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Posts Tagged ‘Chile’

The good thing about being a libertarian is that real-world events repeatedly demonstrate that your skepticism of big government is fully justified.

  • Nations that adopt dirigiste policies don’t do well.
  • States that adopt dirigiste policies don’t do well.
  • Localities that adopt dirigiste policies don’t do well.

The bad thing about being a libertarian is that there are very few governments that even partially follow laissez-faire policies.

Moreover, there’s always a risk that those few governments with reasonably good policy will veer in the wrong direction.

I worry that’s happening in Hong Kong, and I fear it may happen today in Chile if voters make the wrong choice in a national referendum.

In a column for Quillette, Axel Kaiser from Chile’s Adolfo Ibaniez University analyzes what is happening.

In an extraordinary development, Chileans are deciding whether they want to create an entirely new constitution from scratch or preserve the existing one. …Chileans will also vote on whether the new constitution will be drafted by a mixed constitutional convention of politicians and elected representatives from the citizenry, or a constitutional assembly composed entirely of citizens. In either case, decisions by the body would require a two-thirds majority, and its deliberations must be completed within a year. …the new process portends a period of political instability, and the specter of open-ended conflicts and stand-offs between different branches of government. …To many outside Chile, it may seem strange that what has been arguably the most stable and prosperous country in Latin America would circumvent its institutions in this way… But in fact, the creation of an entirely new constitutional order has long been an ambition of the Chilean Left. …Revolutionary efforts to upend existing constitutional schemes have been a common feature in Latin America since the 19th century. …The idea that a new constitution will provide Chile with an instant solution…various forms of social conflict has become an attractive delusion. Yet the more likely scenario is that it will simply legally encode the unrealistic ideological demands that brought Chile to this point in the first place. ……many voters seem…swayed by extravagant promises of the future benefits they will enjoy under a new (and as yet undrafted) constitution. …56 percent of Chileans believe that a new constitution would lead to higher pensions, better education, and superior health care, among a long list of other improvements.

And he also explains why voters should be big fans of the current constitution.

At least if they care about good results, especially for those with lower incomes.

Under the period covered by the current constitution, inflation—which had peaked at over 500 percent in 1973—fell below five percent by the 2000s. Between 1980 and 2015, per-capita income in Chile quadrupled to $23,000—the highest growth rate in Latin America. More importantly, life expectancy rose from 69 to 79, and levels of housing overcrowding fell to one-quarter of its pre-1980 levels. The middle class, as that category is defined by the World Bank, grew from 24 percent of the population in 1990 to 64 percent in 2015. Extreme poverty fell from 34 percent to less than three percent. Between 1990 and 2015, the income of the richest 10th of the population grew a total of 30 percent, while the income of the poorest 10th saw an increase of 145 percent. The Gini index, a widely used statistic that measures income inequality, fell from 52 in 1990 to about 48 in 2015. Chile also held the highest position among Latin American nations in the 2019 UN Human Development Index.

Mary Anastasia O’Grady, in her Wall Street Journal column, is concerned that Chileans may be poised to make a big mistake.

Chile is on the cusp of collective political and economic suicide… On Oct. 25 Chileans will vote on whether the country needs a new constitution. Polls indicate that the “yes” vote will prevail even as the process of rewriting the highest law in the land is shaping up to be a disaster.A new constitution is likely to put at risk the model of democratic capitalism that brought Chilean poverty to below 10% in 2018, from nearly 70% in 1990. Chile also had the highest social mobility in a 2018 Organization of Economic Cooperation and Development study of 16 member countries. …Many Chileans seem to believe that a new constitution will make things right, à la Hugo Chávez’s Venezuela circa early 2000s. …Referendum backers say it is a “democratic” process. It is certainly majoritarian. But Chileans are bound to be disappointed if higher living standards and greater opportunity are the goal. The nation will be lucky if it finishes the exercise on par with the impoverished Argentine welfare state. …expect a document that reads like a litany of unattainable aspirations.

Some people favor majoritarianism, of course, especially if the result is a new set of “positive rights” to other people’s money.

In a column for the New York Times, Professor Michael Albertus hopes a new constitution will incorporate statist economic policy.

Chileans will vote to reject or approve the start of creating a new constitution. The citizens of more countries should do the same. The country’s current Constitution…has protected conservative interests and the military and has suppressed political dissent for 40 years. …The vote to convene a constitutional assembly in Chile could lead to a new document that brings the leadership closer to the people… It could also enshrine greater rights for labor unions, establish health care and education as fundamental rights… Most of Chile’s protesters and their supporters are largely motivated by bread and butter issues like higher pay, gender equity, improved health care access and quality medical care, pension reform, more rights for Indigenous peoples, access to affordable public transportation and free public education. …Protesters view a new constitution as key to delivering on these demands.

So why might Chileans be willing to gamble with their nation’s prosperity?

Early this year, Axel Kaiser offered some insight in a column in the Wall Street Journal.

He blames a left-leaning former government for creating economic malaise.

The economic pain started with the antimarket reforms of the previous government under Socialist President Michelle Bachelet, from 2014-18. Ms. Bachelet increased corporate taxes by 30%; signed a law banning the replacement of workers on strike, thereby dramatically increasing the costs of labor; increased public spending at three times the economic growth rate; and unleashed armies of regulatory bureaucrats on the private sector. Capital investment fell in each year of her term. Such a consistent reduction in investment hasn’t happened since data was first collected, in the 1960s. Economic growth collapsed from an annual average of 5.3% under the previous government of Mr. Piñera (2010-14) to 1.7% under Ms. Bachelet. Real wage growth took a 50% hit.

By the way, I take no pleasure in having predicted that Ms. Bachelet’s tenure would yield bad results.

But let’s not focus on her mistakes.

Indeed, Mr. Kaiser thinks her bad policies (and the anemic Bush/Macri/Sarkozy-type approach of the current government) are largely a reflection of a bigger problem.

The policies result from a profoundly false narrative Chilean elites tell themselves about the country. Over the past 20 years, intellectuals, media personalities, business leaders, politicians and celebrities in this Latin American nation have marketed the myth that Chile is an extreme case of injustice and abuse. It began at the universities, where progressive ideologues spread the idea that there was nothing to feel proud about when it came to Chile’s social and economic record. …Ms. Bachelet’s second term and her social justice-driven agenda were the inevitable result. …The free market didn’t fail Chile… The central problem is that a large proportion of the elites who run key institutions—especially the media, the National Congress and the judiciary—no longer believe in the principles that made the country successful. The result is a full-blown economic and political crisis. Other nations should take note: This is what elite self-hatred can do for you.

I wonder if Alex is referring to the United States when warning other nations about the danger of “elite self-hatred.”

It’s certainly true that many elites in America are quite disdainful of the nation’s economic system. Which has always mystified me since that system enabled their success – or the success of their parents, which allows them to lead very comfortable (albeit guilt-ridden) lives.

More important, it enabled ever-higher living standards for ordinary people, which should please folks on the left, at least if we believe their rhetoric (though I fear many of them are more motivated by hostility to the rich rather than love for the poor).

But let’s not digress. I want to close by noting that poor people have been the biggest winners from Chile’s free-market reforms.

This tweet from Professor Daniel Lacalle is a perfect example. It shows how poverty has plummeted, regardless of which measure is used.

The bottom line is that lower-income people have enjoyed the biggest income gains. And that bit of data is especially impressive given how fast income has grown for the entire country.

P.S. I’ve already written that the most important referendum for 2020 is the upcoming vote whether to retain the Illinois flat tax. Perhaps I should have listed today’s vote in Chile?

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Yesterday’s column was my annual end-of-year round-up of the best and worst developments of the concluding year.

Today I’ll be forward looking and give you my hopes and fears for the new year, which is a newer tradition that began in 2017 (and continued in 2018 and 2019).

With my glass-half-full outlook, we’ll start with the things I hope will happen.

Supreme Court strikes down civil asset forfeiture – It is nauseating that bureaucrats can steal property from citizens who have never been convicted of a crime. Or even charged with a crime. Fortunately, this disgusting practice already has attracted attention from Clarence Thomas and other sound-thinking Justices on the Supreme Court. Hopefully, this will produce a decision that ends this example of Venezuela-style government thuggery.

Good free-trade agreements for the United Kingdom – This is a two-pronged hope. First, I want a great agreement between the U.S. and the U.K., based on the principle of mutual recognition. Second, I want the best-possible agreement between the U.K. and the E.U., which will be a challenge since the political elite in Brussels has a spiteful desire to “punish” the British people for supporting Brexit.

Maduro’s ouster in Venezuela – I already wished for this development in 2018 and 2019, so this is my “Groundhog Day” addition to the list. But if I keep wishing for it, sooner or later it will happen and I’ll look prescient. But I actually don’t care about whether my predictions are correct, I just want an end to the horrible suffering for the people of Venezuela.

Here are the things I fear will happen in 2020.

A bubble bursts – I hope I’m wrong (and that may be the case since I’ve been fretting about it for a long time), but I fear that financial markets are being goosed by an easy-money policy from the Federal Reserve. Bubbles feel good when they’re expanding, but last decade should have taught us that they can be very painful when they pop.

A loss of economic liberty in Chile and/or Hong Kong – As shown by Economic Freedom of the World, there are not that many success stories in the world. But we can celebrate what’s happened in Hong Kong since WWII and what’s happened in Chile since the late 1970s. Economic liberty has dramatically boosted prosperity. Unfortunately, Hong Kong’s liberty is now being threatened from without and Chile’s liberty is now being threatened from within.

Repeal of the Illinois flat tax – The best approach for a state is to have no income tax, and a state flat tax is the second-best approach. Illinois is in that second category thanks to a long-standing provision of the state’s constitution. Needless to say, this irks the big spenders who control the Illinois government and they are asking voters this upcoming November to vote on whether to bust the flat tax and open the floodgates for an ever-growing fiscal burden. By the way, it’s quite likely that I’ll be including the Massachusetts flat tax on this list next year.

I’ll also add a special category for something that would be both good and bad.

Trump gets reelected – Because Trump is producing better tax policy and better regulatory policy, and because of my hopes for judges who believe in the Constitution’s protections of economic liberty, it would be good if he won a second term.

Trump gets reelected – Because Trump is producing worse spending policy and worse trade policy, and because of my concerns never-ending Keynesian monetary policy from the Federal Reserve, it would be bad if he won a second term.

