the results of Alexandrakis and Livanis (2013) and Emara and Rebolledo (2019) and with what we expect from the Fisher's Effect discussed in Mundell (1963) andTobin (1965). In addition, the results show that a ten percent increase in the freedom to trade index increases output per worker by about 0.4% and this is mainly through increasing the country's capital intensity by about 0.17% and human capital accumulation by about 0.14%.…”

“…In order to estimate the relationship between output per worker and economic freedom, we follow the methodological approaches developed by Hall and Jones (1999) and used in Alexandrakis and Livanis (2013) and Emara and Rebolledo (2019). In these papers, the authors use a traditional Cobb-Douglas production function representing a country's aggregate output, and decompose it to express the output per worker as a function of three main components: the stock of physical capital, human capital, and total factor productivity (TFP).…”

“…Finally, !,! represents the error term associated with the country i at time t. As in Alexandrakis and Livanis (2013) and Emara and Rebolledo (2019), we use the averaged value for each one of these variables by sub-period as dependent variables presented in equations ( 1) to (4).…”

“…In their study they measure economic performance as capital accumulation, human capital, and total factor productivity and define institutional characteristics as "social infrastructure" which includes characteristics such as institutions and government policies. Additionally, Alexandrakis and Livanis (2013) studied economic freedom and performance in Latin America through panel data to compare the results to OECD countries. They used five policy areas of economic freedom to evaluate the impact that output per worker, capital intensity, human capital, and total factor productivity has on economic freedom within a country.…”

“…Following Alexandrakis and Livanis (2013), Emara (2014Emara ( , 2016 The output per worker and capital intensity are computed as the ratio between a country's GDP and the total people engaged in the labor force and a country's stock of physical capital and its GDP, respectively. Both of these variables are measured at chained PPPs (in mil.…”