The Effect of Economic Freedom on Economic growth with Institutional Approach (Causal Investigation)

Economic freedom or individual freedom in doing transaction, exchange and assets transfer, which is obtained from legal channel, have significant effects on economic growth in society with relatively efficient institutions such as property rights security and transaction cost reduction, via motivating and promoting competition. This study investigates the effect of economic freedom on economic growth with due attention to institutional economic literature and use of Lakatuch methodology. Also it recognizes the paths of the relationship between economic freedom and growth. The utilized model is the combination of Winhold dynamic model (1993) and Carlsson and Lundstrom model (2001) that study 57 countries during 2000-2006. Also in order to studying these countries exactly, it classifies countries to three categories: Low, middle and high institutional quality. The result shows positive relationship between economic freedom and growth with due attention to efficiency of exist institutions in society. Two sub-index, "property rights security and legal structure" and "laws of labor and credit market and business" of Fraser Economic Freedom whole index that have been selected as economic freedom representation, have positive and significant effect on economic growth. This confirms initial hypothesis that shows importance of institutions in each society