Introduction
Stimulating economic growth is a fundamental goal of both monetary and fiscal policies in any country, leading to extensive research on its determinants In preparation for greater integration by 2020, ASEAN policymakers are focusing on enhancing economic freedom to facilitate an integrated financial market, where goods, services, investments, skilled labor, and capital can move freely among member countries This comprehensive integration aims to foster economic development and alleviate poverty and socio-economic disparities in the region, driven by increased capital flows, trade activities, and skilled labor mobility Economic freedom plays a crucial role by removing financial barriers and tariffs, thereby promoting investment and trade, while also attracting high-skilled labor that enhances human resource quality and stimulates further economic growth.
Recent studies highlight both the benefits and drawbacks of economic freedom, indicating that while it can promote growth, it may also lead to negative consequences Increased economic freedom and financial liberalization in integrated markets can expose low- and low-middle-income countries to greater volatility and economic shocks This vulnerability arises from the removal of financial protectionism, which can adversely affect economic growth (Almekinders et al., 2015) Additionally, Hatfield and Kosec (2013) emphasize the complexities associated with higher levels of economic freedom.
2 competition levels from foreign enterprises can threaten the domestic manufacturing and financial market, which results in lower economic growth in developing countries
Previous studies have presented inconsistent findings regarding the impact of economic freedom on growth, highlighting a significant literature gap that this study aims to address Additionally, recent research has increasingly concentrated on the relationship between economic freedom and growth rates across global economies (Hussain and Haque, 2016; Azman-Saini et al.).
This study seeks to explore the impact of economic freedom on growth within ASEAN economies, an area that has received limited attention compared to developed countries By examining these effects, the research aims to contribute valuable insights into the relationship between economic freedom and economic growth in the ASEAN region.
Economic freedom is a broad concept encompassing various factors that can serve as indicators of economic liberty These indicators are represented by the Heritage economic freedom indices, which are compiled by the Heritage Foundation and the Wall Street Journal (HF/WSJ).
This study utilizes trade freedom, financial freedom, and labor freedom as proxies for economic freedom, aligning with ASEAN's goal of facilitating the free movement of goods, services, investments, and skilled labor among member countries (Asian Development Bank, 2013) According to Guerrero (2010), robust capital flows, trading activities, and skilled labor mobility are essential for ASEAN's economic development in an integrated market Miller et al (2018) emphasize that increased financial freedom enhances capital flows by eliminating financial barriers, while trade freedom reduces tariffs and non-tariff barriers, boosting export and import activities Additionally, labor freedom promotes the movement of skilled labor across ASEAN nations Hussain and Haque (2016) also use the indices of financial freedom, trade freedom, and labor freedom as measures of economic freedom.
This study builds on the work of Hussain and Haque (2016) by utilizing financial freedom, trade freedom, and labor freedom as key indicators of economic freedom, aligning with the objectives of ASEAN integration policies The primary aim is to identify the most significant economic freedom factors that impact the ASEAN integration process While an overall economic freedom index encompassing twelve indicators is included to assess its influence on economic growth in ASEAN, the main focus remains on the critical factors of financial freedom, trade freedom, and labor freedom that are expected to play a pivotal role during the integration process.
Based on the chosen proxies of economic freedom, the purpose of this study particularly aims to answer the following questions:
Whether and how financial freedom affects economic growth?
Whether and how trade freedom affects economic growth?
Whether and how labor freedom affects economic growth?
This study examines the impact of key independent variables—financial freedom, trade freedom, and labor freedom—on economic growth, while also considering several control variables that may affect this relationship These control variables include foreign direct investment, credit to the private sector, unemployment rates, inflation, and exports of goods and services.
Using fixed effects model, this study reports interesting findings on the relationship between economic freedom and economic growth Firstly, this study finds a
A positive and statistically significant relationship exists between economic freedom and economic growth in ASEAN countries, indicating that nations with greater economic freedom experience higher growth rates Additionally, the study highlights that increased trade freedom contributes to economic growth within the region Conversely, it also finds compelling evidence that excessive trade freedom may hinder growth Meanwhile, financial freedom shows an insignificant impact on economic growth in these countries.
This study indicates that ASEAN policymakers should prioritize the promotion of economic and labor freedom to stimulate economic growth Additionally, enhancing the competitiveness and efficiency of domestic firms is crucial to mitigate the negative effects of trade freedom on economic development These insights are particularly significant as ASEAN nations work towards liberalizing their economies to establish an integrated market by 2020.
This study is structured into several key sections: Section 2 defines economic freedom and reviews relevant literature, while Section 3 outlines the data and variables used Section 4 details the empirical models employed, and Section 5 analyzes the data In Section 6, the empirical findings and discussions are presented, culminating in the conclusions found in Section 7.
Literature review
Definition of economic freedom
Economic theories often fall short in fully explaining the determinants of economic growth Adam Smith (1776) was one of the first to argue that economic freedom is essential for fostering development, emphasizing the government's role in maintaining a well-functioning market This idea has become a foundational principle in the relationship between economic freedom and growth In recent years, economic freedom has been recognized as a critical condition and effective means to stimulate economic growth (Borovic, 2014) As defined by Gwartney and Lawson (2003), economic freedom encompasses individuals' rights to make choices about their lives and protect their property, allowing them to determine how to utilize their time, assets, and talents This perspective is further supported by Nikolaev and Bennett.
(2016) suggest that people tend to achieve more when people have more freedom to decide for their lives
Gwartney and Lawson argue that economic freedom is closely linked to institutions and government policies, as these frameworks protect individual property rights and empower citizens to make choices Greater economic freedom is characterized by a robust legal framework and effective enforcement that safeguard people's rights Conversely, diminished economic freedom arises when government actions, such as excessive taxation and restrictive policies, hinder personal choice and disrupt market coordination.
To examine how the economic freedom relates to economic growth, the next sub-section reviews the theoretical framework for the relationship between economic freedom and economic growth
Theoretical framework of the association between economic freedom and economic
Economic freedom encompasses various elements of a nation's economy, evaluating its engagement with the global market through aspects like financial liberalization, trade and investment freedom, and government effectiveness The economic freedom index specifically measures the autonomy of labor and financial markets (Miller et al., 2018) Increased economic freedom is achieved when individuals experience fewer government constraints and interventions, which is crucial as excessive government involvement can infringe on personal liberties and divert resources from productive activities to unearned benefits, ultimately hindering a country's prosperity.
