Effects of Corruption and Economic Freedom on Total Factor Productivity in Middle- and High-Income Countries

Abstract

This study aims to verify the effects of corruption (CPI), economic freedom (EF), and the interaction between these two variables (CPI×EF) on the growth of Total Factor Productivity (TFP) in middle and high-income countries from 1995 to 2019, using a two-step system GMM method for panel data. The results show that reduced perceived corruption and greater economic freedom are positively associated with TFP growth. However, the interaction term has a negative coefficient associated with TFP, suggesting that in countries with high levels of corruption and low economic freedom, which is often found in middle-income countries, implementing anti-corruption policies along with incentives for economic liberalization is a factor of great relevance to achieve higher productivity gains.