Happy New Year, everyone.

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Last month, I criticized the New York Times for a very inaccurate attack against Chile’s successful pro-market reforms.

The paper’s editorial asserted that only the rich have gained, a view that is utterly nonsensical and inaccurate.

Indeed, I visited Chile about a year ago and finished a three-part series (here, here, and here) showing how the less fortunate have been the biggest winners.

But numbers and facts are no match for ideology at the NYT.

We now have a new story, written by Amanda Taub, asserting that free markets have failed in Chile.

For three weeks, Chile has been in upheaval. …Perhaps the only people not shocked are Chileans. …The promise that political leaders…have made for decades — that free markets would lead to prosperity, and prosperity would take care of other problems — has failed them. …Inequality is still deeply entrenched. Chile’s middle class is struggling… There is broad agreement, among protesters and experts alike, that the country needs structural reforms.

This view is echoed by a Chilean professor in a column for the U.K.’s left-leaning Guardian.

Inequality in Chile is scandalous and most middle-class Chileans live in precarity. …the country has a structural problem with a clear name: inequality. The per capita income of the bottom quintile of Chileans is less than $140 a month. Half the population earns about $550. …This crisis is, at heart, an urgent message to the Chilean elite: profound changes are needed to rebuild the social contract.

But if Chile is a failure, then other nations in Latin America must be in a far worse category.

Look at what’s happened to average incomes over the past three decades.

It’s also worth noting Argentina’s decline and Venezuela’s collapse. Does Ms. Taub prefer those outcomes over Chile’s growing prosperity?

Speaking of which, here’s a powerful video comparing Chile and Venezuela.

So why is there discontent when Chile has been so successful?

In her Wall Street Journal column, Mary Anastasia O’Grady worries that the left controls the narrative in Chile.

…the hard left has spent years planting socialism in the Chilean psyche via secondary schools, universities, the media and politics. Even as the country has grown richer than any of its neighbors by defending private property, competition and the rule of law, Chileans marinate in anticapitalist propaganda. The millennials who poured into the streets to promote class warfare reflect that influence. The Chilean right has largely abandoned its obligation to engage in the battle of ideas in the public square. Mr. Piñera isn’t an economic liberal and makes no attempt to defend the morality of the market. He hasn’t even reversed the antigrowth policies of his predecessor, Socialist Michelle Bachelet. Chileans have one side of the story pounded into their heads. As living standards rise, so do expectations. When reality doesn’t keep up, the ground is already fertile for socialists to plow.

Incidentally, even the center-left Economist doesn’t agree with the argument that Chile is a failure.

In Chile, free-marketeers’ favourite economy in the region, protests against a rise in fares on the Santiago metro descended into rioting and then became a 1.2m-person march against inequality… Despite its flaws, Chile is a success story. Its income per person is the second-highest in Latin America and close to that of Portugal and Greece. Since the end of a brutal dictatorship in 1990 Chile’s poverty rate has dropped from 40% to less than 10%. Inflation is consistently low and public finances are well managed. …This is no argument for complacency in Chile. …Chileans still feel underserved by the state. They save for their own pensions, but many have not contributed long enough to provide for a tolerable retirement. Waiting times in the public health service are long. So people pay extra for care.

Sadly, the article then goes on to endorse bigger government and more redistribution – policies which would erode Chile’s competitiveness and prosperity.

Unfortunately, the President of Chile seems willing to embrace these bad policies.

In another column for the WSJ, Ms. O’Grady warns about the possible consequences.

The pain for Latin America’s most successful economy is only beginning. …Mr. Piñera…has opened the door to rewriting Chile’s Constitution to meet the demands of socialists, communists and others on the left. If Latin American history is any guide, a constitutional rewrite will strip away political and economic rights, concentrate power and leave the nation poorer and more unjust. The biggest losers would be the aspirational poor, who will be denied access to a better life in what has become one of the world’s most socially mobile economies. …Mr. Piñera has agreed to talks with the “citizens” whose interests are presumably represented by the firebombers and looters. …This is a stunning surrender and it is hardly surprising that it seems only to have whet the appetite of the radical left.

She points out that Chile’s market reforms have been hugely successful.

What isn’t debatable is the economic gains, across the board, that the market model has created. Less than 9% of the nation now lives below the poverty level. In a 2018 Organization for Economic Cooperation and Development report titled “A Broken Social Elevator? How to Promote Social Mobility,” Chile stands out for its social mobility. According to the data, 23% of sons whose fathers were in the bottom quartile of earners make it to the top quartile. By this measure, Chile had the highest social mobility among 16 OECD countries in the study. …inequality in Chile has been falling for 20 years. …That’s something for Mr. Piñera to think about before he helps the left destroy a model that works.

Amen.

It would be a tragedy if politicians wrecked Latin America’s biggest success story.

Let’s close with some analysis in Harvard’s Latin America Policy Journal by Rodrigo Valdés, who was a finance minister under the previous center-left government.

What are the facts? Chile’s per capita GDP increased almost threefold between 1990 and 2015, with short-lived and shallow recessions in 1999 and 2009 only. More precisely, per capita GDP increased a cumulative 280 percent, or 5.3 percent per year (at PPP and constant dollars). At the same time, the distribution of income improved. …Remarkably, all but the top quintile (actually, all but the top decile) improved their share of total income after taxes and transfers. …For the middle 20 percent or “middle class,” growth explained more than 10 times what they gained through better income distribution. For the bottom 20 percent, the redistribution effort was more relevant, though growth was still dominant, explaining six times more than redistribution. Second, what Chile accomplished in the last 25 years is impressive. For the middle class, even a sudden transformation to the Nordics in terms of income distribution (without changes in aggregate GDP) produces less than one-tenth of what the combination of actual growth and better distribution produced for this segment. The bottom 20 percent gained in these two and half decades more than four times what they would achieve with a sudden Nordic distribution.

I suppose I should highlight the fact that a high-level official for a left-leaning government is pointing out that Chile’s reforms have been very successful.

But what really matters is the point he makes about how growth being far more important than redistribution – assuming the goal is to actually help low-income people live better lives.

The third column shows how much income has expanded for each segment of the population. And you can see (highlighted in red) that the bottom 10 percent has enjoyed more than twice the income gains as the top 10 percent.

But pay extra attention to the first and second columns. Economic growth far and away is the most important factor in boosting prosperity for the less fortunate.

Which shouldn’t be a surprise. I’ve shared lots of evidence (over and over and over again) showing that market-driven growth is the best way of helping low-income people.

Indeed, even the World Bank agrees the Chilean model is vastly superior to the Venezuelan approach.

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By every possible measure, Chile is the most successful country in Latin America.

Income has soared and poverty has plummeted thanks to market-based reforms.

It’s not perfect, of course. The nation’s economic freedom score – 7.89 on a 0-10 scale – is good enough for a #13 ranking, but there’s still room for improvement.

But there’s also plenty of room for economic decline, and that might be the unfortunate outcome if politicians respond in a misguided way to recent protests.

Especially if they take advice from the wrong sources. For instance, the New York Times opined yesterday about the supposed shortcomings of the Chilean model.

Chile is often praised as a capitalist oasis, a prospering and stable nation on a continent where both prosperity and stability have been in short supply. But that prosperity has accumulated mostly in the hands of a lucky few. As a result, Chile has one of the highest levels of economic inequality in the developed world. …Chileans live in a society of extraordinary economic disparities. …What makes Chile an outlier among those 36 nations is that the government does less than nearly any other developed nation to reduce economic inequality through taxes and transfers. As a result, Chile has the highest level of post-tax income inequality among O.E.C.D. members. …Even after increases in recent years, the Chilean government still spends a smaller share of total economic output than every other nation in the O.E.C.D. The obvious path for Chile is for the government to spend more money.

As is sometimes the case with the New York Times, parts of the editorial are downright false. Income in Chile has jumped significantly for all quintiles, not just a “lucky few.”

And even the parts that are technically accurate are very misleading.

Notice, for instance, what the NYT is doing with inequality numbers. It is comparing Chile with rich nations, mostly from Europe.

But what happens if Chile is compared to other countries from Latin America.

That tells an entirely different story, as you can see from this poverty map (dark red is bad, light yellow is good) produced by the Center for Distributive, Labor, and Social Studies in Argentina.

All of a sudden, Chile looks very good.

Even if you use U.N. numbers that rely on the left’s misleading definition of poverty (i.e., based on relative income), Chile is a success story compared to other nations in the region.

It’s especially important to understand that Chile is getting good results for the right reason.

Poverty is falling because of the private economy rather than coercive redistribution. Here are some excerpts from a recent U.N. release.

In an analysis of the countries with the greatest reductions in poverty in the 2012-2017 period, in Chile, El Salvador and the Dominican Republic, the increase in income from wages in lower-income households was the source that contributed the most to that reduction, while in Costa Rica, Panama and Uruguay, the main factor was pensions and transfers received by lower-income households.

Sadly, some people in Chile don’t have the fortitude to build on the market reforms that have boosted national prosperity.

Indeed, it appears there will be backsliding according to the aforementioned New York Times editorial

Sebastián Piñera, the billionaire elected president in 2017, …proposed a slate of reforms, including an increase in the top income tax rate, an increase in retirement benefits, and a guaranteed minimum monthly income. …Andrónico Luksic Craig, chairman of Quiñenco, a financial and industrial conglomerate, wrote on Saturday on Twitter that he was ready to pay higher taxes.

I’m disappointed but never surprised when politicians unravel progress.

But it’s always discouraging when guilt-ridden rich people embrace statist policies (sounds familiar, huh?).

For the sake of the Chilean people, let’s hope this is empty rhetoric.

P.S. Since we’re on the topic of Chile, here are some excerpts from the abstract of a study in the Journal of Development Economics that estimated the heavy economic cost of the nation’s detour to socialism in the 1970s.

…we look at share prices in the Santiago exchange during the tumultuous political events that characterized Chile in the early 1970s. …deploying previously unused daily data and exploiting two largely unexpected shocks which involved substantial variation in policies and institutions, providing a rare natural experiment. Allende’s election and subsequent socialist experiment decreased share values, while the military coup and dictatorship that replaced him boosted them, in both cases by magnitudes unprecedented in the literature. The most parsimonious interpretation of these share price changes is that they reflected, respectively, the perceived threat to private ownership of the means of production under a socialist government, and its subsequent reversal.

