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

• Published date: 01 February 2013
• DOI: http://doi.org/10.1111/rode.12013
• Author: Grigorios Livanis,Constantine Alexandrakis
• Date: 01 February 2013

Economic Freedom and Economic Performance in

Latin America: A Panel Data Analysis

Constantine Alexandrakis and Grigorios Livanis*

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 prop-

erty rights and a tighter monetary policy also raise output per worker, but greater freedom to trade interna-

tionally 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.

1. Introduction

In 2007 the United States of America had the highest Gross Domestic Product (GDP)

per worker in the world. To its north, Canada’s GDP per worker was 81% as high as

and similar to that of France and the United Kingdom.To its south, however, the best-

performing Caribbean country was Trinidad and Tobago with GDP per worker 60%

as high, and the best-performing Latin American country was Chile with GDP per

worker 33% as high. Why does the imaginary line that separates the US from Mexico

mark such real productivity differences between the population that lives to its north

and the one that lives to its south? In this study we test the hypothesis that these dif-

ferences reflect to some extent the varying degree to which the countries that occupy

the Americas have endorsed the allocative function of markets. To do so we use a

sample of Latin American and Caribbean countries to perform panel regressions of

output per worker, capital intensity, human capital and total factor productivity (TFP)

on measures of the size of government, the strength of property rights, the soundness

of money, the freedom to trade internationally and the degree of regulation.

In an influential paper, Hall and Jones (1999) use cross-sectional data to examine

whether the quality of a country’s institutions affects its output per worker.To address

the possibility of reverse causality they use fixed country-characteristics as instru-

ments. While their results do not refute the hypothesis that these characteristics influ-

ence the quality of institutions and, through it, economic performance, they are also

consistent with the hypothesis that the innate characteristics of a country affect its

ability to produce “market goods” and “social infrastructure” independently. There-

fore the correlation between institutional quality and economic performance is not

* Alexandrakis (corresponding author): Department of Economics, 104 Hofstra University, Hempstead,

NY 11549, USA; Tel: 516-463-6954; Fax: 516-463-6519; E-mail: constantine.alexandrakis@hofstra.edu.

Livanis: International Business & Strategy Group, College of Business Administration, 319 Hayden Hall,

Northeastern University, Boston, MA 02115, USA; Tel: 617-373-4801; Fax:617-373-8628; E-mail: g.livanis@

neu.edu.Author names appear in alphabetical order. The authors would like to thank three anonymous ref-

erees for comments that greatly improved the paper.

Review of Development Economics, 17(1), 34–48, 2013

DOI:10.1111/rode.12013

© 2013 Blackwell Publishing Ltd