Does Economic Freedom Influence Economic Growth? Evidence from Latin America

Abstract

This paper investigates the relationship between economic freedom and economic growth in Latin America and the Caribbean over the period 1997–2023, using data from 14 countries. To capture the multidimensional nature of economic freedom, two widely recognized indices—Heritage and Fraser—are incorporated into an extended Solow-type growth model. The empirical strategy relies on a dynamic panel data approach using the Arellano–Bond estimator, which allows for the control of unobserved heterogeneity, autocorrelation, and potential reverse causality. Robustness is assessed through alternative model specifications and in-sample forecasting using rolling-window techniques and Theil’s U-statistic. The results reveal a negative and statistically significant relationship between economic growth and the Heritage Index, while the Fraser Index shows a positive but generally non-significant effect. These findings highlight the methodological sensitivity of the economic freedom–growth nexus and suggest that context-specific institutional factors may shape how liberalization policies translate into development outcomes. The study contributes to the literature by jointly evaluating the impact of both indices in a unified dynamic framework, providing new evidence for a region marked by institutional heterogeneity and growth volatility.