Economic Freedom and Economic Performance: The Case MENA Countries

The recent political up-rise in the Middle East and North African (MENA) economies sparks the light on evaluating the so called structural reforms that aimed at achieving economic freedom. This paper examines the impact of liberal policies on output per worker in 139 countries with a case study on MENA economies. Using panel least square estimation with fixed effects for a sample of 139 countries over the period 1970-2008, the study estimates the impact of different aspects of economic freedom on output per worker and its components; physical capital, human capital, and productivity. The economic freedom measure encompasses different areas including the size of the government, the protection of property rights and enforcement of contracts, the access to sound money, the freedom to access international markets, and the laxness of regulation of credit, labor, and business. In line with the results of Alexandrakis and Livanis (2013), the study finds a non-uniform impact of different areas of economic freedom on output per worker, capital intensity, human capital per worker, or total factor productivity. For instance, while trade freedom, fiscal freedom, monetary freedom, investment freedom, financial freedom, and freedom from corruption enhances output per worker, through the increase in human capital per worker, it does worsen it through a negative impact on capital intensity and total factor productivity. Furthermore, the study finds a significant reverse causality that runs from enhancing either output per worker or its three components on the economic freedom measure. While increasing output per worker or human capital per worker is reflected in an improvement in economic freedom measures, the opposite is found for the increase in capital intensity or total factor productivity. An important policy implication in this respect suggests that liberal economic policies in MENA countries might not be a pre-requisite for their enhanced future productivity.