Economic freedom plays a crucial role in fostering individual control and pursuing personal passions, leading to greater achievements and overall economic growth (Nikolaev & Bennett, 2016) By empowering individuals to make their own choices, economic freedom enhances a nation's prosperity, allowing people to work independently or collaboratively to create goods and services that align with market demands (Miller et al., 2018) This autonomy enables individuals to work, consume, or invest in ways that benefit them, thereby increasing market efficiency and stimulating economic development (Wu, 2011) Ultimately, the ability to make personal decisions not only improves individual lives but also strengthens the economy as a whole.
7 in any channel that benefits them, market efficiency and economic growth will be elevated (Wu, 2011)
Higher economic freedom positively impacts a country's institutions by reducing the misallocation of aid funds and enhancing market transparency, which ultimately stimulates economic growth (Dutta and Williamson, 2016) Government support can distort market efficiency by directing funds to inefficient projects associated with state-owned enterprises or politically connected private companies (Cali and Velde, 2011) Research by Heckelman and Knack (2008) indicates that political leaders may favor state-owned enterprises and misallocate financial resources to inefficient investment projects for personal gain Therefore, increased economic freedom is expected to diminish state ownership and government influence in the economy, thereby improving market efficiency and institutional quality, which contributes to higher economic growth.
Economic freedom facilitates increased foreign entry by reducing various barriers, which in turn can stimulate economic growth through multiple channels According to Dreher and Gehring (2012), greater foreign entry correlates with increased international investments and direct financial transfers, providing essential funding for economic development Additionally, foreign entry enhances the international standards of domestic markets, compelling governments and local businesses to adhere to specific requirements, thereby improving government policies and product quality, which positively impacts economic growth Lastly, foreign aid fosters greater knowledge transfer, benefiting domestic firms and further contributing to economic advancement.
Technology transfer from foreign companies significantly enhances efficiency and profitability for firms, particularly in emerging countries where there is often a lack of advanced technology and management expertise.
While many studies highlight the advantages of economic freedom, some research indicates its potential drawbacks on economic growth Sturm and De Haan (2001) argue that increased economic freedom can heighten domestic competition, potentially hindering firm performance, especially for those lacking efficiency and advanced technology Ryan et al (2011) emphasize that economic freedom can lead to greater interconnectedness among economies, which may facilitate the rapid spread of systemic risks that can destabilize the international financial system and impede economic growth Additionally, the role of government in managing and regulating the economy is crucial, as reduced government intervention can make the economy more susceptible to shocks and systemic risks (Compton et al., 2011).
This study proxies economic freedom through indices of financial, trade, and labor freedom, highlighting policies that facilitate the free movement of goods, services, investments, skilled labor, and capital among ASEAN countries The following subsections will examine recent empirical findings regarding the influence of financial, trade, and labor freedom on economic growth.
Financial freedom and economic growth
Slow economic growth in some developing countries is linked to low financial freedom policies, which hinder capital flows from trading and investment activities (Wu, 2011; Hye and Yeap, 2017) Dreher and Gehring (2012) argue that increased direct money transfers and foreign investments can effectively address funding shortages for development in host countries Borovic (2014) highlights the significance of financial investments in domestic markets, such as stock and bond markets, which provide essential funding for local firms and contribute to economic growth Enhancing financial freedom by reducing obstacles can attract more foreign investment, further stimulating economic development.
Research by Hafer (2013) indicates that the financial sector's contributions to economic growth surpass those of other sectors, with its stability and efficiency being closely linked to overall economic performance Hafer's findings suggest that financial liberalization diminishes the risk of banking crises, which are known to cause significant economic downturns (Borovic, 2014) Similarly, Akinsola and Odhiambo (2017) report comparable results in Sub-Saharan Africa Additionally, increased financial freedom enhances the transparency and efficiency of the financial sector (Chortareas et al., 2013; Bumann et al., 2013), further boosting economic growth rates This improvement is attributed to necessary regulatory changes in domestic financial systems that align with higher liberalization and international standards, resulting in better-quality financial institutions Lopes and Jesus (2015) support this, finding that financial liberalization positively impacts economic outcomes across a sample of 77 countries.
10 economic growth They argue that the change in financial policies allows financial institutions to improve their efficiency and quality as well as credit provisions to the economy
Existing literature highlights the negative effects of financial freedom on economic growth, particularly in countries with limited democratic systems Lopes and Jesus (2015) suggest that while financial freedom can enhance economic growth, this benefit is only realized in nations with strong democratic frameworks In contrast, in restricted environments, increased financial liberalization may hinder economic growth due to the poor quality of domestic institutions and financial sectors This vulnerability can be linked to the inadequately skilled management of financial institutions and policymakers (Azmeh et al., 2017).
Increased financial freedom in sub-Saharan Africa is linked to heightened systematic risk and a greater likelihood of banking and financial crises, ultimately hindering economic growth Akinsola and Odhiambo (2017) highlight that elevated financial freedom exacerbates risk, especially in highly intercorrelated economies Their analysis using linear generalized methods of moments reveals that financial freedom correlates with a higher incidence of banking crises in emerging markets This finding aligns with Chang and Mendy (2012), who assert that greater financial openness elevates insolvency risks and the probability of financial crises, further impeding economic growth in the region.
Mian (2003) analyzes the performance of domestic financial institutions, indicating that they generally exhibit lower resilience to risk and competitive strength compared to foreign counterparts He argues that increased financial freedom may result in inefficient competition, potentially posing detrimental effects on the industry.
A meta-analysis by Bumann et al (2013) indicates a negative relationship between financial liberalization and economic growth during the 1970s; however, these findings may not accurately represent the contemporary dynamics of financial freedom.
This study suggests that increased financial freedom may negatively impact economic growth by diminishing management effectiveness and risk control within domestic countries, as well as affecting institutional quality.
2015), higher risk spread-out effects and the likelihood of financial crisis (Borovic,
2014), and inefficient competition (Mian (2003) Therefore, the first hypothesis suggests a negative relationship between financial freedom and economic growth
H1: Higher financial freedom reduces economic growth
Trade freedom and economic growth
The ongoing debate regarding the relationship between trade freedom and economic growth presents both positive and negative perspectives Research on trade liberalization within the Southern African Customs Union, conducted by Manwa and Wijeweera, explores these complexities.