By the way, this in no way should be interpreted as support for the Pinochet dictatorship.

But what it does say is that dictatorships that allow economic freedom produce much better results than dictatorships impose totalitarian economic policies in addition to totalitarian political policies.

Which is basically the point Milton Friedman made when asked about his connection to Chile.

For what it’s worth, Pinochet eventually allowed a transition to democracy, which somewhat atones for his sins.

P.S. To be fair, the NYT editorial was merely misguided, which is better than the wild inaccuracy that has characterized some analyses.

P.P.S. If you want to learn about Chile’s reforms, here are columns about the private social security system and the national school choice system. And this World Bank comparison of Chile and Venezuela is very instructive as well.

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Today is my last day in Chile, so today’s column will build upon what I wrote last week.

I have three charts that illustrate how Chile’s pro-market reforms have been great news – especially for poor people (or, to be more accurate, for Chileans who used to be poor).

We’ll start with this chart from the most recent issue of Economía y Sociedad, which shows that there’s more mobility in Chile than any other OECD nation.

Honest folks on the left should view this as unambiguously positive.

Similarly, this Gini data (measuring the degree of inequality) should be slam-dunk evidence of progress for all left-of-center people.

For what it’s worth, I don’t care about the Gini coefficient. What matters to me is economic growth so that everyone can get richer.

If rich people happen to get richer faster than poor people (like in China), that’s fine.

And if poor people happen to get richer faster than rich people (like in Chile), that’s fine as well.

What irks me is that folks who fixate on inequality often support policies that retard growth. In other words, they’re so worried about rich people getting richer that they advocate for bigger government, which makes it harder for poor people to become richer.

Economic growth, by contrast, truly is the rising tide that lifts all boats.

Which is why this final chart (based on the Maddison database) is so powerful. It shows 1975-2016 income trends for Chile (red) and other major Latin American economies. As you can see, Chile started near the bottom and is now the region’s richest nation.

Wow, Chile didn’t just converge. It surpassed.

It’s also worth noting how nations such as Argentina, Venezuela, and Cuba have enjoyed very little income growth over the past 40 years.

The bottom line is that those nations are evidence of the costly impact of statism, while Chile is an amazing example of how capitalism generates widely shared prosperity.

P.S. I’m not claiming Chile is a perfect role model. It is #15 in Economic Freedom of the World, so there is considerable room for improvement. But I am arguing it is a successful example of how better policy is great news for all segments of society.

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I’m currently in Chile, enjoying the warm sun and doing research on the nation’s impressive economic performance.

I met yesterday with Jose Pinera, the former minister who created Chile’s incredibly successful system of personal retirement accounts (he’s also one of the people Gary Johnson should have mentioned when he was asked to identify an admirable foreign leader).

Back in 2013, I shared some of Jose’s data showing how the economy took off after Chile enacted pro-market reforms.

I was especially impressed by the stunning reduction in the poverty rate, which had dropped from 50 percent to 11 percent (it’s now down to 7.8 percent).

In other words, capitalism has been great news for poor Chileans. Simply stated, when given more freedom and opportunity, most of them escape poverty.

Interestingly, Reuters reports that even the IMF recognizes Chile’s superior performance.

The International Monetary Fund (IMF) hailed Chile’s strengthening economy in a report published on Friday while encouraging President Sebastian Pinera to push forward with promised structural reforms. In a statement following its annual consultation with Chile, the IMF praised Pinera’s proposed reform drive… Conservative billionaire Pinera took office in March with a strong mandate to make changes to the country’s pension system and labor laws and simplify the tax code. …The bank praised his early efforts, which it said were aimed at “re-invigorating investment and economic growth.”

Hmmm…, makes me wonder if the IMF (given its dismal track record) actually understands why Chile has become so prosperous.

Though the World Bank has praised the country’s pro-market reforms, so international bureaucracies sometimes stumble on the right answer.

But let’s not get distracted. Today, I want to share further evidence about how pro-market reforms produce big benefits for the less fortunate.

Here’s a chart from an article in the latest edition Economia y Sociedad. The article is in Spanish, but a translation of the relevant passage tells us that, “in Chile, the income of the poorest 20% of the population has risen at a rate (8.2% per year) that is 50% higher than that to which the income of the richest 20% has risen ( 5.3% per year).”

In other words, a rising tide lifts all boats (just as in the U.S.), but the bottom quintile is enjoying the biggest increases.

Sounds like great news. And it is great news. But some people put on blinders.

My left-leaning friends loudly assure me that they are motivated by a desire to help poor people. Yet if that’s true, why aren’t they falling over themselves to praise Chile? Why are they instead susceptible to waxing rhapsodic about the hellhole of Venezuela or bending over backwards to defend Cuba’s miserable regime?

And why do some anti-capitalist economists engage in absurd examples of cherry picking in failed efforts to discredit Chile’s accomplishments?

The bottom line is that Chile became the Latin Tiger thanks to economic liberty. That’s great news for the country, but especially good for the less fortunate.

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I’m in China this week, giving various lectures at Northeastern University in Shenyang. My topic today was “Real-World Examples,” which gave me an opportunity to share many of the charts I’ve developed showing how market-oriented nations enjoy much more long-run success.

One of the charts shows how Chile has enjoyed strong growth since it shifted to free markets, especially compared to Venezuela, which is burdened by a vicious form of statism.

But I noticed that I created that chart back in 2011 and it only shows data for the years between 1980 and 2008. And I thought that might lead students to think I was deliberately omitting recent years because the data somehow contradicts my message about free markets and small government.

So it’s time for me to update my comparison of Chile and Venezuela. And I’m going to have lots of evidence to share because the World Bank published a lengthy report on Puzzles of Economic Growth just a couple of years ago. And chapter 7 specifically compares the two countries we’re examining today.

Chile and República Bolivariana de Venezuela are South American countries of similar size and population. They…share a similar history, cultural heritage and comparable social structures. In 1971, they recorded a similar level of per capita income, that is, $6,603 (chained dollars with a base year of 20001) in Chile and $7,231 in República Bolivariana de Venezuela.

The report explains how neither country enjoyed much success in the 1970s, though oil-rich Venezuela at least benefited from rising energy prices.

What’s most relevant, at least for today’s discussion, is how Chile then jumped over Venezuela thanks to pro-market reforms,

In 2003, this value was nearly twice as high in Chile ($12,140) as in República Bolivariana de Venezuela ($6,253). …Chile became a stellar economic growth example in the region and has been outperforming República Bolivariana de Venezuela ever since. The ratio of GDP per capita in Chile and in República Bolivariana de Venezuela changed from 0.75 in 1983 to 1.94 in 2003.

Here’s a chart from the report, showing how Chile’s economy grew rapidly while Venezuela languished.

The report is filled with lots of data.

One item that caught my attention (in part because of Trump’s short-sighted policies in America) is how Chile dramatically reduced trade barriers while Venezuela was more protectionist.

From 1979, Chile’s economy was characterized by the lowest level of tariff restrictions in all of Latin America (10 percent) and a lack of nontariff barriers… República Bolivariana de Venezuela increased its trade restrictions to force consumers to purchase goods produced by the nationalized industries.

But Chile’s success goes well beyond trade policy.

Here’s a table looking quality of governance and red tape.

And here’s some data looking at obstacles to entrepreneurship. As you can see, it took almost four times longer to open a business in Venezuela in 1999.

I assume the numbers are even worse today. Assuming, of course, than anyone even wanted to open a business in that sad country.

Here are some excerpts from the conclusion of the World Bank report. This is a pretty good summary of how Chile reversed its descent to socialism while Venezuela doubled down on bad policy.

In 1971–2003, both Chile and República Bolivariana de Venezuela experienced periods of growing statism in their economic policy. In Chile, however, it was only a short episode (Allende’s socialist experiment in 1971–73), while in República Bolivariana de Venezuela this policy direction was maintained nearly for the entire period covered by the analysis (with its culmination being Chávez’s populist administration elected in 1998). During these periods, state-owned enterprises grew in both countries; market mechanisms were additionally disturbed by administrative price controls and restrictions imposed on freedom of entry into the market—and constrained business activity in many sectors of the economy… Furthermore, severe restrictions on foreign trade and capital flows were imposed. In Chile, the statist experiment was interrupted after three years—once it had driven the economy into a state of profound imbalance with a giant deficit and unchecked inflation. A radical program of economic stabilization and reforms broadening the scope of economic freedom was initiated. This dramatic change in economic orientation produced positive results. From the second half of the 1980s until the end of the analyzed period (2003), Chile was the fastest-growing country in South America.

Now it’s time for me to share an updated version of my chart (though I’m removing Argentina so we can focus just on Chile and Venezuela). As you can see, the updated numbers from the Maddison database tell the exact same story as my 2011 chart.

And why has Chile grown so much faster? As I told the students here in China, it’s because there’s more liberty to engage in voluntary exchange.

In the latest report from Economic Freedom of the World, Chile is ranked #15 while Venezuela is at the very bottom.

P.S. Some people have tried to portray Chile as a failure, but such assertions are easily debunked.

P.P.S. Kudos to the World Bank for publishing a very substantive report. For what it’s worth, it’s the international bureaucracy most likely to produce sensible publications.

P.P.P.S. The only bad World Bank study I’ve encountered equated high tax burdens with a good report card.

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The United States and other western nations became rich during the 1800s thanks to a combination of rule of law and very small government.

Sadly, very few nations – most notably East Asian tiger economies – have become rich in the modern era. Yes, some other countries have grown, but they are not on a path to converge with rich nations.

Chile, however, may be an exception to that unfortunate pattern. It has enjoyed amazing levels of growth since a shift to free-market policies starting about 40 years ago. It is now the richest country in Latin America and if its “improbable success” continues, it will soon be comfortably part of what used to be called the first world.

The flagship reform in Chile was the creation of a funded retirement system based on personal accounts. Basically universal IRAs.

Writing for the Weekly Standard, Fred Barnes shared what he learned about the nation’s private retirement system.

