Aggregation effect of economic freedom and total factor productivity growth with biased technological change

Abstract

Economic freedom has an important impact on total factor productivity (TFP) growth; however, the impact of different sources that comprise economic freedom is not clear and the effect of biased technological change has not been considered. This paper presents an exploration of the impact of economic freedom on TFP growth with biased technological change in terms of heterogeneity in the composition of economic freedom. This paper uses the Economic Freedom Index and its five subdimension indices from the Fraser Institute, introduces the biased technological change hypothesis, and demonstrates the impact of economic freedom and its aggregate effects on TFP growth with biased technological change. Panel analysis was conducted using data from 64 sample economies between 1980 and 2019. The empirical test results indicate the following: First, an increase in the level of economic freedom has significantly promoted TFP growth with biased technological chang but excessive economic freedom leads to a reversal in TFP growth with biased technological change, which can be mitigated by effective improvements in government size. Second, economic freedom in different dimensions and sectors not only independently influences TFP growth with biased technological change as an individual factor within a systemic whole but also collaboratively affects TFP growth with biased technological change to produce complex aggregation effects. Especially when promoting international trade and investment freedom, choosing to indiscriminately relax credit, labor, and business regulations may stimulate excessive flows of international capital and speculative activities, thereby worsening TFP growth with biased technological change.