Spatial and Causal Interaction of Economic Freedom, Trade, Geography and Corruption in Explaining Economic Development.

In spite of the increasing wealth of individual countries over time, we witness an ever increasing gap between rich and poor countries across space. The question that naturally emerges is what has brought rapid economic growth in the well-developed countries while the less developed countries have been left far behind. In this paper, I examine the divergent patterns of economic development across countries, using the standard spatial analysis methods. Besides, I test the impact of economic freedom, trade, geographic distance and institutional quality on economic development, using the standard statistical methods. The findings of the spatial analysis demonstrate that neighboring countries have the same characteristics in terms of economic development. To put it simply, economically developed countries are located in one part of the globe while underdeveloped countries are clustered in another part of the globe. The preliminary statistical results are strongly in favor of institutions, supporting the arguments of the mainstream literature on the effect of institutions on economic performance. The trade variable is statistically insignificant. Economic freedom and geographic distance shape economic development to some degree although the effect of economic freedom decreases dramatically when one introduces the institutional quality variable into the equation. Thus, the findings of the paper are at loggerheads with preferred development policies such as economic freedom and free trade that international donors have been recommending for developing nations, while the root problem remains weak institutions that allow corruption to flourish, impeding economic growth. [ABSTRACT FROM AUTHOR]