From governance to growth: Role of institutional quality in economic freedom

Institutions are central to economic development; yet the channels through which governance enhances economic freedom remain insufficiently understood. This study examines how three dimensions of governance—government cohesion, legislative strength, and popular support—affect contract viability, repatriation of profits, and payment delays across 120 countries from 2005 to 2020. The analysis combines instrumental variables, augmented inverse probability weighting, and dynamic panel autoregressive distributed lag models to evaluate the relationship between governance and economic freedom, while addressing endogeneity, selection concerns, and dynamic adjustment. The findings show that government cohesion has the strongest and most consistent effect on all three dimensions of economic freedom, followed by legislative strength, while popular support plays a more moderate but still meaningful role. The effects are generally larger in high-income countries but remain positive and economically meaningful in middle- and low-income countries. Overall, the results show that governance is not merely an administrative feature but a fundamental determinant of economic freedom and institutional reliability across diverse development contexts. • Governance quality strengthens key dimensions of economic freedom • IV and AIPW results confirm robust effects across country groups • Government cohesion is the strongest predictor of institutional reliability • Legislative strength also improves contract and investment conditions • Effects are strongest in high-income countries but persist in other economies