A study by Manwa and Wijeweera (2016) reveals that higher trade freedom significantly boosts long-term economic growth Trade liberalization reduces tariffs and taxes, fostering healthy competition This increased competition facilitates technology transfer, enhances product variety, and promotes economies of scale, ultimately driving economic growth for domestic firms.
12 apply advanced technology from foreign peers to enhance their efficiency and profitability This could have a positive influence on economic growth
According to Krugman (1990), trade freedom promotes economic growth in emerging economies through two key channels First, it enables domestic producers to access international markets, allowing them to overcome the limitations of domestic demand and increase their output This is particularly relevant for countries focused on labor-intensive sectors such as agriculture and manufacturing Second, by removing government protections, trade freedom compels domestic firms to restructure and enhance their efficiency in response to larger foreign competitors, ultimately leading to improved competitive advantages and positive effects on economic growth.
Manni and Afzai (2012) and Hye and Yeap (2017) demonstrate that greater trade openness in emerging countries significantly boosts exports and drives economic growth Increased exports contribute positively to GDP, while Manni and Afzai note that although higher trade freedom also raises imports, these effects are statistically insignificant They highlight a strong positive correlation between trade freedom and economic growth, revealing that one-third of emerging countries have achieved notable economic growth and poverty reduction over the past two decades due to substantial increases in trade freedom, characterized by lower tariff and non-tariff barriers Additionally, Foster (2008) examines 75 liberalizing countries, focusing on the impacts on low-income nations.
Trade liberalization can significantly benefit countries in the long run, despite causing short-term challenges for domestic firms due to heightened competition According to Foster, while domestic firms may initially struggle, they eventually enhance their operations, leading to greater efficiency and economic growth over time Supporting this view, Keho (2017) employs Granger causality tests, revealing a robust positive relationship between trade liberalization and economic growth in both the short and long run.
Menyah et al (2014) utilize a panel causality approach to analyze the relationship between trade freedom and economic growth in African nations, concluding that increased trade freedom may negatively affect economic growth due to heightened competition that disadvantages domestic firms with limited experience, technology, and resources Meanwhile, foreign firms encounter international challenges such as agency costs, contributing to inefficient competition that hampers economic growth and elevates overall risk (Kim et al., 2012) Additionally, Kneller et al (2008) explore the effects of trade freedom on economic growth through both theoretical and empirical analysis, revealing inconsistent results that may stem from omitted variables in regression models.
This study suggests that increased trade freedom can lead to significant economic growth, despite varying effects across different countries The benefits of enhanced competition (Manwa and Wijeweera, 2016), access to international markets (Krugman, 1990), and elevated export activities (Manni and Afzai, 2012) are key factors contributing to this growth Consequently, we propose the second hypothesis as follows:
H2: Higher trade freedom increase economic growth
Labor freedom and economic growth
Gwartney and Lawson (2003) argue that allowing individuals to freely choose how to utilize their time, assets, and talents fosters strong motivation for economic development Nikolaev and Bennett (2016) support this notion, stating that people tend to achieve more when granted greater freedom in their lives Higher labor freedom enables individuals to better determine their career paths, positively impacting economic growth by enhancing labor market quality Countries with increased labor freedom attract skilled workers and typically experience lower unemployment rates, which further stimulates economic growth (Wu, 2011) However, Keho (2017) finds through Granger causality tests that while higher labor freedom is generally expected to promote growth, it may also lead to lower economic growth as skilled labor moves to more attractive countries This suggests that nations offering better incentives for high-skill labor will reap the most benefits Furthermore, Keho indicates that innovative labor contributes approximately 17% of GDP for Côte d'Ivoire, highlighting that the effects of labor freedom are contingent upon policies that attract skilled workers Ultimately, the primary goal of labor freedom is to enhance the domestic labor market's quality and draw in more qualified professionals.
Minimum wage laws, while designed to protect labor rights, can inadvertently restrict labor freedom These regulations may hinder low-skill workers from entering the job market, as employers are unable to offer wages below the mandated minimum Consequently, this leads to increased unemployment rates and negatively impacts a country's economic growth.
Higher labor freedom policies can enhance the balance of supply and demand in the labor market, resulting in reduced unemployment and increased economic efficiency and growth Research by Hye and Yeap (2017) highlights the critical role of a skilled labor market in fostering economic advancement They assert that greater labor freedom boosts competition, leading to an improved quality of the labor force This, in turn, positively impacts economic growth by enhancing a country's overall output and efficiency.
Nelson and Phelps (1966) were pioneers in recognizing the importance of labor force quality as a key driver of productivity growth, linking it directly to innovative technologies that enhance economic efficiency and foster growth This concept is further supported by Bumann et al (2013), who assert that increased labor freedom attracts skilled workers, thereby enhancing the domestic labor market's quality This influx of high-skill labor promotes technological innovation, ultimately contributing to economic growth.
This study posits that greater labor freedom positively influences economic growth by fostering innovation, enhancing labor market competition, and attracting skilled labor from abroad Thus, the third hypothesis is formulated accordingly.
H3: Higher labor freedom increases economic growth
Data and variables
Data
Economic freedom data is sourced from the Heritage Economic Freedom Database, which is also utilized in recent studies as a proxy for economic freedom, including works by Borovic (2014), Hye and Yeap (2017), and Akinsola and Odhiambo.
This study utilizes macroeconomic data, including inflation, unemployment, foreign direct investment, credit to the private sector, and exports of goods and services, sourced from the World Bank's World Development Indicators It focuses on annual GDP growth and GDP per capita growth rates as indicators of economic growth, aligning with the findings of Azman-Saini et al (2010) and Hussain and Haque (2016) Both GDP growth and GDP per capita growth data are also obtained from the World Bank's dataset.
This study analyzes data from eight ASEAN countries—Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, and Vietnam—covering the period from 2000 to 2017, as Brunei Darussalam and Myanmar lack economic freedom data Additionally, labor freedom data is only available from 2005 to 2017, leading to fewer observations for this variable compared to others To mitigate the loss of observations, the regression models incorporate one economic freedom indicator at a time.
