Economic freedom, inclusive growth, and financial development: a heterogeneous panel analysis of developing countries

The effective and efficient management of financial systems and resources fosters a socioeconomic climate conducive to technological and innovative advancement, thereby fostering long-term economic growth. The study used panel data from 72 countries classified as less financially developed between 2009 and 2017 to examine the role of economic freedom and inclusive growth in financial development. For the long-run estimations, we utilised the linear dynamic panel GMM-IV estimator, panel corrected standard errors (PCSE) linear regression method, and contemporaneous correlation estimator, a generalised least squares method. Our analyses indicate that economic liberty, inclusive growth, and capital stock significantly contribute to financial development in a positive manner. Moreover, inclusive growth contributes positively to overall financial development by enhancing economic freedom. Regardless of exogenous and endogenous shocks, we found that the tax burden and investment freedom are negative drivers of financial development as measured by the overall financial development index. In contrast, protection of property rights, government spending, monetary freedom, and financial freedom are positive and significant drivers of economic growth.