The rags-to-riches Chile story lives on as a model of what a poor country can achieve if it spurns socialism and adopts free markets and democracy. Peru is now copying Chile. More may follow. …Chile was once a Third World country headed downhill economically after Salvador Allende was elected president in 1970…bent on creating a Marxist state. In 1973, the military led by General Augusto Pinochet staged a coup. …When he took over, Chile had one of the highest rates of poverty in South America. It was a basket case. Now it has the continent’s strongest economy. Without Pinochet’s having heeded the advice of economist Milton Friedman, imposed capitalism, and hired a team of free market economists, many trained at the University of Chicago, the rise to First World status wouldn’t have happened. One of the economists was José Piñera, brother of the new president and Harvard-educated. He created a stable, fully-funded pension program that has become a monument to the success of private markets. …Piñera released a study in January that found “72 percent of the capital accumulated in the personal retirement account of the average Chilean worker, after 36 years in the private pension system, comes from the return on the investments done with their contributions.” That’s a long way of saying the plan is a dazzling success.

Though there are opponents, mostly those inspired by the communist regime in Cuba and a Pope who thinks we should worship the state.

But obstacles remain. …Even with Fidel Castro gone, Cuba exports communism as aggressively as it once did sugar. …socialists have an ally in Pope Francis, who spent three days in Chile in mid-January. …there’s a disconnect between how people here feel about capitalism—as a concept anyway—and the economic success they are experiencing. Pinochet is partly to blame, I suspect. He’s a hard man to credit, given his bloody takeover.

Barnes’ final point is also important.

I’ve had many people tell me that personal accounts are bad because they were implemented during Pinochet’s reign. But that’s a silly argument, sort of like deciding to be against free trade because the dictatorial Chinese government opened up to the global economy.

As far as I’m concerned, tyrannical leaders are awful and should be condemned, but if they happen to grant citizens a slice of economic liberty, that’s a silver lining to an otherwise dark cloud.

Back to our main topic, Monica Showalter, in a column for the American Thinker, explained what makes Chile’s system a role model for the United States.

…the Chilean Model…shows some spectacular new results for ordinary citizens… the Chilean Model is working, big time.  Basically, you skip Social Security taxes for starters, which leaves you a lot more money to play around with.  You then put 10% of your income into a government-certified private pension account (and you have many choices among them)… This is mass-scale wealth creation, and it benefits workers most of all. …Chile has no pension crisis as most of the rest of the developed world does – no worries about a “trust fund” and no Social Security “cuts” to speak of.  This is why.  Thirty nations have adopted the same plan… the left hates this stuff.  It keeps workers out of the clutches of unions and un-dependent on government handouts.  Of course leftists want it gone.  They tried hard in Chile to turn workers against this pension idea.

And here’s a chart from her article showing how investment returns have played a big role in helping ordinary Chileans build nest eggs for their old age.

Let’s look at some additional research.

In a monograph published by the U.K.-based Institute of Economic Affairs, Kristian Niemietz takes an in-depth look at Chiles’s approach.

Taken together, the value of the assets accumulated by Chilean pension funds is equivalent to about two thirds of the country’s GDP (Figure 1). This places Chile in the same league as countries which have had private pensions for over a century, and miles ahead of countries with traditional Bismarckian systems… The poverty rate among the elderly is lower than that of the population as a whole – 3.9 per cent vs. 10.3 per cent, or 8.4 per cent vs. 14.4 per cent, depending on the poverty measure used… Chile’s 1981 pension reform has given rise to a number of positive economic spillover effects: the prefunded system has been an active ingredient in the accelerated economic development that the country has been experiencing since the mid-1980s. …It has increased employment, especially in the formal sector… It has boosted the development and sophistication of Chile’s capital markets, and thus raised Total Factor Productivity… Despite the current backlash against it, Chile’s pension system is a success story. The system has achieved consistently high rates of return. It offers excellent value for money and solid pensions for those who contribute regularly. … The official retirement age is not as important in Chile as it is in countries with state-run systems. By and large, in that system, people retire when they have accumulated enough savings, not when politicians think they should retire.

Here’s the chart Kristian mentioned in the text. By this important metric, Chile is firmly ensconced in the upper tier of developed countries.

Now let’s address some of the critics.

Under the previous leftist government, there were protests against the country’s famous private social security system and attempts to undermine the model. Indeed, I wrote about that battle back in 2014. And I also noted that even some academics agreed that it would be foolish to undermine a successful approach.

Let’s see what’s happened since then. The Economist reported about the complaints about a year ago.

…tens of thousands of Chileans in Santiago…protest against the country’s privatised pension system. Organisers—a mix of unions, pensioners’ associations and consumer-advocacy groups—say that… Pensions are too small…benefits have not measured up to people’s unrealistic expectations. The scheme’s founders told workers that if they contributed continuously throughout their careers they would receive a generous 70% of their final salaries upon retirement. …But most workers contributed far less. Women took time off to raise children (and retire earlier than men). Many Chileans spent time in informal jobs or unemployed. On average, they contribute for only 40% of their prime working years. …The system has generated high returns for pensioners, averaging 8.6% a year between 1981 and 2013. But…high fees have bitten a huge chunk out of those returns, reducing them to 3-5.4%.

Though the article also noted all the benefits of personal accounts.

Rather than saddle the government with an unaffordable pay-as-you-go system, in which today’s taxpayers support today’s pensioners even as the population ages, Chile created one in which workers save for their own retirement by paying 10% of their earnings into individual accounts. These are managed by private administrators (AFPs). …the system worked. Contributions to the AFPs flowed into capital markets, which boosted growth. Annual GDP growth from 1981 to 2001 was 0.5 percentage points higher than it would have been without the investment, according to one study. This helped lift millions of people out of poverty.

The last couple of sentences of the above passage are worth highlighting. As I’ve noted, even small differences in economic growth – if they are sustained for a long period – make a huge difference in terms of national prosperity. And 0.5 percent more growth every year is actually a big boost when looking at the impact of just one policy.

Last but not least, here’s Ian Vasquez’s response to the attacks on the Chilean system.

Critics in Chile assert that the average pension provided by the private pension fund companies is around $340 per month, which is not better than the public pension system. But as the Chile-based Liberty and Development institute (LyD) has shown, that is like comparing apples to oranges. To calculate the private system’s figures, all those affiliated with it are taken into account, even if they have only contributed to their accounts once in their lifetime. The corresponding figure for the public pension system, however, only takes into account the pensions of those who have contributed for a minimum of 10 to 15 years, something that leaves out half of the people affiliated with that system. In addition, pensions under the private system are obtained through contributions that amount to 10 percent of wages, while in the public system the contribution is 20 percent. Correcting for those distortions shows that the value of the pensions the AFPs provide is three times higher than that of the public system. …it’s true that many Chileans do not contribute regularly to their retirement accounts because too many work outside the formal sector and getting work is still too precarious for many, that is a problem that affects any pension system, whether public or private, and can only be solved with labor reforms. …Chile’s private pension system can certainly be improved, but the reality is that it has been extremely successful. …old-age pensions no longer represent a burden on the treasury. Pension savings have reached $168 billion, about 70 percent of GDP, which has stimulated high growth and domestic investment, and has put Chile on the verge of becoming a developed country—a remarkable achievement.

Amen. Chile’s system isn’t perfect, but it’s far better, by several orders of magnitude, than the debt-ridden, pay-as-you-go models that are wreaking havoc with the public finances of other countries.

And Chile is prospering in a way unimaginable in other Latin nations.

It would be very nice to have a similar system of personal retirement accounts in the United States. And here’s the cartoon version of the argument.

P.S. Chile also has nationwide school choice.

P.P.S. Bill Clinton supported good Social Security reform and was prepared to work with congressional Republicans (and some Democrats) on good legislation for personal accounts, but that effort was sidetracked by the partisan impeachment fight. A genuine tragedy.

P.P.P.S. I’ve written before about overseas bathroom adventures and I now have another episode to add to the mix from my recent trip to India. I like modern facilities, including ones that have energy-saving features. But building engineers should realize that motion-activated lights may not make sense in bathrooms. At least not when people may be locked in stalls with no good options when the lights go out. Enough said.

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One of the interesting things I’ve noticed in my world travels is that supporters of free markets and small government generally are known as “liberals” everywhere other than North America.

I think the rest of the world has the right idea. After all, folks like Adam Smith are considered “classical liberals,” so it’s bizarre that “liberal” now is used to describe anti-capitalists in America.

To muddy the waters even further, it’s not uncommon for modern supporters of capitalism to be called “neoliberals.”

Though I wonder if that’s supposed to a be a term of derision. When I’m called a neoliberal in other countries, it’s always by someone who is criticizing my support for economic liberty.

Professor Dani Rodrik of Harvard, in a column for the U.K.-based Guardian, is not a fan of neoliberalism. He acknowledges that the term is ill-defined, but recognizes that it means a less power for government.

…neoliberalism…denotes a preference for markets over government, economic incentives over cultural norms, and private entrepreneurship over collective action. …The term is used as a catchall for anything that smacks of deregulation, liberalisation, privatisation or fiscal austerity. …That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders, does not mean that it is irrelevant or unreal. Who can deny that the world has experienced a decisive shift toward markets from the 1980s on? Or that centre-left politicians – Democrats in the US, socialists and social democrats in Europe – enthusiastically adopted some of the central creeds of Thatcherism and Reaganism, such as deregulation, privatisation, financial liberalisation and individual enterprise?

Rodrik then proceeds with a lengthy discussion of the weaknesses and limitations of conventional economic analysis.

Much of what he writes is perfectly reasonable. The economy is not a machine and people are not robots, so mechanistic economic concepts – while useful – have limited value. Moreover, culture and institutions make a big difference, and it’s rather difficult to capture those concepts in economic models.

Moreover, he makes some interesting observations on how various nations such as China have liberalized in ways that defy easy analysis.

Which is certainly a fair point.

But then he finishes up his column with two examples that simply don’t make sense.

First, Rodrik cites Mexico as a supposed example of neoliberal reform.

Following a series of macroeconomic crises in the mid-1990s, Mexico embraced macroeconomic orthodoxy, extensively liberalised its economy, freed up the financial system, sharply reduced import restrictions and signed the North American Free Trade Agreement (Nafta). These policies did produce macroeconomic stability and a significant rise in foreign trade and internal investment. But where it counts – in overall productivity and economic growth – the experiment failed. Since undertaking the reforms, overall productivity in Mexico has stagnated, and the economy has underperformed even by the undemanding standards of Latin America.

My reaction is “huh?”

I spend a lot of time combing through international data in hopes of finding success stories to publicize and I’ve never come across anything to suggest Mexico is a good example. Instead, I found evidence a few years ago suggesting the country is a bad example.