Economic growth measurement
This study examines the factors influencing economic growth by utilizing the annual percentage growth rate of GDP per capita as a proxy Specifically, the growth rate is derived from the gross domestic product (GDP) per capita divided by the midyear population, following recent literature on economic growth determinants.
Economic freedom measurement
This study utilizes economic freedom indicators from the Heritage Economic Freedom database, where values range from 0 to 100, indicating that higher scores reflect a greater degree of economic freedom The measurement methods for these indices are thoroughly detailed in the annual report by Heritage Economic Freedom (Miller et al.).
The labor freedom index evaluates a country's labor market by examining various legal regulations, including minimum wage laws, restrictions on working hours, and conditions surrounding layoffs and severance It specifically assesses seven key areas, such as the ratio of minimum wage to the average value added per worker and barriers to hiring additional employees.
The index is constructed using components that include rigidity of hours, difficulty in terminating redundant employees, legally mandated notice periods, mandatory severance pay, and the labor force participation rate, as outlined by Miller et al (2018) Each component is assigned equal weight and is scaled from 0 to 100, with each sub-factor calculated accordingly.
Sub-factor Score i = 50 × (Sub-factor average / Sub-factor i )
The score for each country is derived from its comparison to the global average, multiplied by 50 Specifically, the calculation of labor freedom incorporates this global average, and the overall score is the average of seven sub-factors.
The trade freedom index measures a country's tariff and non-tariff barriers affecting import and export activities It is calculated using the trade-weighted average tariff rate and the presence of non-tariff barriers (NTBs) Since various goods and services are subject to different tariff rates, the overall tariff degree of a country is represented by the average of all applicable tariffs.
Trade freedom i = 100 (Tariff max – Tariff i ) / (Tariff max – Tariff min – NTB i )
Tariff max and Tariff min represent the upper and lower limits for tariff rates, with Tariff min typically set at zero In country i, Tariff i indicates the weighted average tariff rate When assessing nontariff barriers (NTBs), a base score is reduced according to the extent of these barriers, with a maximum deduction of 20% when NTBs are widespread across various goods and services, and no deduction when NTBs are absent NTBs encompass five primary categories: (1) quantity restrictions, including import quotas and export limitations; (2) price restrictions, such as antidumping duties; and (3) regulatory restrictions.
Licensing, packaging, labeling, and sanitary and phytosanitary standards play a crucial role in regulatory compliance Additionally, customs restrictions, including advance deposit requirements and customs clearance procedures, significantly impact trade Direct government intervention through subsidies, monopolies, procurement policies, and industrial policies further shapes the market landscape.
The index of financial freedom evaluates bank efficiency and the financial sector's independence from government control It considers government ownership in financial institutions and capital markets, highlighting that greater economic freedom occurs when the financial market operates with minimal government influence, allowing credit allocation based on market demand Key factors include low government ownership in the financial sector, the autonomy of banks in extending credit and deposits, the independence of central banks, and the unrestricted operation of foreign financial institutions within the domestic market This index encompasses five primary areas: the extent of government regulation of financial services, levels of government ownership in the financial sector, the influence of government on credit allocation, the development of financial and capital markets, and the degree of financial liberalization for foreign competition.
Miller et al (2018) clearly provides criteria of levels of financial freedom, which can be specified as follows:
Levels ranging from 70 to 90 indicate minimal government interference, characterized by limited government ownership, minimal regulations on financial institutions, and reduced influence of the government on credit allocation.
A Level of 60 indicates a moderate level of government influence in the banking and financial sectors, where regulations may be perceived as burdensome In this scenario, the government holds a substantial share in financial institutions, which face various restrictions that impact their operations.
Level 50 refers to considerable government interference, where credit allocation is significantly influenced by the government, the government ability to enforce contracts is weak, and government ownership in financial sector makes up large share of total financial sector assets
Level 40 refers to the strong government interference, where the central bank has low freedom for making decisions, the ability to prevent fraud is weak, and the government’s share in financial sector is very high in relative to total financial assets
Levels of 20 to 30 refers to the heavy to extensive government interference, where credit allocation is extensively influenced, the central bank is not independent, and foreign institutions are prohibited
Level 10 refers to the near-repressive where credit allocation is controlled by the government, bank information is restricted, and foreign institutions are prohibited
Level 0 refers to the repressive level, indicating that private financial sector are nonexistent and financial institutions are fully restricted by regulations
3.3.4 The overall economic freedom index
The overall economic freedom index is derived from twelve key indicators, including property rights, judicial strength, and government integrity, as outlined in the Heritage Economic Freedom database This index assesses various dimensions such as tax burden, government spending, and fiscal health, alongside business, labor, monetary, trade, investment, and financial freedoms However, it's important to note that this overall index may not accurately represent the unique characteristics of economic freedom within ASEAN economies.
This study incorporates several control variables into the regression models alongside economic freedom variables to mitigate the risk of endogeneity The following subsection examines how these control variables influence economic growth.
Control variables
In addition to economic freedom variables, this study also examines the effects of some macroeconomic factors on economic growth
A study by Iamsiraroj and Ulubasoglu (2015), which analyzed data from 140 countries between 1970 and 2009, reveals a strong correlation between increased foreign direct investment (FDI) and economic growth The research indicates that higher FDI serves as a crucial source of savings and capital accumulation for nations Additionally, it enhances the quality of the labor market and fosters better intersectoral connections within the economy According to Hye and Yeap (2017), the improvement in labor quality is a key driver of economic growth.
Baldwin et al (2005) also finds that higher FDI is associated with more access to international markets for the host countries
Research indicates that increased foreign direct investment (FDI) enhances technology transfer, thereby driving economic growth Baldwin et al (2005) demonstrate that higher FDI directly contributes to economic growth by introducing advanced technologies, which in turn elevates managerial skills, infrastructure, and human capital Additionally, Foster (2008) highlights the technology spillover effect, enabling domestic firms to access cutting-edge technologies from foreign competitors This access boosts the efficiency of domestic companies, resulting in increased output, profitability, and overall economic development.
