MercoPress. South Atlantic News Agency

The Secret of Prosperity is Freedom

By Michael Magan (*)
On economic policy, Latin American leaders face a basic choice: Adopt old style government-heavy populism championed by Venezuelan president Hugo Chavez, or the market-friendly reforms instituted in countries like Brazil, Peru, and Chile?

Research from the Legatum Institute, an independent policy research organization in Britain, should make that choice a lot easier.

The 2009 Legatum Prosperity Index measures and ranks 104 countries, representing 90 percent of global population and it takes a holistic approach to measuring wealth and well-being.

Researchers considered both the economic variables required for long-term development, such as the rate of entrepreneurship, and non-economic variables related to citizens' quality of life, such as health and safety.

Hugo Chavez's home turf of Venezuela did particularly poorly in the rankings, coming in at 74th overall.

A big reason for Venezuela's weak showing is Chavez's habit of nationalizing businesses and industries once they're profitable. In October, Chavez ordered the state takeover of a Hilton hotel located on the resort island of Margarita. Over the past four years, he has nationalized an array of entire industries, including oil, steel, cement, banking, electrical utilities, and even coffee roasters.

These moves represent a blatant violation for property rights. And they have a chilling effect on entrepreneurship: People aren't going to start businesses if the government will just take them away once they're successful.

Unsurprisingly, the rate of new start-ups in Venezuela is abysmal, with the Index ranking the country a lowly 85th in the sub-category of “entrepreneurship and innovation.”

The sub-category Venezuela did the worst in, though, was “governance,” which tracks the accountability, efficiency, and trustworthiness of public agencies. Venezuela came in at 101st - rubbing shoulders with such countries as Yemen and Zimbabwe.

Chavez flaunts virtually every rule meant to check government authority. Back in July 2008, for instance, he granted himself special decree powers and unilaterally passed 26 laws expanding his control over the economy and armed forces. One of the new laws made Chavez-supporting militias an autonomous wing of the country's military, effectively giving the president his own private security force in the event his generals try to overthrow him again.

These moves scare away foreign investors, leading to a poor and unhappy citizenry.

And despite Chavez's “liberal” use of government police powers, huge chunks of the country aren't safe. The capital city of Caracas suffers from rampant crime, and has earned a reputation as one of the most dangerous cities in the Western Hemisphere. The Index reflects this reality, putting Venezuela at 93rd in the “safety and security” sub-category.

Nations allied with Chavez are also flailing.

Ecuador, for instance, came in at a weak 71st. President Rafael Correa has cut off all trade negotiations with the United States, and instead opted into a series of compacts with Chavez. The Correa regime also imposes costly restrictions on business, including a 2006 windfall revenue tax on oil companies.

The result? An economy “facing a lot of problems: a contraction in domestic demand, lack of investment and liquidity, a contraction of credit and a fall in remittances,” according to the country's own Finance minister, Mauricio Pozo.

The Bolivian economy has also suffered under socialist dictates. President Evo Morales has entered into a total of 34 cooperation agreements with Chavez, and nationalized big portions of the Bolivian economy, including the energy sector.

The adverse effects on business and investment have left Bolivia the poorest country on the continent, and a lowly 73rd on the Legatum Index.

It's a different story for the Latin American countries that have distanced themselves from Chavez and embraced personal freedom and market competition.

Take Uruguay.

At 33rd, it is the highest ranking Latin American nation on the Index. The country's well-educated workforce, relatively hands-off approach to business regulation, and open trade channels have made it a major source of foreign investment, particularly in the software and consulting industries.

Uruguay's real GDP growth rate was a robust 7% in 2006. And the IMF has identified it as one of only two major South American countries expected to grow despite this year's economic downturn.

Chile, just three spots down the Index at 36th, has achieved success through similar means. Starting in the 1980s, the country instituted a flurry of free market reforms, including privatizing its social security system, easing banking restrictions, and slashing tariffs.

While these moves have provoked a backlash, the facts show that they've generally worked. Between 1990 and 2003 Chile's poverty rate dropped 50%. And it's averaged 5 to 6% annual GDP growth since 2001.

Of course, Uruguay, Chile, and other market-oriented countries like Brazil still have a lot of room to improve. But their achievements so far indicate that freedom is essential to prosperity.

The Legatum Index shows that if Latin American countries want to become more prosperous, they should distance themselves from Chavez, reject populism, and allow markets to flourish.

* Michael Magan is Senior Vice President for Management and External Relations of the Legatum Institute, and has more than fifteen years of experience in the field of Central and South American affairs. The 2009 Legatum Prosperity Index is available at www.prosperity.com.