Unpacking Corruption: The Role of Economic Freedom in Developing Countries

This comprehensive study examines the effects of economic freedom on corruption in a panel of 92 developing countries from 1995 to 2021. The study uses two composite measures of economic freedom: the Fraser Institute and the Heritage Foundation. The study also tests individual subcomponents of each composite economic freedom measure (e.g., regulation and government size). The study finds composite economic freedom measures moderate corruption. The results are robustly tested and consistent across three corruption measures (i.e., ICRG, Transparency International, World Bank), model specifications, and econometric frameworks (e.g., OLS, FE, RE, FGLS, GMM). The study uses the Method of Moment quantile econometric framework to test if there is an uneven effect based on the corruption environment (e.g., low corruption versus high corruption). The study finds economic freedom reduces corruption even in countries with the most rampant corruption, which counters findings from other studies. Economic freedom subcomponent analysis reveals property rights protection and deregulation are particularly effective at reducing corruption. One dimension of economic freedom that can exacerbate corruption is smaller governments, as they may lack the capacity to provide adequate oversight and enforcement of laws and regulations.