While foreign direct investment (FDI) is often viewed as a catalyst for economic growth, several studies highlight its potential negative impacts Borensztein et al (1998) indicate that increased FDI inflows may prioritize profit opportunities over efficiency, leading to market distortions Additionally, Gorg and Strobl (2002) suggest that emerging economies may become overly reliant on FDI, which can diminish their motivation for sustainable economic development Furthermore, research by Carbonell and Werner (2018) on Spain reveals no statistically significant correlation between FDI and economic growth, challenging the notion that FDI is inherently beneficial for economic advancement.
Empirical research on the relationship between inflation and economic growth presents mixed results, fueling ongoing debate Valdovinos (2003) employs the Baxter and King filter to reveal that lower inflation correlates with higher long-term economic growth Similarly, Hye and Yeap (2017) demonstrate that reduced inflation rates positively impact employment levels.
Increased productivity in the economy enhances capacity utilization and reduces the output gap, ultimately driving higher economic growth However, as noted by Kneller et al (2008), a significant rise in inflation can negatively impact the profitability of foreign companies, prompting them to withdraw their capital to safeguard their interests This capital flight can hinder economic growth, posing challenges for the overall economy.
Lopez-Villavicencio and Migon (2011) identify a U-shaped relationship between inflation and economic growth, indicating that high inflation negatively impacts growth, while low inflation can have beneficial effects Supporting this, Burdekin et al (2004) assert that while high inflation is detrimental to economic growth, lower inflation rates or deflation can stimulate the economy Gregorio (1993) further explains that moderate inflation encourages domestic firms to boost production for greater profitability, leading to reduced unemployment and enhanced economic growth.
Private sector credit, defined as the domestic credit provided to the private sector by banks as a percentage of GDP, plays a crucial role in economic growth, particularly in Sub-Saharan Africa Research by Mbate (2014) indicates that increased credit to the private sector fosters its development, subsequently enhancing national output and growth Supporting this view, Bumann et al (2013) assert that the private sector operates more efficiently than the public sector, with higher credit allocation leading to improved market efficiency and significant economic growth Additionally, Azman-Saini et al (2010) identify a strong correlation between bank-provided private sector credit and economic advancement.
Economic growth is significantly influenced by the development of the financial intermediary sector, which is crucial for stimulating overall economic activity Research by Gorg and Strobl (2002) indicates that increased bank credit to the private sector reflects a higher demand for credit within the economy This expansion and enhanced output from domestic firms ultimately contribute to further economic growth.
Higher private sector credit from banks may be linked to reduced economic growth, particularly in emerging economies where most firms are small and medium-sized (Menyah et al., 2014) While increased credit can support these businesses, it also poses risks that may lead to a rise in non-performing loans, ultimately harming long-term economic growth Research by Oluitan (2012) on Nigeria indicates that although higher bank credit to the private sector can spur short-term growth, the associated financial risks may negatively impact sustainable economic development over time.
Recent studies consistently highlight the inverse relationship between unemployment rates and economic growth, emphasizing the crucial role of the labor force in driving economic progress (Wu, 2011) According to Hye and Yeap (2017), a lower unemployment ratio signals favorable economic conditions and periods of robust growth Neely (2011) notes that the unemployment rate is highly responsive to fluctuations in economic growth, as changes in firm output can lead to workforce reductions Consequently, a decrease in unemployment rates reflects strong domestic firm performance, contributing to enhanced economic growth Additionally, Hussain and Haque (2016) support the notion that lower unemployment fosters economic stability and expansion.
Unemployment rates serve as a key indicator of effective economic policies that promote growth, with studies showing that a 1% decrease in unemployment can result in over a 3% increase in economic growth Wu (2011) emphasizes that reducing unemployment is a primary goal for governments Additionally, Krueger and Lindahl (2001) suggest that lower unemployment rates are linked to higher quality education and human capital, which enhance social stability, boost consumption, and increase national output, ultimately driving higher economic growth.
The relationship between unemployment and economic growth is complex and varies based on a country's economic structure, as noted by Bean and Pissarides (1993) Additionally, Lopes and Jesus (2015) highlight that factors such as laws, social customs, technology, and demographics can significantly influence the effects of unemployment on the economy.
3.4.5 Export of goods and services
Trade freedom aims to eliminate various tariffs and non-tariff barriers to enhance export and import activities Research by Manni and Afzai (2012) and Hye and Yeap (2017) demonstrates a strong correlation between increased exports and economic growth This relationship can be attributed to the notion that higher exports indicate superior quality and standards of domestic goods and services, thereby boosting overall economic performance (Dreher and Gehring, 2012) Additionally, a rise in export value enhances a country's net export value, which is closely linked to economic growth Improved export activities enable domestic firms to penetrate international markets, benefiting from technology spillovers.
26 effect (Manwa and Wijeweera, 2016) Higher performance and efficiency of domestic firms could be associated with higher economic growth
While many studies highlight the positive impact of exports on economic growth, some research presents contrasting views Gabriele (2006) argues that in emerging economies, export-oriented service activities are often controlled by foreign companies, resulting in limited benefits that do not significantly correlate with the host countries' economic growth Similarly, Serena et al (2016) contend that a heavy reliance on the export value generated by foreign direct investment (FDI) enterprises can negatively affect economic growth, as it diminishes the contribution of domestic firms to the GDP.
Research method
This study investigates the relationship between economic freedom and growth in ASEAN countries using a fixed effects estimator to tackle unobservable variables The fixed effects model, as noted by Ivanovic and Stanisic (2017), provides consistent regression estimates and addresses biased coefficient estimates linked to unobservable factors However, if unobservable factors are not time-invariant and correlate with independent variables, a random effects model may yield more reliable estimates To validate the use of the fixed effects estimator across all regression models, this study employs the Hausman test.
The study employs a random effects model, supported by a Hausman test p-value of less than 0.05, indicating the rejection of the null hypothesis Additionally, to address the potential period-effect problem, which occurs when the intercept uniformly shifts across all cross-sectional units over time, the model incorporates a year fixed effect dummy variable.
The model of this study is given as follows:
EGrowth i,t = α 0 + β 1 FFreedom i,t + β 2 TFreedom i , t + β 3 LFreedom i,t + β 4 Macro i,t +γ i,t + ε i,t
In this analysis, we examine the relationship between economic growth (EGrowth) and various factors including financial freedom (FFreedom), trade freedom (TFreedom), and macroeconomic control variables such as foreign direct investment, inflation, private sector credit, unemployment, and exports of goods and services The model incorporates year fixed effects (γ) to account for temporal variations, while the error term (ε) captures unexplained variations.
