The Freedom Factor: Economic Growth Dynamics in Low and Lower Middle-Income Nations

This study examines the dynamic relationship between the economic freedom index, comprising five components (Legal System & Property Rights, Freedom to Trade Internationally, Size of Government, Sound Money, and Regulation), and economic growth in low and lower-middle-income countries. The study analyzes contemporaneous and prolonged impacts using Bayesian Panel Vector Autoregression (VAR) and fixed-effect panel regression models with lagged dependent variables. While confirming a positive overall relationship between economic freedom and growth, the findings reveal substantial variation in the dynamic effects of individual components. Specifically, the Legal System and Property Rights and Freedom to Trade Internationally show a strong, positive instantaneous impact. In contrast, the Size of Government shifts from a negative to a positive effect, underscoring the complex and evolving nature of these relationships.