The Impact of Economic Freedom on Economic Growth in Western Balkan Countries

Roberta Bajrami, Kaltrina Bajraktari () and Adelina Gashi
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Roberta Bajrami: Department of Economics and Marketing, Faculty of Economics, AAB College, 10000 Pristina, Kosovo
Kaltrina Bajraktari: Department of Economics and Marketing, Faculty of Economics, AAB College, 10000 Pristina, Kosovo
Adelina Gashi: Department of Economics and Marketing, Faculty of Economics, AAB College, 10000 Pristina, Kosovo

JRFM, 2025, vol. 18, issue 8, 1-27

Abstract: Although it is generally accepted that economic freedom stimulates economic growth, its effects in transitional economies are still up for debate. More empirical research is needed to examine the long-term effects of economic freedom on growth in the Western Balkans, a region characterised by uneven reform trajectories, fiscal pressures, and institutional fragility. This study examines the effects of seven fundamental factors on real GDP per capita growth (annual percentage change) in six Western Balkan nations between 2013 and 2023. These factors include property rights, government spending, government integrity, business freedom, monetary freedom, trade openness, and education spending. Importantly, in order to better capture macroeconomic constraints, it takes into account two fiscal burden indicators: the public debt and the government budget deficit. A triangulated analytical framework is used: Random Forest regression identifies non-linear patterns and ranks the importance of variables; Bayesian Vector Autoregression (VAR) models dynamic interactions and inertia; and the Generalised Method of Moments (GMM) handles endogeneity and reveals causal relationships. The GMM results show that while government integrity (β = −0.0820, p = 0.0206), government spending (β = −0.0066, p = 0.0312), and public debt (β = −0.0172, p = 0.0456) have negative effects on growth, property rights (β = 0.0367, p = 0.0208), monetary freedom (β = 0.0413, p = 0.0221), and the government budget deficit (β = 0.0498, p = 0.0371) have positive and significant effects on growth. Although the majority of economic freedom indicators are statistically insignificant, Bayesian VAR confirms strong growth persistence (GDP(−1) = 0.7169, SE = 0.0373). On the other hand, the Random Forest model identifies the most significant variables as property rights (3.72), public debt (5.88), business freedom (4.65), and government spending (IncNodePurity = 9.80). These results show that the growth effects of economic freedom depend on the context and are mediated by the state of the economy. Market liberalisation and legal certainty promote growth, but their advantages could be offset by inadequate budgetary restraint and difficulties with transitional governance. A hybrid policy approach, one that blends strategic market reforms with improved institutional quality, prudent debt management, and efficient public spending, is necessary for the region to achieve sustainable development.

Keywords: economic freedom; GDP growth; generalised method of moments (GMM); Bayesian vector autoregression (VAR); random forest (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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