Impact of Good Governance on Economic Freedom in MENA Countries

اقتصاد و توسعه منطقه ای

Article 10, Volume 22, Issue 9, December 2015, Pages 246-288   

Document Type: مقالات پژوهشی

DOI: 10.22067/erd.v22i9.50926

Authors

Abolfazl Shahabadi^{* 1}; Mahsa. Ganji²

¹Bu-Ali Sina University- Hamedan

²Bu-Ali Sina University, Hamedan, Iran

Abstract

One strategy for economic development is Achieve desired economic freedom. Several factors have an impact on the economic freedom index, Therefore, it seems achieve to favorable economic freedom depends on an accurate understanding of the determinants and factors affecting economic freedom. The index published in economic freedom of the world measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property. Forty-two variables are used to construct a summary index and to measure the degree of economic freedom in five broad areas: Size of government; legal system and property rights, sound money, freedom to trade internationally, regulation. The cornerstones of economic freedom are (1) personal choice, (2) voluntary exchange coordinated by markets, (3) freedom to enter and compete in markets, and (4) protection of persons and their property from aggression by others. Economic freedom is present when individuals are permitted to choose for themselves and engage in voluntary transactions as long as they do not harm the person or property of others. While individuals have a right to their own time, talents, and resources, they do not have a right to those of others. Thus, individuals do not have a right to take things from others or demand that others provide things for them. The use of violence, theft, fraud, and physical invasions are not permissible in an economically free society, but otherwise, individuals are free to choose, trade, and cooperate with others, and compete as they see fit. To a large degree, the EFW measure is an effort to identify how closely the institutions and policies of a country correspond with the ideal of a limited government, where the government protects property rights and arranges for the provision of a limited set of “public goods” such as national defense and access to money of sound value, but little beyond these core functions. In order to receive a high EFW rating, a country must provide secure protection of privately owned property, even-handed enforcement of contracts, and a stable monetary environment. It also must keep taxes low, refrain from creating barriers to both domestic and international trade, and rely more fully on markets rather than government spending and regulation to allocate goods and resources. In many ways, a country’s EFW summary rating is a measure of how closely its institutions and policies compare with the idealized structure implied by standard textbook analysis of microeconomics. Improvement in Economic Freedom closely related to institutional indicators performance such as Good Governance index. So the aim of this study is an analysis of the Economic Freedom index and examines the impact of good governance on economic freedom index in MENA countries over the period 1996-2010 using exploratory and confirmatory factor analysis.
Theoretical frame work
The EFW’s annual reports emphasize the fact that the world’s richest countries are also its most liberal ones. This relationship is presented as a reason for encouraging developing countries to liberalize. The basic idea underlying this prescription is that poor countries can become wealthy by emulating rich ones, a contestable proposition that has been criticized by many scholars. Conceptually, economic freedom covers a wide range of economic indicators, so obviously many factors are involved to improve or weaken the index of economic freedom. Index of economic freedom is not only influenced their components, but on the other hand, strongly influenced by other institutional components as good governance index. Improving good governance index affects economic environment through various means such as political stability, increase government efficiency, curb inflation. Improving good governance indicators also will improve the economic freedom index as regulation, legal structure, property rights and market regulation recovery.
Methodology
In this study we have used factor analysis method. The purpose of exploratory factor analysis is to reduce a larger set of variables into a smaller range of factors denoting common underlying concepts. With complete-linkage hierarchical cluster analysis, MENA countries are divided into the same category in accordance with farthest euclidian (L2) distances between groups. Factor Analysis, includes exploratory and confirmatory factor analysis. Exploratory factor analysis is approach to reduce variables and identify the factors that are not empirically. Confirmatory factor analysis confirms or denies grouping data.
Results & Discussion
The analysis shows that economic freedom index is heavily influenced by the good governance index to the extent that legal system and property rights index is one of the indicators of economic freedom, is more closely associated with the good governance. A wide range of legal system and property rights index is defined by good governance indicators. The relationship between economic freedom index and the index of good governance is also confirmed.
Conclusions & Suggestions
Economic freedom and good governance are strongly connected. This means that indicators of good governance to pave the way to improve the economic freedom index. So the policy recommendations for policy makers that systematic review of institutional indicators is essential to improve economic outcomes. Good governance should considering as a prerequisite for improving other macroeconomic indicators. Resolve conflict and rectify the institutional indicators like economic freedom and good governance approved in developing countries.

Keywords: Economic Freedom, Good Governance, Exploratory and Confirmatory Factor Analysis, MENA Region

JEL Classification: P16, O11, H11

Keywords

Economic Freedom; Good governance; Exploratory and Confirmatory Factor Analysis; MENA Region

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