Latin America’s Tale of Two Countries


Latin America’s Tale of Two Countries

Mar 22nd, 2012 2 min read
James M. Roberts

Research Fellow For Economic Freedom and Growth

James M. Roberts' primary responsibility is to edit the Rule of Law and Monetary Freedom sections of Index of Economic Freedom.

It’s a well-kept secret, but Latin America boasts one of the world’s 10 freest economies. Chile ranks seventh globally — ahead of the 10th place United States, in fact — according to the 2012 Index of Economic Freedom.

That’s cause for celebration in Santiago. Studies show economic freedom is closely related to stronger economic growth and prosperity — and with other desirable outcomes ranging from environmental protection, to wellness, to general “happiness.”

Of course, not all the news from Latin America was positive. The Index shows the region also is home to two of the world’s most repressed economies: Venezuela (ranked 174th) and Cuba (177th). Only Zimbabwe and North Korea offer their citizens less economic freedom than the Castro regime.

The Cuban economy has been repressed for decades. That’s not the case in Venezuela. Comparing what’s happened over the last dozen years in Chile to what’s happened in Venezuela vividly illustrates the benefits of economic freedom.

Hugo Chávez came to power in Caracas in 1999. At that time, economic reforms advanced by the democratic government of Patricio Aylwin were already well under way in Chile. Still, the two nations were far from polar opposites in terms of economic freedom.

In 1999, the Index already ranked Chile 12th in the world, with a rating of 74.1 (out of a possible 100). Venezuela ranked 99th out of 179 nations with a 56.1 rating. But Chile continued marching toward greater economic freedom while Venezuela, under Chávez, made a hard U-turn.

As president, Chávez has done away with property rights and imposed foreign-exchange controls. Along the way, he has nationalized many private businesses, from agricultural producers and financial institutions to oil and steel companies. This approach, notes the CIA Fact Book, has “hurt the private investment environment [and] reduced productive capacity . . . ”

The strongman’s misguided push to tighten government control of the economy has produced dramatic changes. In its annual report measuring the quality of life in nations around the world, London’s Legatum Institute notes that, in Venezuela, cronyism is now rampant, “[t]he rule of law is incredibly weak,” and it has “one of the most inefficient bureaucracies in the world.”

And Venezuelans are paying the price: a chronic electricity crisis, food shortages, an epidemic of crime and the lowest economic growth rate in the Americas. They also suffer from the worst inflation in Latin America — the rate improved to “only” 27 percent in 2011.

Contrast that with Chile, where free-market policies have produced economic growth averaging 4 percent annually since 2009. Barriers to free trade are low, and foreign investment is welcome. Indeed, from 2004 to 2010, direct foreign investment quadrupled.

As of November 2011, Chile had more than $18 billion banked against the next downturn and an economy getting stronger by the day. GDP, which increased more than 5 percent in 2010, increased at a 6-percent clip in 2011. And all that growth came despite an 8.8-magnitude earthquake — one of the 10 strongest on record — that rocked the nation in early 2010.

Blessed with a free economy, Chile was able to pick up the pieces, recover and move on to even greater prosperity. Compare that to Venezuela, where a sharp drop in oil prices caused an economic contraction in 2009-2010. Though Chávez has devalued the currency twice within the last two years, Caracas still ended 2011 with a budget deficit running 5.3 percent of GDP and sharply higher national debt.

After 12 years of Chávez, economic inequality is far greater in Venezuela than in Chile, and a greater proportion of Venezuelans face a daily struggle to afford adequate food and shelter.

Small wonder, then, that Legatum reports “[m]any among Venezuela’s professionals, intellectuals and members of the middle class choose to emigrate . . . ”

Chávez has chosen to replace the hidden hand of free markets with the dead hand of government control. His people are the poorer for it — literally and in terms of the overall quality of their lives.

Chile and Venezuela present a “natural experiment” — one that proves, once again, the value and virtue of economic freedom.

James M. Roberts is a research fellow at The Heritage Foundation’s Center for International Trade and Economics.

First appeared in The Miami Herald