Free Markets, Limited Government Keys To Prosperity

COMMENTARY International Economies

Free Markets, Limited Government Keys To Prosperity

May 20, 2014 3 min read

Former Research Fellow For Economic Freedom and Growth

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

For the last 20 years, the Index of Economic Freedom has evaluated the state of economic freedom in virtually every nation, documenting the critical link between economic opportunity and prosperity.

It shows how free-market, limited-government, rules-based capitalism helps people at every level of society to prosper.

This month the Heritage Foundation launched the third annual edition of a companion study — the 2014 Global Agenda for Economic Freedom. Based on the core principles of the Index, the Global Agenda prescribes specific corrective policies to improve economic freedom in every region of the world.

From Venezuela to Ukraine, real and tangible threats are on the rise everywhere. And because of that, the Global Agenda warns, promotion of economic freedom at home and abroad has become essential — not only to revitalize the U.S. economy, but also to improve our national security.

Too many countries are dominated by authoritarian regimes looking out for themselves — not their citizens.

For example, Russia and many other former Soviet states are plagued by mismanagement, corruption, abysmal rule of law, poor protection of property rights, and crumbling infrastructure.

In Russia, capital flight now far exceeds inflows of foreign direct investment.

No wonder Vladimir Putin would rather change the subject and distract people with his destructive foreign adventurism in Ukraine and Georgia!

As the Global Agenda notes, the Eurasian Customs Union that Putin wants to impose on those countries and others is a retrograde structure that serves only the interests of Russia's collapsing economy.

The picture is a little brighter in the Western Hemisphere where, as the Global Agenda notes, many Latin American countries are emerging as global leaders in free trade.

The Pacific Alliance (Mexico, Costa Rica, Colombia, Peru, and Chile along with potential member Panama) merits praise as a worthy model of regional economic integration that will enhance prosperity.

That's because Pacific Alliance (PA) countries take a market-led approach, with the state focused on enhancing transparency and efficiency in the flows of capital, goods, and ideas and maximizing investor confidence in the rule of law, the enforcement of contracts, and the protection of intellectual and real property.

The long-term benefits reflected by the willingness to follow these policies are reflected by their relatively high levels of economic freedom.

Unfortunately the report also notes the polarizing legacy of Venezuela's late president, Hugo Chavez, and his "21st century socialism" Bolivarian Alliance (ALBA) model.

Led by populist authoritarian caudillos (strongmen), the ALBA countries of Venezuela, Ecuador, Nicaragua, and Bolivia have been transformed into welfare dependencies where the rule of law has eroded. Argentina under Peronist President Cristina Kirchner is following that same road to serfdom.

The Global Agenda reports the results of these two approaches. PA countries, which enjoy per-capita incomes that are well above ALBA, are also far ahead in attracting the foreign direct investments — resulting in more economic growth and job creation.

The same holds true when it comes to metrics of non-commodity economic growth.

The challenge for all South American countries is to wean themselves from dependence on exports of basic agricultural and mineral commodities and other raw materials (i.e., the "Resource Curse") by adopting economic and other public policies that stimulate the growth of their services and value-added manufacturing sectors without resorting to the protectionism of past decades (e.g., the "import substitution" policies of the 1950s and 1960s).

Pacific Alliance countries are out in front of ALBA in this area as well.

Closer to home, the Global Agenda paints a mixed picture. It praises Mexico's many positive steps to challenge the private and public monopolies and duopolies (e.g., in energy, telecommunications, financial services and transportation) that have historically hampered huge portions of its economy.

Meanwhile, economic freedom continues to decline in the United States due to reckless deficit spending by government and ever-more burdensome regulation.

Milton Friedman once astutely observed that a major "objection to a free economy is precisely that it ... gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself."

The 2014 Global Agenda tells governments around the world what their citizens want: a world with more trade and investment freedom; a world with less corruption and more property rights; a world with less crony corporatism and fewer state-owned enterprises economic. In short, a world with more economic freedom.

 - Roberts is research fellow for economic freedom and growth in the Center for International Trade and Economics (CITE) at the Heritage Foundation.

Originally appeared in Investor's Business Daily