Here’s the Mexican data from Economic Freedom of the World. You can certainly argue that Mexico did some good reforms in the late 1980s. But where’s the evidence for sweeping liberalization after the mid-1990s?

There was a very slight increase in Mexico’s score after 1995, which is better than nothing. But I’m not surprised that it didn’t yield impressive results since the rest of the world was liberalizing at a much faster rate.

Indeed, Mexico dropped from #49 to #69 between 1995 and 2000 because other nations were the ones with “extensive liberalization,” not Mexico.

Second, he takes a shot at Chile.

Chile’s neoliberal experiment eventually produced the worst economic crisis in all of Latin America.

“Huh?” would be an understatement. I was flabbergasted by this assertion.

But not the first part of that sentence. He’s correct that Chile is a poster child for market-friendly reform.

Here’s a chart from Economic Freedom of the World showing how the nation’s score dramatically improved between 1975 and 1995.

But I was shocked by the second part of the sentence. Chile had “the worst economic crisis in all of Latin America”?

Since I’ve written several times about the Chilean economic boom, I was totally baffled. What was Rodrik talking about?

So I took another look at a couple of sources to see if I had overlooked something.

Here’s the IMF data on per-capita GDP for Chile and the rest of Latin America. The numbers are only available back to 1980, but everything we see underscores my argument that Chile is a great success. It used to have living standards only slightly higher than the average for Latin America and now the people are more than twice as rich as their peers. If that’s a “worst economic crisis,” we should all be lucky enough to have similar problems.

Then I looked at the Angus Maddison dataset, which allows us to go back to 1970.

His numbers are adjusted for inflation, so the lines don’t rise as rapidly, but we see the same long-run pattern. Chile is getting richer at a much faster pace than other countries from Latin America. Once again, if this is a “crisis,” other nations should hope for a similar fate.

So what did Rodrik mean by “worst economic crisis”?

His article doesn’t provide any details, but if you look at the Maddison data for the early 1980s, there was a downturn, with per-capita output dropping in Chile from about $6,000 to about $5,000. And that reduction was noticeably larger than the average reduction for the rest of Latin America.

I’m guessing this is the supposed “crisis” that he mentions in the article.

But if that’s true, he’s guilty of an egregious example of “cherry-picking” data. Sort of like saying the record-setting 1998 Yankees were a failure because of a four-game losing streak in late August that year.

Honest analysis requires a look at the overall record, and all data sources show that Chile’s economic performance is far superior to its peers.

The bottom line is that Rodrik is on solid ground when he points out the limitations of conventional economic analysis. But when he then decides to criticize pro-market reforms, he concocts two examples that are – at best – sloppily inaccurate.

P.S. By the way, I can’t resist commenting on one additional assertion in Rodrik’s column.

The use of the term “neoliberal” exploded in the 1990s, when it became closely associated with…financial deregulation, which would culminate in the 2008 financial crash and in the still-lingering euro debacle.

This is another “huh?” moment.

The “neoliberals” were the people who opposed the policies – artificially low interest rates from the Federal Reserve and the corrupt Fannie Mae and Freddie Mac subsidies – that led to the financial crisis. And people like me were very opposed to the excessive government spending that led to the European fiscal crisis.

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I wrote yesterday about the most recent OECD numbers on “Average Individual Consumption” in member nations.

There was a very clear lesson in that data about the dangers of excessive government. The United States was at the top in this measure of household living standards, not because American policies are great, but rather because huge welfare states in Europe have undermined economic vitality on the other side of the Atlantic.

Indeed, the only countries even remotely close to the United States were oil-rich Norway and the two tax havens of Switzerland and Luxembourg.

Those AIC numbers gave us an interesting snapshot of relative living standards in 2014.

But what would we discover if we looked at how that data has changed over time?

It appears that the OECD began assembling that data back in 2002. Here’s a table showing how nations rose or fell, relative to other OECD nations, since then. Based on convergence theory, one would expect to see that poorer nations enjoyed the biggest relative gains, while richer nations fell in the rankings. And that is what generally happened, but with some notable exceptions.

Here are the countries that did not conform, for either good reasons or bad reasons, to convergence theory.

We’ll start with the nations that have bragging rights.

  • Chile started at the very bottom compared to the rich nations of the western world, so anything other than a large increase would have been a disappointment. But the magnitude of Chile’s increase is nonetheless quite impressive and presumably a testament to pro-market reforms.
  • Finland was almost 7 points below the OECD average in 2002 and now is more than 2 points above the average, which is a significant jump for a nation near the middle of the pack. Maybe having sensible leaders is a good idea.
  • Oil-rich Norway was above average at the start of the period and even farther above average at the end of the period.
  • The United States was very high in 2002 and remained very high in 2014. Since that outcome violates convergence theory, that’s a non-trivial accomplishment and another piece of evidence that big governments in Europe are imposing a harsh economic cost.
  • Switzerland also started high and remained high. That’s presumably a reflection of good policies such as federalism and spending restraint.

Now for the nations that did not fare well.

  • Luxembourg suffered a large drop, some of which is understandable since the tiny tax haven was in first place back in 2002. But the magnitude of the decline – particularly compared to the United States and Switzerland – is not an encouraging sign. This may be a sign that anti-tax competition efforts by the OECD have hit the nation hard.
  • Greece, Spain, Ireland, and Italy all tumbled in the rankings even though – at best – they started in the middle of the pack. It will be interesting to see how these nations perform as they recover (or don’t recover, as I expect in the cases of Italy and Greece) from the European fiscal crisis.
  • Slovenia also went from bad to worse, which perhaps is not a big surprise since it is one of the least reform-oriented countries to emerge from the Soviet Bloc.
  • The United Kingdom suffered a rather large decline, almost all of which happened under the profligate Blair and Brown Labour governments. This will be another nation that will be interesting to watch in coming years, particularly because of Brexit.
  • France and the Netherlands also suffered, starting well above average in 2002 but falling to the mean in 2014.

If you like this kind of data on whether nations are trending in the right direction or wrong direction, I’ve also tinkered with the data from Economic Freedom of the World.

Last year, I highlighted countries that have made significant moves in the EFW rankings, including oft-overlooked success stories such as Israel and New Zealand.

I also looked specifically at changes in Europe this century and did not find any reason for optimism.

The bottom line is that there’s no substitute for free markets and limited government. If nations want faster growth and more prosperity, they need to mimic jurisdictions such as Hong Kong and Singapore.

Unfortunately, there’s very little reason to be optimistic about that happening in Europe.

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I shared yesterday a remarkable TV show about Estonia’s entrepreneurial miracle.

Today, let’s look at the Chilean version in the series. It shows how the South American nation, which now is ranked very high for economic freedom, is a shining example of how small government and free markets are a recipe for good results.

I don’t follow Chile as closely as Estonia, so instead of five good and bad policy developments (or lack thereof) in the nation, we’ll focus on three favorable items and one unfortunate feature.

Here are the three most positive policy lessons from Chile

First, Chile is the world champion for personal retirement accounts. It shifted from a failed pay-as-you-go tax-and-transfer to a funded system of personal accounts. Workers were given the opportunity to stay in the old system, but more than 95 percent realized it was better to have private savings rather than empty promised from politicians.

Second, Chile’s shift to free trade and away from protectionism has been enormously beneficial for the economy. Openness has produced big benefits for consumers, and also created big markets for exports.

Third, Chile shows the value of monetary stability. If you look at the big increase in the country’s economic freedom since 1975 and break it down by the major sub-categories, there have been impressive improvements in fiscal policy, regulatory policy, trade policy, and rule of law/property rights. But the biggest jump was for monetary policy. The nation went from hyperinflation and instability to a more sensible monetary regime.

Here’s the one thing that worry me about Chile.

Chile has enjoyed reasonably stable and practical leaders since suffering the chaos and brutality of Marxist and military governments in the 1970s and 1980s. Even left-leaning governments have been reasonable, recognizing that it would be a mistake to undermine the goose that has been laying golden eggs. That’s the good news. The bad news is that some recent politicians have adopted strident anti-market views. And the nation’s economic freedom score and ranking have both marginally declined in recent years.

By the way, you’ll have noticed in the above video that Peru also got some positive attention for its economic reform. It isn’t ranked nearly as high as Chile, but the progress has been enormous. Particularly when you consider how other nations in the region such as Venezuela are total basket cases of statism.

P.S. Chile also has one of the world’s best school choice systems, though it also has come under pressure from recent left-leaning politicians.

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Venezuela is falling apart. Decades of bad policy have produced economic stagnation and misery.

On the other side of South America, Chile has enjoyed comparatively strong growth since reforms began in the 1980s.

Can we learn lessons by comparing these two nations?

Yes. More than five years ago, I compared three decades of data to show that pro-market Chile grew somewhat faster than mixed-economy Argentina and much faster than statist Venezuela.

Now we have some new data.

My colleague at the Cato Institute, Marian Tupy, has an article in Reason that compares Chile and Venezuela.

He starts by noting that the two nations have moved in dramatically different directions when measuring economic freedom.

Chile’s success starts in the mid-1970s, when Chile’s military government abandoned socialism and started to implement economic reforms. In 2013, Chile was the world’s 10th freest economy. Venezuela, in the meantime, declined from being the world’s 10th freest economy in 1975 to being the world’s least free economy in 2013.

Here’s a sobering chart on the changes.

Some may believe that economic freedom as merely an abstraction.

What’s more important, they argue, is results. Is a nation enjoying good economic performance, or is it stagnating?

Well, it turns out that the abstraction of economic freedom is very important if you want good performance. Here’s another chart from Marian’s article. You can see that Venezuela has stagnated while Chile has boomed.

Chile is not a perfect role model, to be sure, because of an unsavory period of military rule.

But the good news, Marian points out, is that economic liberty has led to political liberty. Whereas the opposite has happened in Venezuela.

…as the people of Chile grew richer, they started demanding more say in the running of their country. Starting in the late 1980s, the military gradually and peacefully handed power over to democratically-elected representatives. In Venezuela, the opposite has happened. As failure of socialism became more apparent, the government had to resort to ever more repressive measures in order to keep itself in power.

Here’s a chart showing the remarkable progress in Chile..as well as the deterioration of rights in Venezuela (please note that “1” means strong political rights and “7” means low or nonexistent political rights).

