ABSTRACT
The alternative channels through which institutions affect growth
are outlined, and the empirical relationship between
institutions, investment, and growth is studied. The empirical results
indicate that: i. free-market institutions have a positive
effect on growth; ii. economic freedom affects growth through both
a direct effect on total factor productivity and an indirect
effect on investment; iii. political and civil liberties may stimulate
investment; iv. an important interaction exists between
freedom and human capital investment; v. Milton Friedman's conjectures
on the relation between political and economic
freedom are correct; and vi. promoting economic freedom is an effective
policy toward facilitating growth and other types of
freedom.