Investigating relationships between economic freedom, growth, and development in CEE countries

Over the last three decades, Central and Eastern European Countries (CEEC) have undergone profound institutional reforms to transition from centrally planned to market economies. Full EU membership began two decades ago, marking another significant milestone. The paper seeks to examine how the regulations and other institutions, as measured by the economic freedom indicator and its components, shape the economic growth and development of CEEC. Two research questions are posed. Data spanning from 1996 to 2021 for 11 countries are examined. We employ hierarchical clustering to identify homogeneous groups of countries and utilize panel cointegration tests and the AutoRegressive Distributed Lags model to find long- and short-term relationships. The study identifies four groups of countries according to the EF indicator. Two long-run statistical relationships are identified between GDP per capita and economic freedom and between the Human Development Index (HDI) and economic freedom. Granger causality test shows that in the short-run, GDP per capita and HDI preceded economic freedom, except for business freedom, which was a precursor to GDP per capita, and property rights, which preceded HDI. That underscores the role of institutional order in creating an environment conducive to growth and development.