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Heritage Ranking Reveals the Good, the Bad, the Ugly

By: Contributor - Feb 3, 2015, 10:35 am

The Heritage Foundation recently released its 2015 Index of Economic Freedom. For over 20 years they, in partnership with the Wall Street Journal, have published this annual ranking that measures levels of economic freedom and institutional stability of countries around the world.

The ranking assigns countries scores based on 10 categories, such as rule of law, limited government, regulatory efficiency, and open trade. These indicators ultimately demonstrate that there is a strong correlation between the levels of economic freedom enjoyed by countries and their respective standards of living.

These rankings shed some light on the current state of affairs in the Western Hemisphere. The reality is that the region has been a mixed bag when it comes to economic freedom as of late. We’ll take a look at some of the most notable cases.

United States and Canada

In the Western Hemisphere, Canada is at the top of the rankings at sixth place, followed by Chile in seventh place and the United States in 12th. The United States and Canada have stayed solidly within the top 15 positions since the rankings were first released.

These two countries have enjoyed First World standards of living for decades, given their strong proclivities towards free-market policies and the Anglo-Saxon traditions that guide their political institutions. The United States, however, has seen a considerable decrease in economic freedom over the past five years, but it still remains well off when compared to the rest of the world.

Chile

Chile stands out above the rest of Latin America at seventh place, despite the current government’s efforts to push in the other direction. Chile is the most economically developed country in Latin America and is a beacon of economic freedom for her neighbors and the rest of the world.

Chile’s success is due to its strong institutions and the wide-ranging economic reforms the nation undertook during the 1980s, which effectively lifted it out of the economic doldrums. There is still much work to be done for Chile to join the ranks of the First World, but its experience demonstrates that it is possible for countries in Latin America to enjoy persistent economic growth.

Colombia

Colombia, in 28th place, has been historically rife with violence but is now starting to get its institutional house in order. Colombia’s move up the economic-freedom rankings is thanks to the various free market reforms and security measures carried out by ex-president Alvaro Uribe during his two terms in office (2002-2010). Many of these reforms have stayed intact during the administration of current president Juan Manuel Santos. Unfortunately, there is still widespread corruption in Colombia, and there is reason to doubt whether Santos’s dealings with the FARC will bring deliver peace.

Mexico

Since the 1990s, Mexico has been a regional leader in free-trade policies, through its participation in NAFTA (North American Free Trade Agreement) the Alliance of the Pacific and other trade agreements with countries such as Japan, Israel, and the European Union.

Unfortunately, Mexico is still plagued by regulatory inefficiency and outdated licensing requirements. Worst off all, rampant drug trafficking, corruption, and security problems have stymied economic growth and investor confidence. The aforementioned factors have effectively landed Mexico a mediocre 59th place in the Heritage ranking.

And on to the cellar dwellers.

Brazil

Despite strong economic growth spurred by high commodity prices over the past decade, Brazil comes in at a measly 118th place in the freedom index. This is due to onerous licensing requirements, rising inflation, restrictive trade policy, price controls, and an inefficient judiciary.

Brazil has generally been one of the more protectionist economies in the world and has been slow to adopt broad trade liberalization measures. A resource-rich country that has benefited from various commodity booms, Brazil has yet to reach its true potential due to its institutional defects.

Argentina

Argentina’s 169th place should come as no surprise. The country has been on a 70-year economic roller coaster ride since Juan Domingo Perón came to power. His populist legacy has left an ideological footprint on Argentinean politics, which Cristina Fernandez de Kirchner has perpetuated during her administration. Characterized by rampant inflation, stringent currency controls, stagnant economic growth, and widespread corruption, Argentina has one of the most repressed economies in the world.

Venezuela

Last but certainly not least is Venezuela at 176th. Venezuela may just be the best example in contemporary times of what happens to a country when it adopts hardline socialist policies. In short, Venezuela is Argentina on steroids.

Shortages of basic goods, shocking levels of inflation, oppressive capital controls, and political repression are the order of the day. The country has practically become uninhabitable. As a result, hundreds of thousands of Venezuelans are waiting in line to leave the country.

The Venezuelan case should serve as a fair warning to all who believe that socialism is a viable economic system. Once a vanguard country in Latin America, Venezuela has become a global laughing stock and is quickly heading to banana republic status.

Aside from those noted here, the other countries in the Americas tend to hover between 5oth and 170th. In other words, the region still has a lot of work to do when it comes to economic freedom.

Of particular interest is that there is a clear divide in terms of economic stability and performance between countries that are members of the Pacific Alliance (Chile, Colombia, Mexico, and Peru) and MERCOSUR (Argentina, Brazil, and Venezuela) trade blocs. The Pacific Alliance is the free-market oriented of the two regional blocs and has seen much more meaningful integration and economic activity than its more protectionist counterpart.

If Latin-American countries want their place in the sun, they must follow the free-market road. The Chilean model is the most practical example of achieving that goal. But in reality, these countries (even Chile) should go much further and adopt the Hong Kong and Singaporean models (numbers one and two in the ranking). There is some hope on the horizon with the rise of the Pacific Alliance and the ZEDE (Zone for Employment and Economic Development) project in Honduras.

It is incumbent upon Latin-American intellectuals and public policy makers, though, to understand that economic growth does not happen by magic. Its steady rise is the logical result of policies and frameworks that enable mutually beneficial, voluntary exchange.

There are no shortcuts in the path to prosperity. Plain and simple.

Edited by Fergus Hodgson.