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Posts Tagged ‘Singapore’

Singapore is one of my favorite nations for the simple reason that it consistently gets very high scores from Economic Freedom of the World and the Index of Economic Freedom (as well as from Doing Business, Global Competitiveness Report, and World Competitiveness Yearbook).

I also greatly admire Singapore’s strict adherence to my Golden Rule for a 10-year period beginning in the late 1990s. Government spending actually shrank by a bit more than 1 percent per year, on average, over that decade.

This reduced the burden of government spending to just 12 percent of economic output, almost as low as it was in North America and Western Europe in the 1800s.

Unfortunately, the public sector has since crept back up to 20 percent of GDP, but that’s still very low compared to the rest of the developed world.

What’s especially attractive is that the welfare state is very small in Singapore. According to the IMF (see page 44), expenditures on “social development” are only about 8 percent of GDP, and that category includes education and health care. If you peruse Singapore budget documents, spending on “transfers” is well under 5 percent of economic output.

Either figure is far below levels of redistribution in other developed nations.

One of the reasons the welfare state is so small is that individuals are required to set aside their own money for health and retirement.

And since the burden of spending is modest, that enables Singapore to have a non-oppressive tax regime.

That’s the good news. The bad news is that a value-added tax was imposed back in the 1990s. Though the rate has stayed low (so far) and hasn’t (yet) become a money machine for big government.

Singapore is also very good in areas other than fiscal policy. It is a shining example of the benefits of open trade. It ranks very highly for rule of law. And there’s very little regulation.

Indeed, Singapore has consistently ranked #2 for economic freedom in recent decades, trailing only Hong Kong (the U.S. briefly edged out Singapore for second place after all the market-friendly reforms of the Reagan and Clinton years, but now we trail by a wide margin thanks to the statism of the Bush-Obama years).

Here’s a graph from Economic Freedom of the World showing how Singapore started at a decent point in 1970 and then had a 20-year period of improvement (most because of deregulation and better monetary policy).

As I repeatedly argue, if you want good economic results, you need good policy.

And that’s exactly the story of Singapore.

I’m currently in the country because I spoke earlier today at a conference on global investment (the audience got quite excited when I explained the effort to defund the OECD).

Walking the streets, it’s hard not to be impressed by the widespread prosperity of the jurisdiction. Sleek buildings. Fancy shops. Lots of professionals.

And ordinary people are the biggest winners. Here’s a remarkable chart from Human Progress showing per capita GDP (in $2015 inflation-adjusted dollars) in Singapore and the United States, along with the world average.

As you can see, Singapore used to be far below the United States and somewhat below the world average. Now it is one of the wealthiest places on the planet.

Singapore’s jump from poverty to prosperity is astounding.

What’s really remarkable is that the country was as poor as Jamaica back in the 1960s. But thanks to rapid economic growth, the people of Singapore enjoy very high living standards today.

The moral of the story is that ordinary people in Singapore enjoy prosperity because the government was smart enough to focus on growth and didn’t worry about inequality.

Here’s what Marian Tupy, one of my colleagues at the Cato Institute, wrote about the country’s incredible growth.

The incredible transformation of Singapore from a sleepy outpost of the British Empire to a global commercial and technological hub was partly facilitated by a very high degree of economic freedom. …As late as 1970, per person income in Singapore was 54 percent of the global average. Today it is 321 percent of the global average.

Now for the bad news.

Singapore is very pro-market, but it’s not very pro-liberty. In an article for the Foundation for Economic Education, Donovan Choy highlights some of the nation’s shortcomings.

Within libertarian circles, Singapore generally enjoys a good reputation for its economic freedom.

But it’s not Nirvana.

The Housing Development Board (HDB), the public housing arm of the state, houses more than 80% of the population in high-rise apartment homes. …Education is largely monopolized by the state from the primary school level up until the university level… Singapore suffers from a severe lack of press freedom, ranking at an alarming 151 in the World Press Freedom Index… The state also controls public broadcasting from television to radio. …Singapore is perhaps most well-known for its non-tolerance of drugs. Drug users can be jailed or housed in rehabilitation centers for up to three years and drug traffickers face the death penalty. …Singaporean males are also subject to mandatory conscription of up to two years by the age of 18, a law that has been in effect since 1967. Civil ownership of guns are outlawed in Singapore.

These are reasons why Singapore does not earn a high score in the Human Freedom Index.

