Why are some countries mired in poverty while others are prosperous? Are natural resources, geography or the consequences of history responsible for the divide between the rich and the poor, as some contend?
Blaming the rich fits neatly into the narrative of populist class warfare, but the data reveals something else: The more economic freedom a country enjoys, the more likely it is able to reduce poverty.
This is precisely one of the many conclusions that a team of economists and scholars come up with when compiling The Heritage Foundation’s Index of Economic Freedom, which we co-publish with The Wall Street Journal. Now in our 18th edition, the annual Index analyzes the relationship between greater economic freedom and economic opportunity and prosperity.
Index scores are based upon measures of regulatory efficiency, tax burdens, open markets, and the rule of law to determine the economic freedom for 179 countries. For example, under regulatory efficiency we look at how easy (or hard!) it is to start a business while the rule of law category studies the impact of corruption.
The United States continued to slip in this year’s rankings, falling from 9th to 10th place because of deteriorating scores for government spending, freedom from corruption and investment freedom. The U.S. dropped out of the coveted “Free” category two years ago; now we are only “Mostly Free.”
As a whole, Latin American countries reveal a study of contrasts. On the one hand you’ve got a country like Chile. It did exceedingly well in this year’s Index by embracing the free market and rejecting protectionist measures such as non-tariff barriers. On the other hand, you’ve got countries like Venezuela and Cuba. They finished at the very bottom of the world’s rankings. (A disappointing 174 and 177, respectively.) Venezuelan and Cuban regimes have wrapped themselves in the mantle of 21st century socialism, but economic freedom has been wiped out -- all that’s left for the people is misery and discontent.
And yet the lore of populism continues to draw millions of followers all across Latin America. For countries like Nicaragua and Ecuador, the temptation that the government can spend their way out a recession and generate wealth has been too great to resist. Unfortunately, the time-honored maxim by the great Margaret Thatcher continues to ring true: “The trouble with socialism is that you eventually you run out of other people’s money.”
For all the Latin America’s caudillos promise of lifting people out of poverty, their new breed of 21st century socialism has been a miserable failure.
Freedom, not repression, is the key to reducing poverty.