Economic freedom and growth: the role of informal institutions

There is a common notion that economic freedom has a positive effect on economic development. However, despite formal institutions considered beneficial for economic freedom being increasingly recognised there persists large differences in economic development across the globe. A possible explanation can be found within the framework of informal institutions. Economic freedom being a transmission channel for culture-specific behaviour and attitudes could be one explanation to why simply having more economic freedom is not enough to permanently increase economic prosperity. This paper provides further insight on how institutions affect economic growth. By utilizing a panel of 86 developed, developing and less developed countries between 1980-2014 and fixed effects this paper attempts to establish a link between economic freedom and economic growth and investigate whether this link is determined by underlying cultural norms and values. Trust and self-determination are taken as measurements of culture from WVS and the results indicate that economic freedom is an appropriate transmission channel for the latter, but not the former. In addition, this paper posits that culture and economic freedom are both important for economic development and can both complement/substitute each other. (Less)