December 15, 1996 | Commentary on Foreign Aid and Development
In Hong Kong, for example, the per-capita gross domestic product (GDP) has increased from $2,279 in 1965 to $22,527 in 1995 -- a tenfold jump. In the Republic of China on Taiwan the increase was equally dramatic: from $1,133 to $13,235. This is extraordinary progress.
Unfortunately, such economic success is by no means universal. During the same 30-year period many other less-developed countries have stagnated or declined economically. In our own backyard, Haiti's per-capita GDP was $360 in 1965; by 1994 it was down to $225. Peru's per-capita GDP fell from $1,137 to $1,103. And Niger's was down from $617 to $272, a staggering 60 percent decline. (All numbers are expressed in constant 1987 dollars.)
This raises an obvious question: Why do some economies blossom and flower, while others whither on the economic vine?
The answer, while obvious in one sense, is not what typically comes to mind. Contrary to pupular belief, a country's economic success does not depend on its possession of, or access to, inexpensive natural resources, such as oil, on how productive its farmland is, or on the rate at which new technology is introduced into its economy.
While these can be important, they are not the key. Hong Kong, for example, must import all the raw materials and energy it uses, has no arable land to speak of, and was no more advanced technologically than any other developing country 30 years ago. Yet its economy has boomed.
By contrast, 10 percent of the land in the West African nation of Gabon is arable and the country is a major source of diamonds. But its economy is a basket case. Indeed, at $2,770, Gabon's per-capita GDP was larger than Hong Kong's in 1965. Today, however, it is about one-sixth the size of Hong Kong's. What accounts for this?
The answer is economic freedom. All of the countries that have graduated from the under-developed world to the developed world in the past 20 years -- Chile, Hong Kong, Singapore, South Korea, Taiwan -- have free economies. Gabon, Haiti, Niger and Peru have unfree economies, as do most other countries around the world.
The correlation between economic freedom and prosperity is clearly demonstrated by the "The Heritage Foundation/Wall Street Journal Index of Economic Freedom."
To conduct this study, we rated each of 150 countries on 10 economic factors that -- depending on the policies the countries pursue -- can either encourage or serve as an impediment to economic growth and wealth creation. Specifically, we looked at their banking, foreign investment, monetary, tax, trade, and wage and price policies; the size of their government sectors; property rights; regulatory restrictions; and black market activity, a "negative indicator" showing that something is amiss elsewhere in the economy.
Each country was given a rating of one to five in each category, one being the best, five the worst. The individual scores were then added up and averaged. Each country's average score on the "Index of Economic Freedom" was then overlayed on a grid showing the country's per-capita GDP.
What we found was more than a coincidence. In short: Virtually all of the countries with the highest per-capita income levels, or the most rapidly growing economies, were those with the best (i.e. lowest) scores on the "Index." Conversely, the poorest countries -- places like Angola, Cuba, Iran, Iraq, Laos, Mozambique, North Korea and Sudan -- have the worst scores on the "Index."
What does this mean in terms of global poverty? We asked economist William W. Beach, the former chief economist of Sprint Corp., to answer this question.
Beach chose as his example the People's Republic of Bangladesh, a South Asian country of 128 million residents whose per-capita GDP last year was just $1,290 -- less than half of what Gabon's was 30 years ago.
If the Bangladesh economy -- which ranks in the bottom quarter on the "Index" -- continues to "grow" at its current rate, Beach found, Bengali living standards won't reach the level currently enjoyed by the western nations for another 102 years. If, on the other hand, Bangladesh frees its economy and it can achieve a rate of growth equal to the "Four Tigers" of Asia, the Bengali people could be living as well as Americans do today in just 40 years.
Poverty is not a natural state for any country. It is largely a condition imposed on people by ill-conceived and repressive economic policies. Free up the latent economic energies of poor nations, and prosperity will follow.
Kim R. Holmes, Ph.D. is Vice President of Foreign and Defense Policy Studies and Director of the Kathryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation, Washington, D.C., where Bryan T. Johnson is a former policy analyst. They are co-editors, with Wall Street Journal Asst. Editorial Page Editor Melanie Kirkpatrick, of the 1997 "Heritage Foundation/Wall Street Journal Index of Economic Freedom." (Washington, D.C./New York, 520 pages, $24.95, plus shipping & handling). Copies can be ordered by calling (in the U.S. only) 1-800-975-8625.