But I’m an economist, so I’m still as positively impressed as I was back in 2009.

P.S. I went to the iconic Raffles Hotel to visit the iconic Long Bar and drink an iconic Singapore Sling. But my attempt to be a stereotypical tourist was derailed because that part of the hotel is being renovated. Which is probably a good outcome since I learned that the Singapore Sling is a gin-based drink, which presumably would not agree with my sensitive palate. Though I did learn that the last wild tiger in Singapore was killed at the hotel back in 1902.

P.P.S. One final policy comment: The bureaucrats at the OECD produced a report on Asian economies and argued that taxes should consume at least 25 percent of GDP to achieve prosperity, which was a remarkable assertion since the report showed that Singapore was the richest nation in the region and has a tax burden barely half that level. That’s an example of what soccer fans call an “own goal.” The OECD wasn’t just being statist, it was being incompetently statist.

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I’ve looked at some of the grim fiscal implications of demographic changes the United States and Europe.

Now let’s look at what’s happening in Asia.

The International Monetary Fund has a recent study that looks at shortfalls in government-run pension schemes and various policies that could address the long-run imbalances in the region. Here are the main points from the abstract.

Asian economies are aging fast, with significant implications for their pension system finances. While some countries already have high dependency ratios (Japan), others are expected to experience a sharp increase in the next couple of decades (China, Korea, Singapore). …This has…implications. …pension system deficits can increase very quickly, limiting room for policy action and hampering fiscal sustainability. …This paper explores how incorporating Automatic Adjustment Mechanisms (AAMs)—rules ensuring that certain characteristics of a pension system respond to demographic, macroeconomic and financial developments, in a predetermined fashion and without the need for additional intervention— can be part of pension reforms in Asia.

More succinctly, AAMs are built-in rules that automatically make changes to government pension systems based on various criteria.

Incidentally, we already have AAMs in the United States. Annual Social Security cost of living adjustments (COLAs) and increases in the wage base cap are examples of automatic changes that occur on a regular basis. And such policies exist in many other nations.

But those are AAMs that generally are designed to give more money to beneficiaries. The IMF study is talking about AAMs that are designed to deal with looming shortfalls caused by demographic changes. In other words, AAMs that result in seniors getting lower-than-promised benefits in the future. Here’s how the IMF study describes this development.

More recently, AAMs have come to the forefront to help address financial sustainability concerns of public pension systems. Social insurance pension systems are dominated by defined benefit schemes, pay-as-you-go financed, with liabilities explicitly underwritten by the government. …these systems, under their previous contribution and benefit rules, are unprepared for population aging and need to implement parametric reform or structural reforms in order to reduce the level or growth rate of their unfunded pension liabilities. …Automatic adjustments can theoretically make the reform process politically less painful and more likely to succeed.

Here’s a chart from the study that underscores the need for some sort of reform. It shows the age-dependency ratio on the left and the projected increase in the burden of pension spending on the right.

I’m surprised that the future burden of pension spending in Japan will only be slightly higher than it is today.

And I’m shocked by the awful long-run outlook in Mongolia (the bad numbers for China are New Zealand are also noteworthy, though not as surprising).

To address these grim numbers, the study considers various AAMs that might make government systems fiscally sustainable.

Especially automatic increases in the retirement age based on life expectancy.

One attractive option is to link statutory retirement ages—which seem relatively low in the region—to longevity or other sustainability indicators. This would at the very least help ameliorate the impact of life expectancy improvements in the finances of public pension systems. … While some countries have already raised the retirement age over time (Japan, Korea), pension systems in Asia do not yet feature automatic links between retirement age and life expectancy. …The case studies for Korea and China (section IV) suggest that automatic indexation of retirement age to life expectancy can indeed help reduce the pension system’s financial imbalances.

Here’s a table showing the AAMs that already exist.

Notice that the United States is on this list with an “ex-post trigger” based on “current deficits.”

This is because when the make-believe Trust Fund runs out of IOUs in the 2030s, there’s an automatic reduction in benefits. For what it’s worth, I fully expect future politicians to simply pass a law stating that promised benefits get paid regardless.

It’s also worth noting that Germany and Canada have “ex-ante triggers” for “contribution rates.” I’m assuming that means automatic tax hikes, which is a horrid idea. Heck, even the study acknowledges a problem with that approach.