Data analysis
Descriptive statistics
Table 1 presents descriptive statistics for a data sample of 10 ASEAN countries from 2000 to 2017, highlighting significant economic growth The average growth rates for GDP per capita and GDP are 3.73% and 5.26%, respectively, which are notably higher than the global averages of 1.651% and 2.9% during the same period, according to World Bank data This indicates that ASEAN countries outperformed the global economy in terms of growth However, the presence of negative values in the minimum column signifies that these countries faced economic recessions at various points between 2000 and 2017.
The economic growth rates in ASEAN exhibit significant volatility, largely influenced by the aftermath of the Great Recession in 2008 This is evidenced by the considerable disparity between the maximum and minimum average values of economic growth indicators, resulting in high standard deviations that reflect inconsistent growth patterns.
Financial freedom in ASEAN countries is notably low, with an average score of 45.41 on a scale of 0 to 100, indicating significant government interference The government's influence extends to the central bank's decisions, a weak legal framework for preventing fraud and enforcing contracts, and substantial control over the financial sector through both direct and indirect ownership In contrast, other economic freedom indicators in the region show higher average values.
60, indicating moderate degree of economic freedom Section 5.2 provides more details of economic freedom in ASEAN countries
Variable Obs Mean Std Dev Min Max
Exports of goods and services 161 73.08 50.26 19.12 231.19
Table 1 highlights notable macroeconomic trends in ASEAN countries, showing that their foreign direct investment (FDI) as a percentage of GDP averages 2.97%, which is significantly higher than the global average, according to the World Bank.
ASEAN countries present a favorable environment for attracting foreign direct investment (FDI); however, recent declines in FDI may hinder economic growth The average credit to the private sector in these nations stands at 62.73%, significantly lower than the global average of 80.88% (World Bank) This discrepancy may stem from limited economic freedom, which stifles private sector development and diminishes credit demand While the public sector enjoys government support, the private sector encounters financial challenges, including tariffs and restrictive regulations, leading to its slower growth.
The average unemployment rate in ASEAN stands at 3.11%, significantly lower than the global average of 5.76% (World Bank), highlighting the region's economic strength and the government's success in maintaining low unemployment levels Additionally, ASEAN's export of goods and services represents 73.08% of its GDP, far exceeding the world average of around 28%, indicating a robust contribution of exports to economic growth However, the region faces challenges with high inflation, averaging about 1% above the global rate (World Bank), and the substantial disparity between minimum and maximum inflation rates reflects significant volatility within ASEAN economies.
Economic freedom in ASEAN
Figure 1 reports the average values of economic freedom indicators in ASEAN countries by year It is clear that economic freedom and its indicators in ASEAN
Between 2000 and 2017, economic freedom in ASEAN saw a slight increase, with the index rising from 60 to approximately 63, aligning closely with the global average of 61.1 in 2017 Despite efforts towards deeper integration in the ASEAN common market, significant advancements in economic freedom indicators were lacking, highlighting a slow liberalization process that requires further enhancements Additionally, the labor freedom index remained stagnant during this period, reflecting no improvements in regulations concerning minimum wages, working hours, or layoffs To enhance labor freedom, achieving deeper liberalization by 2020, which facilitates the free movement of labor across ASEAN countries with reduced regulatory restrictions, is essential.
Trade freedom in ASEAN countries rose from 70 in 2000 to 80 in 2017, indicating a significant increase of 10 points This improvement surpasses the overall index of economic freedom by three points, reflecting a greater governmental focus on trade activities As a result, ASEAN governments have taken steps to eliminate various tariffs and non-tariff barriers, enhancing trade dynamics in the region.
ASEAN countries exhibit high trade freedom, with 70 to 80 out of 100, reflecting minimal tariffs and non-tariff barriers on the import and export of goods and services.
Turning to level of financial freedom in ASEAN, the index increased from 40 in
From 2000 to 2017, there was a gradual enhancement in financial freedom, decreasing from 2000 to 50 According to Miller et al (2018), the financial sector in ASEAN is significantly influenced by government intervention, particularly in the decisions made by the central bank.
The government's influence leads to weak enforcement of contracts and inadequate prevention of fraud It maintains control over the financial sector through substantial direct and indirect ownership Additionally, foreign competitors encounter various restrictions when attempting to operate or enter the domestic market.
Figure 1: Economic freedom in ASEAN by year
The economic freedom levels in ASEAN countries reveal significant disparities, as shown in Figure 1 and Figure 2 Notably, Brunei Darussalam and Myanmar are excluded due to insufficient data Singapore stands out with an impressive average economic freedom index of approximately 80/100, while Laos records the lowest scores Since 2020, financial freedom has been on the rise, enabling investments and financial resources to flow more freely within the region Aside from Singapore and Laos, the remaining six ASEAN nations exhibit relatively similar levels of economic freedom, indicating minimal gaps among them.
ASEAN economic freedom by year
Economic freedom Labor freedom Trade freedom Financial freedom
Figure 2: Economic freedom in ASEAN by country
Empirical findings and discussions
The impact of economic freedom on growth in ASEAN
This section presents the results of fixed effects methods used to investigate the impact of economic freedom on economic growth in ASEAN countries from 2000 to
In 2017, Ivanovic and Stanisic highlighted the use of fixed effects models to address unobservable variable issues in panel data The regression models incorporate robust standard errors and year effects to mitigate heteroscedasticity and period effects Each result table presents five regression models, following the structure of recent studies (Menyah et al., 2014; Hye and Yeap, 2017) Models (1) to (4) examine the individual impacts of economic freedom, labor freedom, trade freedom, and financial freedom on economic growth Model (5) integrates all three components of economic freedom to assess the consistency of their effects on growth.
Cambodia Indonesia Laos Malaysia Philippines Singapore Thailand Vietnam
ASEAN economic freedom by country
Economic freedom Labor freedom Trade freedom Financial freedom
Models (1) to (4) incorporate one indicator of economic freedom alongside five control variables, while including all variables in a single regression model may result in a significant loss of observations In contrast, Model 5 features three indicators of economic freedom—labor freedom, trade freedom, and financial freedom—paired with the same five control variables.
