EspañolWhile the free market is guided by voluntary exchange, politics is directed by the state and its centrally planned mandates. Both of these paths intersect to a greater or lesser extent in modern societies. To effectively satisfy the needs and preferences of the public, both require certain rules and institutions that facilitate coordination between economic agents.
These institutions have a great impact on economic development, and countries that protect individual rights and restrain the power of the political class have more prosperous economies than those under the rule of a caudillo.
Argentinean economist Martín Krause recently visited Quito, Ecuador, to present the Institutional Quality Index (ICI), released each year by the Liberty and Progress Foundation (LyP). The index ranks countries based on how well their institutions shield individual rights from state power. In other words, it analyzes the quality of political and economic institutions, which are directly related with economic growth and a higher quality of life.
To calculate the ICI, researchers measure certain political indicators, such as legislation that protects individual rights, a functioning judiciary, accountability, free speech, and the degree of corruption as perceived by the public. They also assess certain economic factors, like how easy it is to do business in the country, global competitiveness, and economic freedom.
Switzerland tops the global ICI ranking, followed by Finland, New Zealand, Denmark, and Norway. Interestingly, these same countries also rank high in the 2014 UN Human Development Index, with Norway at the top, followed by Switzerland (3), New Zealand (7), Denmark (10), and Finland (24).
Chile, at the 22nd position, is the highest ranked Latin-American country. Ecuador, on the other hand, has dropped 81 positions in the last seven years, and is now ranked 151 out of 193 countries. Venezuela shows up at position 184, after Bolivia (139), and Argentina (137), all countries that belong to the “Bolivarian Alliance.”
It is important to have high quality institutions, because this is what generates the necessary incentives to attract investment and entrepreneurs. This, in turn, leads to more economic growth, which creates more opportunities for societies to prosper.
The arbitrary coercion of authoritarian rulers harm individual rights. Under the rule of populist leaders, governments create obstacles that prevent people from trading and entering into contracts voluntarily. The state punishes the most productive members of society with progressive taxes, artificially expands the money supply, generates inflation, limits free speech, etc.
No government program has ever lifted as many people out of poverty than economic liberty and the free market. The only way to earn a profit in the free market is by benefiting other people.
It does not matter whether you own a soda company or sell mail-order cosmetics, serving other individuals better than your competition is the only way to make money in a truly free market. This is how humanity’s entrepreneurial creativity has expanded throughout history.
Translated by Adam Dubove. Update: 4 p.m., July 24, 2015.