All this data seemingly is slam-dunk evidence for the Chilean model over the Venezuelan model.

Yet there have been a number of leftists who actually praised the statist policies of Venezuela’s authoritarian rulers. Here are some excerpts from an exposê in the Daily Caller.

Socialist Venezuelan dictator Hugo Chavez was praised throughout his life by many figures in academia, journalism and Hollywood despite his brutal regime. This praise included Salon writer David Sirota’s piece after the leader’s death, titled “Hugo Chavez’s economic miracle.” In British publication The New Statesman, a headline as Chavez was nearing death in January 2013 was “Hugo Chavez: Man against the world,” and its sub-headline read “As illness ends Hugo Chavez’s rule in Venezuela, what will his legacy be? Richard Gott argues he brought hope to a continent.” This praise of Chavez by so many who enjoyed the benefits of living in a capitalist society while looking at the economic record of the late leader, as well as what his successor President Nicolas Maduro, has come undone.

And Joe Stiglitz gushed about Venezuela’s economic performance back in 2007.

Nobel Prize winning economist and former vice-president of the World Bank, Joseph Stiglitz, praised Venezuela’s economic growth and “positive policies in health and education” during a visit to Caracas on Wednesday. “Venezuela’s economic growth has been very impressive in the last few years,” Stiglitz said during his speech at a forum on Strategies for Emerging Markets sponsored by the Bank of Venezuela. …Venezuela has taken advantage of the boom in world oil prices to implement policies that benefit its citizens and promote economic development. “Venezuelan President Hugo Chavez appears to have had success in bringing health and education to the people in the poor neighborhoods of Caracas, to those who previously saw few benefits of the countries oil wealth,” he said. In his latest book “Making Globalization Work,” Stiglitz argues that left governments such as in Venezuela, “have frequently been castigated and called ‘populist’ because they promote the distribution of benefits of education and health to the poor.” “It is not only important to have sustainable growth,” Stiglitz continued during his speech, “but to ensure the best distribution of economic growth, for the benefit of all citizens.”

Wow, this is a remarkable case of ideological blindness. Stiglitz presumably allowed his statist views to drive his analysis.

But let’s focus on one part of that excerpt. Yes, it’s very desirable for all citizens to benefit from economic growth.

But if you look at the chart from Marian’s article comparing GDP per capita in Chile and Venezuela, it’s abundantly clear which nation is producing better outcomes from average citizens.

This is a fundamental flaw of statists. By fixating on redistribution and equality, this leads them to policies that re-slice a shrinking economic pie.

The evidence from all over the world is that this is not a recipe for convergence with rich nations.

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Chile is one of the world’s economic success stories.

Reforms in the 1980s and 1990s liberalized the nation’s economy and resulted in rapid increases in economic growth and big reductions in poverty.

Unfortunately, the current government is pushing policy in the wrong direction.

This drift toward statism has been unfortunate, featuring higher tax burdens, more spending, and increased intervention.

But I’ve always assumed that Chile’s private pension system would be safe from attack. After all, as noted in a new column for Investor’s Business Daily by Monica Showalter, it’s been a huge success.

Chile’s 35-year old private pension program…is working spectacularly well. …savings, ownership, control, responsibility and wealth building…are the pillars of the Chilean Model — and have as their ultimate reward a comfortable retirement, which Chileans now do.

But Monica warns that an ongoing education campaign is necessary to make sure that workers realize the benefits of the system.

And that’s been lacking.

…successive socialist governments in Chile have pretty well limited their recognition of the Chilean Model to criticism of it, many of them still unhappy that it’s not a state model that’s providing such high returns. …All the issues that had been called problems were largely the result of widespread public ignorance of economics…the people who should know better aren’t educating the public.

Given that Chile has enjoyed such strong growth in recent decades, you would think ordinary people would be happy, even if they’re not aware of the relationship between pro-market reforms and rising living standards.

And since Chile has grown far faster than other nations in Latin America, you would think that the political elite actually would understand that there is a strong relationship between economic freedom and national prosperity.

But that’s not the case, and the current left-leaning government is an obvious example. It even created a commission to review Chile’s pension system, and that decision was perceived as an effort – at least in part – to undermine support for the private system.

Fortunately, it’s very difficult to look closely at the Chilean system and conclude that personal retirement accounts have been unsuccessful.

Professor Olivia Mitchell of the Wharton School at the University of Pennsylvania served on the Commission and wrote a column based on that experience for Forbes.

She starts by acknowledging Chile’s personal retirement accounts are a gold standard for reform and then asks why there’s a desire to change something that works.

Chile’s retirement system has been hailed as “best in class” by pension experts near and far. The country’s fabled individual and privately-managed accounts include around 10 million affiliates, hold $160 billion in investments, and pay retirement benefits to over a million retirees. So why did President Michelle Bachelet establish a Pension Reform Commission that just delivered to her 58 specific reforms and three comprehensive proposals to overhaul remodel Chile’s retirement system?

A benign explanation for the Commission is that it’s a helpful way of helping people learn about the system.

Ms. Mitchell (no relation, by the way) points out that workers in Chile suffer from genuine and widespread ignorance.

…only a handful (19% of men, 11% of women) know how much they contribute to the accounts: 10% of pay. This underscores my own research showing that most Chileans had no idea how much they paid in commissions, how their money was invested, or how their benefits would be determined at retirement. Only one-fifth of the participants had the faintest idea about how much money they held in their accounts (even within plus or minus 20%!).

But if those people paid close attention, they’d learn that the private system – particularly when combined with the government’s safety net – does a very good job of protecting the less fortunate.

Chile’s retirement system actually does a rather remarkable job of protecting against old age financial destitution. …Adding the means-tested to the self-financed pension generates replacement rates of about 64%, levels even above what retirees in the US get from social security.

Nonetheless, some of the Commissioners want to weaken the current system and give government a bigger role.

Prof. Mitchell is not impressed by their thinking.

…reforms offered by others on the panel have a major flaw: these would – slowly or rapidly – eat into the money so painstakingly built up in the private accounts over time. My view, along with the majority of the Commissioners, was that wrecking Chile’s funded pension system is not the answer. Instead, this would destroy decades of national saving and economic growth, not to mention the well-being of future generations. This is an especially critical concern in view of Chile’s rapid aging: this nation is set to become the oldest country in South America within 15 years. …Chile needs a resilient retirement system that encourages continued work, incentivizes saving, and offers credible pension promises that can actually be paid when the time comes. It would be unfortunate to see Chile dismantle the system that has done so well for so many, over the past 35 years.

The good news, as you can see from the column, is that most Commissioners don’t want radical changes to Chile’s private pension system.

This is a positive outcome. Assuming, of course, that the current left-wing government follows their recommendations.

What we don’t know, though, is whether other governments learn any lessons from all this analysis.

America’s Social Security system has gigantic unfunded liabilities, for instance, and many other nations also have big fiscal shortfalls in their tax-and-transfer systems operated by their governments.

The right answer is a transition to personal retirement accounts. That’s what will happen if policy makers from elsewhere in the world learn from Chile’s success.

P.S. This comparison of Chile and Cuba tells you all you need to know about markets vs statism.

P.P.S. Here’s a comparison of real savings in Australia’s system of private accounts compared to the growing debts of America’s pay-as-you-go government-run system.

P.P.P.S. If you want to see a strong case for personal retirement accounts, click here for an explanation from the man most responsible for Chile’s remarkable reforms.

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There aren’t any nations with pure libertarian economic policy, but there are a handful of jurisdictions that deserve praise, either because they have comparatively low levels of statism or because they have made big strides in the right direction.

Hong Kong and Singapore are examples of the former, and Switzerland deserves honorable mention.

And if we look at nations that have moved in the right direction, then Chile is definitely a success story.

The free-market revolution in Chile is remarkable. If you look at the Economic Freedom of the World rankings, Chile was in last place in 1970 and third from the bottom in 1975. But then reforms began. It climbed to 60th place in 1980, 40th place in 1985, 28th place in 2000, and Chile now has one of the world’s freest economies, hovering around 10th place.

And the results are amazing. Now known as the Latin Tiger, Chile has become the richest nation in the region, thanks to a big increase in economic liberty. Many people know about that nation’s very successful system of personal retirement accounts (discussed here by Jose Pinera), but Chile’s economic renaissance is much deeper than private pensions.

The country has an admirable system of school choice, for instance, and 60 percent of students now attend private schools.

Most remarkable, the poverty rate has plummeted, showing that free markets and small government are the best way of helping the less fortunate.

But there’s no such thing as permanent success, and it appears that Chilean politicians may try to kill the geese that are laying the golden eggs.

Here are some excerpts from a Wall Street Journal report, starting with a description of the class-warfare tax plan proposed by the nation’s socialist leader.

Chile’s leftist government is proposing a controversial overhaul of its tax code that business leaders say threatens to reverse the gains that have made this country Latin America’s most prosperous nation. …The government says the tax reform will increase the tax haul by three percentage points of annual economic output, or by about $8.2 billion annually. The proposed overhaul includes an increase in the corporate tax rate to 25% from the current rate of 20% and the elimination of a popular tax exemption program that allows businesses that reinvest profits, known as the FUT. …Ms. Bachelet, a 62-year-old Socialist Party member, said Wednesday that the changes are required to fund a plan to improve the quality of the schools system.

The FUT system sounds like expensing, which is how the tax code should treat business investment, not a loophole.

In any event, we definitely know that the tax plan would significantly boost the tax burden.

And that has wealth creators worried.

The plan to raise the corporate tax rate and close an exemption that companies use to reinvest profits has stirred up an ideologically-charged debate at a time when economic growth has weakened to its slowest level in four years. …many of the company’s 450 business clients in Chile are reconsidering investment plans. “They are watching this with a lot of concern.” …business groups say they will try to pressure the government to rethink the tax overhaul. Juan Pablo Swett, the head of Chile’s association of small businesses, said that some 250,000 small-business owners could protest if the government doesn’t save the FUT. “Chile is going down the road of Latin American populism,” added Axel Kaiser, an economist and executive director at the Foundation for Progress, a conservative Chilean think tank.

The story notes that economic reform has been very positive for Chile.