Table 2 analyzes the impact of economic freedom on economic growth in ASEAN countries from 2000 to 2017, utilizing a fixed effects estimator to ensure consistent results by eliminating time-invariant unobservable variables The findings indicate a positive relationship between economic freedom and growth, suggesting that increased economic freedom fosters greater individual control, allowing people to pursue their passions and achieve more This self-direction enables individuals to create goods and services that align with market demands, ultimately enhancing a nation's growth and prosperity Additionally, economic freedom is shown to improve market efficiency by addressing misallocated resources and increasing transparency, which are crucial for stimulating economic growth.
Empirical research indicates that economic freedom promotes growth through three key channels Firstly, increased financial liberalization enhances international investments and direct monetary transfers, thereby stimulating economic growth Secondly, economic freedom enables domestic markets to access international platforms, which elevates their standards Lastly, improved government policies contribute to this positive impact on economic growth.
Improving product quality and increasing technology transfer can significantly enhance economic growth by boosting market efficiency and overall economic performance.
Research indicates a strong correlation between higher labor freedom and economic growth, with statistical significance at the 1% level Countries that reduce regulations on minimum wages, working hours, and severance pay tend to experience greater economic expansion Keho (2017) highlights that increased mobility of skilled labor toward more attractive markets enhances the labor force, which is crucial for economic development Additionally, greater labor freedom empowers individuals to make life choices, fostering innovation, which contributes approximately 17% to economic growth Nelson and Phelps (1966) emphasize that the quality of the labor force is vital for productivity growth, directly influencing innovative technologies that enhance economic efficiency Hye and Yeap (2017) argue that a competitive labor market, spurred by labor freedom, improves labor quality and overall economic performance Furthermore, labor freedom helps address labor market mismatches, enabling entrepreneurs and workers to fulfill their needs without regulatory constraints.
Higher trade freedom may negatively impact economic growth in ASEAN countries, as indicated in Table 2 This suggests that countries with lower tariffs, non-tariff barriers, and trade restrictions tend to experience greater economic growth One possible explanation is that increased trade liberalization fosters a healthier economic environment.
Increased competition is linked to enhanced technology transfer, product variety, and economies of scale, which collectively boost economic growth (Manwa and Wijeweera, 2016) Higher trade freedom plays a crucial role in promoting economic growth in emerging countries through two primary channels First, it enables low-cost producers to access global markets, resulting in higher exports and increased national output (Krugman, 1990; Afzai, 2012; Hye and Yeap, 2017) Second, foreign competition compels domestic firms to restructure and improve efficiency, thereby strengthening their competitive advantages (Krugman) While the short-term effects of increased competition may pose challenges to the domestic market, the long-term benefits are significant (Foster, 2008).
The findings indicate an insignificant relationship between financial freedom and economic growth in ASEAN countries While Model (4) suggests that higher financial liberalization may enhance economic growth, this effect is statistically insignificant In contrast, studies from developed nations, such as those by Hye and Yeap (2017), Borovic (2014), and Bumann et al (2013), demonstrate a positive and significant correlation between financial freedom and economic growth The coefficients in Model (4) imply a potential positive association; however, the insignificance may stem from ASEAN countries not fully liberalizing their financial sectors during the analyzed period With an average financial freedom score of only 45.41/100, there is considerable government interference in the economy, a weak legal framework to combat fraud, and substantial government ownership in the financial sector (Miller et al., 2018).
36 could turn to be significant when ASEAN countries significantly liberalized their financial sector for deeper integration
Table 2: Economic freedom and economic growth in ASEAN – Fixed effects model
Year effect Yes Yes Yes Yes Yes
The table presents the effects of economic freedom on GDP per capita growth in ASEAN countries from 2000 to 2017, analyzed through the fixed effects method, which is validated by the Hausman test The dependent variable in this study is GDP per capita growth, with significance levels indicated by ***, **, and * at 1%, 5%, and 10%, respectively Robust standard errors are provided in parentheses.
This study highlights that higher foreign direct investment (FDI) significantly boosts economic growth, as evidenced by robust findings in Table 2 Increased FDI contributes to essential savings and capital accumulation, positively impacting economic growth (Iamsiraroj and Ulubasoglu, 2015) Additionally, it provides domestic firms with greater access to international markets (Baldwin et al., 2005) The transfer of technology from foreign companies enhances the capabilities of local businesses, resulting in substantial improvements in skills, infrastructure, human capital, and overall economic growth.
According to Foster (2008), the technology spillover effect enables domestic firms to access advanced technologies from foreign competitors This access enhances the efficiency of these firms, resulting in increased output, higher profitability, and overall economic growth.
Table 2 indicates that an increase in credit to the private sector may negatively impact economic growth, particularly in ASEAN countries where small and medium-sized enterprises dominate These firms often struggle with financing and risk management, leading to heightened overall economic risk Consequently, while increased credit may stimulate short-term growth, it can have detrimental effects in the long run due to the associated financial market risks, as noted by Menyah et al (2014) and supported by Oluitan (2012).
To further confirm the results of fixed effects estimator shown in Table 2, this study employs a robustness check to examine the impact of economic freedom on economic growth.
Robustness check
To validate the primary findings of this research, Table 3 presents an alternative measure of economic growth: the annual gross domestic product (GDP) growth rate This approach is aligned with the methodologies of Simonoff (2008) and Borovic (2014), which also utilize the annual GDP growth rate as a key indicator of economic performance.
Table 3 demonstrates a significant positive relationship between economic freedom and economic growth, supporting the findings in Table 2 (Model 1) According to Miller et al (2008), reduced government influence on the economy and individuals leads to enhanced economic growth Theoretically, increased personal control allows individuals to pursue their passions more effectively, resulting in greater achievements and driving economic development Thus, economic freedom is essential for fostering a nation's growth and prosperity by empowering people to make decisions about their own lives (Miller et al., 2018; Wu, 2011).
The promotion of economic freedom is linked to increased foreign entry, which can enhance economic growth through three key channels Firstly, the presence of foreign companies can lead to greater international investments and direct financial transfers, fostering stronger economic development Secondly, foreign entry raises domestic market standards as government policies and local products must align with international requirements, resulting in improved quality and positive impacts on economic growth Lastly, domestic firms benefit from technology transfers from foreign companies, boosting market efficiency and further contributing to economic growth.
