It’s a question that has perplexed politicians, philosophers and philanthropists for generations: Why are some countries rich and others poor?
Some say it’s a matter of luck—favorable geography or the presence of some high-demand resource. Others say it’s because wealthy countries don’t give poor ones enough financial aid. Still others insist that rich countries keep the poor ones down and exploit them.
What we need aren’t theories, though, but facts. What does the evidence show?
For more than a decade, The Heritage Foundation and The Wall Street Journal have carefully examined the evidence. Every year, for the Index of Economic Freedom, they sift through data on everything from inflation to imports, from tariffs to trade—and they do it for every country. And one big-picture message about poverty and wealth consistently shines through, year after year: Wealth and economic freedom go hand in hand.
Favorable geography? Tell that to the people of Asia, where some of the world’s wealthiest countries can be found remarkably close to some of the poorest. Here, you’ll find Hong Kong, the top-ranked country in the 2007 Index—a place with a $212 billion economy and a per capita income of $30,822. But you’ll also find poverty-stricken North Korea, which finished dead last in the Index. You’ll find wealthy Singapore and dirt-poor Bangladesh. And so on.
Asia isn’t the only region where such disparities exist. Some nations in South America suffer from terrible poverty; Venezuela, despite its huge oil reserves, is in pretty bad shape, with high unemployment and a per capita income of $6,043. But did you know that average income is 80 percent higher in nearby Chile, a big importer of oil? Why? Because Chile is one of the most economically free nations in the world. Ranked number 11 on the Index’s overall list, it beats many European nations.
The list could go on, but the trend should be clear: Poverty and riches aren’t dependent on chance or luck. What really makes a difference is policy. More specifically: How much economic freedom do people enjoy? Time and again, the Index shows, the more economically free people are, the more wealth they generate.
Here in the United States (4th globally in the Index rankings), we enjoy many economic freedoms. But how often do we consider the difference they make in our lives? Say you want to start a business. Sure, we complain about doing the paperwork, but it takes an average of just five days. Compare that to the world average of 48 days. Heck, compare it to Venezuela, where it would take about 141 days—more than four months! And once you get your business going, our government leaves you largely free to operate it as you see fit. Not in Venezuela, where complicated and inconsistent regulations make running a business extremely difficult.
Take another example. Here in the United States, for example, we can trade freely with most other countries. We enjoy dynamic financial markets, inflation is low, and we’re open to foreign investment. It’s easy to take all this for granted, even to think ourselves inherently wonderful, but what really separates us, economically, from many other nations isn’t talent or wisdom but freedom. Were our markets, trade and investment climate as constricted as that of Bangladesh, would we have an $11.7 trillion dollar economy? No way.
Other factors, ones we don’t even think of, exert a powerful influence on our “pursuit of happiness.” Take property rights. Yes, they are a component of economic freedom, and a vitally important one. If a business owner didn’t know that our legal system would fairly, impartially and consistently defend his property holdings, how could he expand his business and ensure that it works as effectively and efficiently as possible? Without property rights, he, and thousands like him, couldn’t concentrate on running a profitable business. You can imagine how this would damage our economy.
Still, we shouldn’t pat ourselves on the back too heartily. Our economy is hamstrung by two serious problems: government spending and high tax rates. Our top corporate rate of 35 percent, in particular, makes it hard for U.S. firms to compete globally; 29 of our 30 top trading partners tax corporate profits at lower rates. Even French President Jacques Chirac has called for reducing his country’s top corporate rate to 20 percent. Our federal spending, meanwhile, has surged 45 percent since 2001. With the right cuts in spending and tax rates, there’s no reason we should have to stay at No. 4 on the Index list.
Fortunately, no country is yoked to a particular level of economic freedom. Governments can make changes—and, in turn, make dramatic improvements. Index editor Tim Kane, for example, recently told me how the introduction of property rights in New Zealand’s fishing industry has encouraged ocean preservation efforts there—which, he notes, help both the environment and the industry’s bottom line.
In short, freedom isn’t a zero-sum game. The Index shows that governments that disavow repressive practices, open their economies and free the entrepreneurial spirit of their people aren’t giving up anything. They’re unleashing one of most mutually beneficial forces on earth—and making it possible for people not only to increase their material wealth, but to live their lives in peace and dignity.