THE ROLE OF ECONOMIC FREEDOM AND FINANCIAL DEVELOPMENT IN DRIVING SUSTAINABLE DEVELOPMENT
DOI:
https://doi.org/10.18623/rvd.v22.n6.4000Keywords:
Economic Freedom, Financial Development, Sustainable DevelopmentAbstract
This study examines the role of economic freedom and financial development in driving sustainable development using cross-country data from 2004 to 2021. Employing a Bayesian regression framework, the analysis accounts for parameter uncertainty and cross-country heterogeneity, providing probabilistic insights beyond conventional frequentist approaches. The empirical results reveal strong asymmetries between developing and developed economies. In developing countries, economic freedom is associated with lower sustainable development outcomes, indicating that market liberalization may intensify resource-intensive growth and environmental pressures when structural constraints persist. Financial development, however, exerts a positive direct effect, suggesting that improvements in financial depth and access can support sustainable development by enhancing capital allocation efficiency. Notably, the interaction between economic freedom and financial development is negative, implying that financial expansion combined with strong liberalization may channel resources toward short-term, unsustainable activities. In contrast, both economic freedom and financial development positively contribute to sustainable development in developed countries, and their interaction further reinforces this effect. These findings demonstrate that economic freedom does not automatically promote sustainable development and that financial development plays a critical conditioning role. The study highlights the importance of context-specific policies that align market liberalization with financial structures conducive to long-term sustainable development.
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