This mineral-rich, long sliver of a country that hugs the Pacific Ocean has long been a laboratory for economic innovation. Starting in the mid-1970s, when much of Latin America had closed their economies from international trade, Chile went the other way, embarking on a program to liberalize trade, deregulate and even create a private pension system. Since 1990, successive governments, most of them left-leaning, oversaw business-friendly policies that turned it into the region’s most stable and wealthiest nation. …The robust economic growth, coined the “Chilean Miracle,” led to a decline in poverty to 15% in 2011 from almost 40% in 1990, according to the World Bank. During the same period, Chile’s gross domestic product per capita rose from less than $5,000 to more than $20,000, the highest in Latin America.

And since reform has produced such good results, that leaves us with two issues.

First, why do the politicians want to ruin a good thing? These people presumably are educated and well-traveled. They must realize how Chile has prospered relative to other nations in the region. So why tinker with success? Are they really so short-sighted that they’re willing to condemn their nation to slower growth just so they have the ability to buy votes with a temporary increase in tax revenue?

Second, why did voters elect these politicians? Don’t they realize that they’ve benefited from the pro-market reforms? Though I suspect the answer is that previous left-of-center governments haven’t done anything bad, while the recently ousted right-of-center government didn’t do anything good, so maybe voters didn’t realize that the new left-leaning government intended to make radical changes.

Regardless, it will be tragic if these reforms are imposed and Chile sinks back into economic stagnation.

The world in general – and Latin America in particular – already has plenty of basket case economies such as Cuba, Venezuela, and Argentina. The last thing we need is another statist economy.

I realize this may sound like whining, but it would make my job easier to have more examples of jurisdictions that can be role models for free markets and small government.

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One of my goals is to convince people that even small differences in long-run growth can have a powerful impact on living standards and societal prosperity.

In other words, the economy is not a fixed pie. The right policies, such as free markets and small government, can create a better life for everybody.

And bad policy, needless to say, can have the opposite impact.

Very few people realize, for instance, that Argentina was one of the world’s 10-richest nations at the end of World War II, but interventionist policies have weakened growth and caused the country to plummet in the rankings.

Hong Kong, by contrast, had a relatively poor economy at the end of the war, but now is one of the globe’s most prosperous jurisdictions.

If you want more examples, check out this chart showing how North Korea and South Korea have diverged over time.

Or how about the chart showing how Chile has out-performed other major Latin American economies.

This comparison of living standards in the United States and Europe also is very compelling.

Here’s a simple guide to highlight the difference between weak growth and strong growth. It shows how long it takes a nation to double economic output depending on annual growth.

As you can see, a nation with 1 percent growth (think Italy) will have to wait 70 years before the economic pie doubles in size.

But a nation that grows 4 percent or faster each year (think Singapore) will double GDP in less than 20 years.

Years to Double GDP

So why am I plowing through all this material?

My answer is simple, but depressing. I’m worried that the United States is becoming more like Europe. During the Bush-Obama years, we’ve seen big increases in the size and scope of government, and it’s no surprise that we’re now suffering from anemic economic performance.

That’s the first point I made in this interview with Michelle Fields of PJTV.

Much of the material in the interview will be familiar to regular readers, but a few points deserve some emphasis.

I say that America becoming more like Europe isn’t the end of the world, but I should elaborate. What I meant is that we can survive 2 percent growth instead of 3 percent growth. We could even survive 1 percent growth.

But if we continue on the current path of ever-growing government and combine that with an aging population and poorly designed entitlement programs, then we will see the end of the world. At least in the sense of fiscal crisis and economic collapse.

All the points I make about jobs, employment, labor force participation, unemployment insurance and disability are simply different ways of saying that it’s not good for the economy when politicians continuously make dependency more attractive than work.

If you want to know more about why the so-called stimulus was a failure, my article in The Federalist is a nice place to start.

The libertarian fantasy world of a small central government is a very good goal, but it’s still possible to make significant progress if politicians follow Mitchell’s Golden Rule.

P.S. You may recognize the host because she narrated a very good video for the Center for Freedom and Prosperity. Michelle explained how the big-government policies of Hoover and Roosevelt deepened and extended the Great Depression.

She also exposed rich leftists as complete hypocrites in this interview.

P.P.S. Since I mentioned above that South Korea has far surpassed North Korea, I should share this powerful nighttime picture of the Korean peninsula.

North Korea v South Korea

Gee, maybe capitalism is better than statism after all.

Unless, of course, you think there’s something really nice about North Korea to offset South Korea’s economic advantages.

Such as malnutrition or enslavement. Or a small carbon footprint, which led some nutjobs to rank Cuba far above America.

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I’m in Vienna, Austria, for the annual European Resource Bank meeting.

I had the pleasure last night of listening to Jose Pinera speak about economic reform in Chile, particularly the system of personal retirement accounts.

He shared a chart that conclusively shows why good economic policy makes a difference.

Chile Miracle

Wow. Look at how much faster the economy has grown since the communists were ousted in 1975 and replaced by a pro-market government.* And the poverty rate has plummeted from 50 percent to 11 percent!

Simply stated, economic reform has been hugely beneficial to poor and middle-class people in Chile. Something to remember as we try to rein in the welfare state in America.

Let’s look at some more data. A couple of years ago, I shared this chart showing how Chile had out-paced Argentina and Venezuela. In other words, Chile’s performance is ultra-impressive, whether examined in isolation or in comparison with other nations in the region.

The reason for all this success is that Chile didn’t just reform its pension system. As you can see from this Economic Freedom of the World data, Chile has made improvements in virtually all areas of public policy.

The nationwide school choice system, for instance, is another example of very beneficial reform.

It’s not quite Hong Kong or Singapore, but Chile is definitely a huge success story.

*The Pinochet government that took power in the 1970s may have been pro-economic liberty, but it also was authoritarian. Fortunately, Chile made a successful and peaceful transition to democracy in the late 1980s and has generally continued on a pro-free market path.

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A reader from New York has a follow-up question for me.

Referencing a “Question of the Week” from last month, in which I expressed guarded optimism that America could be saved, she wants to know what I would do if things go the wrong way.

In other words, what if things go really wrong and America suffers a Greek-style fiscal collapse? And imagine how bad that might be since there wouldn’t be an IMF or European Central Bank capable of providing bailouts to the United States.

Perhaps because of an irrational form of patriotism, I’m fairly certain that I will always live in the United States and I will be fighting to preserve (or restore) liberty until my last breath.

But I probably would want my children someplace safe and stable, so I’ll answer the question from that perspective.

The obvious first choice is a zero-income tax jurisdiction like the Cayman Islands that is prosperous and reasonably well governed.

But I’m not sure about the long-run outlook for the Cayman Islands, in part because the politicians there have flirted with an income tax and in part because the jurisdiction inevitably would suffer if the United States was falling apart.

So what’s a place that is stable and not overly tied to the American economy.

Then the obvious choice is Switzerland. That nation’s long-run fiscal outlook is relatively favorable because of  modest-sized government and a very good spending control mechanism.

But while Switzerland is not dependent on the U.S. economy, it is surrounded by European welfare states. And I’m fairly certain that nations such as France, Italy, and (perhaps) Germany will collapse before America.

And even though most Swiss households have machine guns and the nation presumably can defend itself from barbarian hordes in search of a new welfare check, Switzerland’s probably not the ideal location.

Estonia is one of my favorite countries, and they’ve implemented some good reforms such as the flat tax. But I worry about demographic decline. Plus, I’m a weather wimp and it’s too chilly most of the year.

Another option is a stable nation in Latin America, perhaps Chile, Panama, or Costa Rica. I haven’t been to Chile, but I’m very impressed by the nation’s incredible progress in recent decades. I have been to Panama many times and it is one of my favorite nations. I’ve only been to Costa Rica two times, but it also seems like a nice country.

The bad news is that I don’t speak Spanish (and my kids don’t speak the language, either). The good news is that Hispanics appear to be the world’s happiest people, so that should count for something.

“G’day mate, we’ve privatized our social security system!”

This brings me to Australia, the country that probably would be at the top of my list. The burden of government spending in Australia is less than it is in the United States.

But the gap isn’t that large. The reason I like Australia is that the nation has a privatized Social Security system (called Superannuation) and the long-run fiscal outlook is much, much better than the United States.

Plus the Aussies are genuinely friendly and they speak an entertaining form of English.

So if America goes under, I recommend going Down Under.

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I wrote back in July about the remarkable transformation of Chile into a prosperous market economy.

In that post, I noted that Chile was a pioneer in the shift from unsustainable tax-and-transfer entitlement schemes to savings-based personal retirement accounts. And with good reason. That system, which has been in place for more than three decades, is hugely successful.

We should do the same thing in America, and we should do it yesterday, if not sooner.

But Chile’s success is driven by more than just pension reform. And I want to mention something remarkable about what’s happening with school choice in that country.

Jose Pinera – Freedom Fighter

First, some background. I’m currently at a Cato Institute donor retreat, where I had the chance to talk to Jose Pinera, who is now the Co-chairman of Cato’s Project on Social Security Choice, but who also was the person who implemented the pension reforms in his home country of Chile.

I knew Chile had a school choice program, and I wrote a brief post about those reforms back in 2010.

But I was stunned when Jose told me yesterday that about 60 percent of Chilean kids – of all ages – now attend private schools.

That’s far better than Sweden, which also has nationwide school choice, but has only about 20 percent of high school-age kids in private schools.

Jose thinks that it is just a matter of time before more than 80 percent of Chilean kids are in private schools. Why? Because people like freedom and choice.

He often brags – and rightly so – that more than 95 percent of workers chose personal retirement accounts when given the option of staying with the old government-run pension system. So it shouldn’t be a surprise that parents also choose wisely when deciding how to get the best possible education option for their kids.

Now, if we can just figure out how to expand school choice in America

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One of the reasons why this blog is called International Liberty is that the world is a laboratory, with some nations (such as France) showing why statism is a mistake, other jurisdictions (such as Hong Kong) showing that freedom is a key to prosperity, and other countries (such as Sweden) having good and bad features.

It’s time to include Chile in the list of nations with generally good policies. That nation’s transition from statism and dictatorship to freedom and prosperity must rank as one of the most positive developments over the past 30 years.

Here’s some of what I wrote with Julia Morriss for the Daily Caller. Let’s start with the bad news.

Thirty years ago, Chile was a basket case. A socialist government in the 1970s had crippled the economy and destabilized society, leading to civil unrest and a military coup. Given the dismal situation, it’s no surprise that Chile’s economy was moribund and other Latin American countries, such as Mexico, Venezuela, and Argentina, had about twice as much per-capita economic output.