Lower government influence, facilitated by greater economic freedom, can significantly enhance economic efficiency This improvement arises because government support and interventions often distort market activities, directing funds towards inefficient projects, whether in state-owned enterprises or private companies with strong political connections (Cali and Velde, 2011).
Political leaders often back state-owned enterprises and allocate financial resources to inefficient investment projects for personal gain Theoretically, increasing economic freedom reduces state ownership and government influence in the economy, which enhances market efficiency and institutional quality, ultimately promoting higher economic growth (Heckelman and Knack, 2008).
Labor freedom positively and significantly impacts economic growth, as evidenced by recent studies (Model 2) Research by Nikolaev and Bennett (2016) indicates that individuals tend to achieve more when granted the freedom to make their own life choices, driving the dynamics of economic growth This aligns with Gwartney and Lawson (2003), who suggest that allowing people to freely determine how to utilize their time, assets, and talents fosters strong motivation for economic development.
Increased labor freedom significantly enhances the quality of the domestic labor force, attracting high-skill labor and reducing unemployment rates, which in turn stimulates economic growth (Wu, 2011) Countries that offer greater benefits to labor are more likely to attract skilled workers, leading to improvements in labor quality that directly boost economic growth through enhanced innovation and market efficiency (Nelson and Phelps, 1966) Additionally, greater trade freedom helps to align labor market demand and supply, allowing entrepreneurs and workers to operate without regulatory constraints These factors collectively demonstrate how increased labor freedom can drive economic growth in ASEAN countries.
Table 3: Economic freedom and economic growth (GDP growth) in ASEAN countries
Fixed Fixed Fixed Fixed Fixed
Year effect Yes Yes Yes Yes Yes
The table presents the effects of economic freedom on economic growth within ASEAN from 2000 to 2017, employing fixed effects methods validated by the Hausman test The dependent variable analyzed is annual GDP growth, with significance levels indicated by ***, **, and * at 1%, 5%, and 10%, respectively Robust standard errors are provided in parentheses.
This study reveals a significant relationship between trade freedom and economic growth in ASEAN countries, indicating that increased trade freedom may actually hinder economic growth This phenomenon can be attributed to the inefficiencies of domestic firms that struggle to compete with foreign companies due to inadequate management, experience, technology, and capital Consequently, their underperformance adversely affects overall economic growth Additionally, heightened competition can elevate the risks within the economy, leading to a rise in non-performing loans in the banking sector when domestic borrowers fail, ultimately jeopardizing economic stability Overall, domestic firms in ASEAN countries often lack the international standards necessary to thrive in a competitive landscape.
41 management can suffer from the increased competitive levels, resulting in the lower economic growth
The analysis of control variables, excluding exports of goods and services, aligns with previous findings in Table 2 Notably, Table 3 reveals that increased exports of goods and services positively contribute to economic growth in ASEAN, as demonstrated in Models 5 to 10 Enhanced export activities enable domestic firms to tap into international markets, benefiting from technology spillover effects (Manwa and Wijeweera, 2016) Furthermore, a higher volume of exports signifies improved quality and standards of domestic goods and services (Manni and Afzai, 2012; Hye and Yeap, 2017).
Conclusions
Conclusions
In recent years, ASEAN countries have undergone a significant liberalization process aimed at achieving deep economic integration by 2020, focusing on enhancing trade, labor, and financial freedoms While the potential benefits of increased economic freedom on the economy are acknowledged, the specific impacts remain underexplored Furthermore, empirical research on the relationship between economic freedom and economic growth has yielded inconclusive results This study seeks to analyze the effects of economic freedom, trade freedom, labor freedom, and financial freedom on the economic growth of ASEAN nations from 2000 to 2017.
This study employs fixed effects models to address unobservable variables, revealing that increased economic freedom correlates with enhanced economic growth The findings suggest that greater individual autonomy and reduced government intervention in the economy foster higher growth rates Furthermore, higher economic freedom facilitates the entry of foreign competitors and ownership, which in turn promotes efficient competition, transparency, technological advancement, adherence to international standards, and an improved labor force These factors are essential for driving economic development and growth.
This study reveals that within the ASEAN community, increased labor freedom—characterized by relaxed regulations on minimum wages, work hours, and layoffs—correlates with enhanced economic growth By addressing the mismatch between entrepreneurs' demands and the available workforce, labor freedom facilitates the movement of skilled workers across member countries, thereby improving the overall quality of the labor force Additionally, a higher degree of labor freedom fosters experience, competition, and technology transfer, all of which contribute to a more skilled domestic workforce Ultimately, these advancements in human resource quality play a crucial role in driving economic growth.
This study provides strong evidence that increased trade freedom negatively impacts economic growth in ASEAN countries A key factor contributing to this trend is the inadequate management, technology, and capital within domestic firms, which hinders their ability to compete effectively against foreign competitors.
43 domestic firms can be negatively influence in a more intense competitive market, resulting in the lower economic growth
The findings highlight the importance of economic freedom, trade freedom, and labor freedom for the economic performance of ASEAN countries, suggesting that policymakers should enhance labor freedom to foster higher economic growth Additionally, promoting private sector development and strengthening domestic competitiveness will better equip these nations to compete with foreign counterparts Overall, this research adds to the growing body of evidence regarding the positive impacts of economic, labor, and trade freedoms on global economic growth.
Research limitations
This study faces limitations, notably the absence of economic freedom data for Myanmar and Brunei Darussalam, resulting in a sample that includes only eight out of ten ASEAN countries Additionally, employing fixed effects models may lead to biased outcomes due to endogeneity issues The study focuses on trade freedom, labor freedom, and financial freedom as proxies for economic freedom, aligning with ASEAN's goals of fostering an integrated market that allows for the free movement of goods, services, investments, skilled labor, and capital However, it is important to acknowledge that other significant indicators of economic freedom, such as property rights, business freedom, and investment freedom, are also crucial.
Future research recommendations
This study highlights several limitations and offers recommendations for future research To enhance the reliability of findings, future studies should employ robust econometric techniques, such as the Generalized Method of Moments (GMM) or Two-Stage Least Squares (2SLS), to effectively tackle endogeneity issues Additionally, expanding the economic freedom variables could provide deeper insights into their influence on economic growth within ASEAN countries.
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