Realizing that change was necessary, the nation began to adopt pro-market reforms. Many people in the policy world are at least vaguely familiar with the system of personal retirement accounts that was introduced in the early 1980s, but we explain in the article that pension reform was just the beginning.

Let’s look at how Chile became the Latin Tiger. Pension reform is the best-known economic reform in Chile. Ever since the early 1980s, workers have been allowed to put 10 percent of their income into a personal retirement account. This system, implemented by José Piñera, has been remarkably successful, reducing the burden of taxes and spending and increasing saving and investment, while also producing a 50-100 percent increase in retirement benefits. Chile is now a nation of capitalists. But it takes a lot more than entitlement reform, however impressive, to turn a nation into an economic success story. What made Chile special was across-the-board economic liberalization.

We then show the data (on a scale of 1-10) from the Fraser Institute’s Economic Freedom of the World, which confirm significant pro-market reforms in just about all facets of economic policy over the past three decades.

But have these reforms made a difference for the Chilean people? The answer seems to be a firm yes.

This has meant good things for all segments of the population. The number of people below the poverty line dropped from 40 percent to 20 percent between 1985 and 1997 and then to 15.1 percent in 2009. Public debt is now under 10 percent of GDP and after 1983 GDP grew an average of 4.6 percent per year. But growth isn’t a random event. Chile has prospered because the burden of government has declined. Chile is now ranked number one for freedom in its region and number seven in the world, even ahead of the United States.

But I think the most important piece of evidence (building on the powerful comparison in this chart) is in the second table we included with the article.

Chile’s per-capita GDP has increased by about 130 percent, while other major Latin American nations have experienced much more modest growth (or, in the tragic case of Venezuela, almost no growth).

Perhaps not as impressive as the performance of Hong Kong and Singapore, but that’s to be expected since they regularly rank as the world’s two most pro-market jurisdictions.

But that’s not to take the limelight away from Chile. That nation’s reforms are impressive – particularly considering the grim developments of the 1970s. So our takeaway is rather obvious.

The lesson from Chile is that free markets and small government are a recipe for prosperity. The key for other developing nations is to figure out how to achieve these benefits without first suffering through a period of socialist tyranny and military dictatorship.

Heck, if other developing nations learn the right lessons from Chile, maybe we can even educate policy makers in America about the benefits of restraining Leviathan.

P.S. One thing that Julia and I forgot to include in the article is that Chile has reformed its education system with vouchers, similar to the good reforms in Sweden and the Netherlands.

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Okay, the title’s an exaggeration, but this chart is rather revealing. It shows how per-capita GDP has changed between 1980 and 2008 in Chile, Argentina, and Venezuela.

As you can see, Chile used to be the poorest of the three countries and now it is comparatively rich. Argentina has enjoyed a bit of growth. Venezuela, by contrast, used to be the richest of the three nations but has stagnated and now is in last place.

So what accounts for these remarkable changes in relative prosperity? The answer, at least in part, is the difference between free markets and statism. Simply stated, Chile has reduced the burden of government a lot in the past three decades, Argentina has reduced the burden of government a little, and Venezuela has gone in the wrong direction and increased the burden of government.

The following numbers come from the Economic Freedom of the World, which looks at all facets of economic policy, including regulation, trade policy, monetary policy, fiscal policy, rule of law, and property rights.

* Chile’s score jumped from 5.6 in 1980 to 8.0 in 2008, and the country now ranks as the world’s 4th-freest economy (ahead of the United States!).

* Argentina’s ranking has improved a bit, rising from 4.4 to 6.0 between 1980 and 2008, but that still only puts them in 94th-place in the world rankings.

* Venezuela, by contrast, is embarrassingly bad. The nation’s score has dropped from 6.3 to 4.4, and its ranking has plunged from 22nd-place in 1980 to 121st-place in 2006.

The simple lesson is that nations have the ability to create prosperity, but they have to follow a simple recipe. Adam Smith is reported to have written several hundred years ago that, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.”

Since Adam Smith probably never imagined a world filled with things such as OSHA, the Department of Energy, the IRS, agriculture subsidies, and fiat money, his recipe might be a bit dated, but the general idea still holds.

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Here’s a story for the better-late-than-never file. Former Cuban dictator Fidel Castro confessed that communism doesn’t work and that his nation’s economic system should not be emulated.

Fidel Castro told a visiting American journalist that Cuba’s communist economic model doesn’t work, a rare comment on domestic affairs from a man who has conspicuously steered clear of local issues since stepping down four years ago. The fact that things are not working efficiently on this cash-strapped Caribbean island is hardly news. Fidel’s brother Raul, the country’s president, has said the same thing repeatedly. But the blunt assessment by the father of Cuba’s 1959 revolution is sure to raise eyebrows. Jeffrey Goldberg, a national correspondent for The Atlantic magazine, asked if Cuba’s economic system was still worth exporting to other countries, and Castro replied: “The Cuban model doesn’t even work for us anymore” Goldberg wrote Wednesday in a post on his Atlantic blog.

Too bad Castro didn’t have this epiphany 50 years ago. The Cuban people languish in abject poverty as a result of Castro’s oppressive policies. Food is harshly rationed and other basic amenities are largely unavailable (except, of course, to the party elite). This chart, comparing inflation-adjusted per-capita GDP in Chile and Cuba, is a good illustration of the human cost of excessive government. Living standards in Cuba have languished. In Chile, by contrast, the embrace of market-friendly policies has resulted in a huge increase in prosperity. Chileans were twice as rich as Cubans when Castro seized control of the island. After 50 years of communism in Cuba and 30 years of liberalization in Chile, the gap is now much larger.

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Unlike the United States and most European nations, Chile does not face a long-term Social Security crisis. This is because lawmakers shifted to a system of personal accounts almost 30 years ago. As a result, Chile’s economy is much stronger, the financial system is healthy, workers are better off, and taxpayers are protected. It also turns out that a system of personal accounts has a positive impact on the labor supply of older workers. Instead of getting lured into retirement by a punitive tax-and-transfer government system, they remain active to reap the rewards of a system that rewards them (rather than tax collectors) for continued work. A former World Bank expert has the details in a new report from the National Center for Policy Analysis.
American workers live longer each decade but they continue to retire early. They often begin receiving Social Security benefits, quit working and stop contributing to national output well before age 65. Reversing these trends must be an important objective when designing long-term reforms to balance revenues and expenditures on elderly entitlements. Chile faced similar problems prior to 1981. It had a traditional pay-as-you-go defined benefit system, like Social Security in the United States. Workers had strong incentives to start their retirement benefits as soon as possible, because postponing pensions and adding contributions did not increase benefits commensurately. Labor force participation dropped dramatically when workers became eligible for pensions. This changed with reforms in 1981 that replaced the defined benefit system with a defined contribution system. All new workers were required to join the defined contribution system while existing workers had a choice. Most workers are now in the new system and are required to contribute 10 percent of their wages to an individual account. Contributions are invested in a pension fund chosen by the worker and accumulate a market rate of return. Payouts take the form of inflation-protected annuities or gradual withdrawals during retirement. The new system increased incentives for older workers to postpone retirement and continue working. The response was dramatic….Following the 1981 policy changes and reforms, and after controlling for other sources of change in retirement behavior, the percentage of individuals receiving early benefits fell significantly: The proportion who received benefits before age 65 decreased by about 8 percentage points. The proportion of individuals who started receiving retirement benefits by their early 60s fell by about a quarter. The proportion who started receiving benefits by their 50s was cut in half. Postponing the commencement of benefits could be due to market returns on additional contributions, which made workers more willing to continue working in order to save more money for retirement. Or it could be due to tighter preconditions on early retirement, which required more individuals to continue working until age 65. Tighter preconditions seem to dominate, as the percentage of individuals who receive benefits after 65 has not changed. More older workers kept working following the reform, after controlling for other factors: Labor force participation rates for individuals in their 50s rose 12 percentage points. Labor force rates rose 13 percentage points for those aged 65-70. Individuals aged 60-64 increased their labor force participation the most – by 19 percentage points. The biggest change in labor force participation was for individuals who had started receiving benefits from their retirement accounts: Participation rates rose by 15 percentage points for pension recipients in their late 60s. Rates rose by 28 percentage points for those in their 50s and early 60s. Among all pension recipients under age 70, the proportion who continued working more than doubled.

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Here’s another study showing the benefits of comprehensive school choice in a foreign country. Interestingly, the author of the report about the Chilean system clearly is not a fan of competition, yet even his data shows higher scores for private schools and rising overall scores, even in the government schools – which is exactly what one would expect since competition encourages every type of school to do a better job:

Chile’s education system was decentralized in 1980, and a voucher-type subsidy was introduced to encourage private providers to enter the market. …Following the reform…, the subsidized private sector rapidly expanded…with 56 percent of enrollments in the municipal sector and 34 percent in subsidized private schools. The fee-paying private sector has expanded…to account for 10 percent of total enrollment. …test results have tended to improve over time, especially at 4th grade, but there are significant differences…fee-paying private schools on average score 19 more points than municipal schools in the SIMCE test, whereas subsidized private schools score 4.5 more.

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Omen for Massachusetts?

As reported by the Financial Times, Sebastian Pinera, the brother of Cato’s Jose Pinera, was elected President of Chile this weekend. The press is viewing Pinera’s election through the right-left lens of Latin American politics, but this is a bit misleading since Chile has remained a very pro-market nation during nearly two decades of supposedly left-wing rule. According to Economic Freedom of the World (see page 10), Chile was the world’s fifth-most free-market nation as of 2007, ranking above the United States, Australia, and Estonia. The new president hopefully will push Chile even farther in the right direction, but the real lesson from Chile is that free markets boost prosperity regardless of which political party is in charge. That being said, hopefully this is a harbinger of good election results elsewhere in the world:

Sebastián Piñera, a billionaire businessman, has defeated Chile’s ruling leftist coalition to return the right to power for the first time since the return of democracy after General Augusto Pinochet’s dictatorship in 1990. With 99.2 per cent of the vote counted, giving Mr Piñera a lead of 51.61 per cent to Mr Frei’s 48.38 per cent, the former president conceded defeat. It was the right’s first victory at the ballot box in Chile since 1958 and bucks a South American trend with the left in power in many countries from Venezuela to Brazil to Argentina.

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