…raising contribution rates can have important effects on the labor market and growth, it would be important to prioritize other adjustments.

From my perspective, the main – albeit unintended – lesson from the IMF study is that private retirement accounts are the best approach. These defined contribution (DC) systems avoid all the problems associated with pay-as-you-go, tax-and-transfer regimes, generally known as defined benefit (DB) systems.

The larger role played by defined contribution schemes in Asia reduce the scope for using AAMs for financial sustainability purposes. Many Asian economies (Hong Kong, Singapore, Australia, Malaysia and Indonesia) have defined contribution systems, …under which system sustainability is typically inherent.

Here are the types of pension systems in Asia, with Australia and New Zealand added to the mix..

For what it’s worth, I would put Australia in the “defined contribution” grouping. Yes, there is still a government age pension that serves as a safety net, but there also are safety nets in Singapore and Hong Kong as well.

But I’m nitpicking.

Here’s another table from the study showing that it’s much simpler to deal with “DC” systems compared with “DB” systems. About the only reforms that are ever needed revolve around the question of how much private savings should be required.

By the way, even though the information in the IMF study shows the superiority of DC plans, that’s only an implicit message.

To the extent the bureaucracy has an explicit message, it’s mostly about indexing the retirement age to changes in life expectancy.

That’s probably better than doing nothing, but there’s an unaddressed problem with that approach. It forces people to spend more years working and paying into systems, and then leaves them fewer years to collect benefits in retirement.

That idea periodically gets floated in the United States. Here’s some of what I wrote in 2011.

Think of this as the pay-for-a-steak-and-get-a-hamburger plan. Social Security already is a bad deal for workers, forcing them to pay a lot of money in exchange for relatively meager retirement benefits.

I made a related observation about this approach back in 2012.

…it focuses on the government’s finances and overlooks the implications for households. It is possible, at least on paper, to “save” Social Security by cutting benefits and raising taxes. But such “reforms” force people to pay more and get less – even though Social Security already is a very bad deal, particularly for younger workers.

The bottom line is that the implicit message should be explicit. Other nations should copy jurisdictions such as Chile, Australia, and Hong Kong by shifting to personal retirement accounts

P.S. Speaking of which, here’s the case for U.S. reform, as captured by cartoons. And you can enjoy other Social Security cartoons here, here, and here, along with a Social Security joke if you appreciate grim humor.

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I wrote a rather favorable column a few days ago about a new study from economists at the Organization for Economic Cooperation and Development. Their research showed how larger levels of government spending are associated with weaker economic performance, and the results were worth sharing even though the study’s methodology almost certainly led to numbers that understated the case against big government.

Regardless, saying anything positive about research from the OECD was an unusual experience since I’m normally writing critical articles about the statist agenda of the international bureaucracy’s political appointees.

That being said, I feel on more familiar ground today since I’m going to write something negative about the antics of the Paris-based bureaucracy.

The OECD just published Revenue Statistics in Asian Countries, which covers Indonesia, Singapore, Malaysia, South Korea, Japan, and the Philippines for the 1990-2014 period. Much of the data is useful and interesting, but some of the analysis is utterly bizarre and preposterous, starting with the completely unsubstantiated assertion that there’s a need for more tax revenue in the region.

…the need to mobilise government revenue in developing countries to fund public goods and services is increasing. …In the Philippines and Indonesia, the governments are endeavoring to strengthen their tax revenues and have established tax-to-GDP targets. The Philippines aims to increase their tax-to-GDP ratio to 17% (excluding Social Security contributions) by 2016…and Indonesia aims to reach the same level by 2019.

Needless to say, there’s not even an iota of evidence in the report to justify the assertion that there’s a need for more tax revenue. Not a shred of data to suggest that higher taxes would lead to more economic development or more public goods. The OECD simply makes a claim and offers no backup or support.

But here’s the most amazing part. The OECD report argues that a nation isn’t developed unless taxes consume at least 25 percent of GDP.

These targets will contribute to increasing financial capacity toward the minimum tax-to-GDP ratio of 25% deemed essential to become a developed country.

This is a jaw-dropping assertion in part because most of the world’s rich nations became prosperous back in the 1800s and early 1900s when government spending consumed only about 10 percent of economic output.

And not only were taxes a concomitantly minor burden during that period, but many nations didn’t have any income taxes at all.

At this point, you may be thinking the OECD bureaucrats are merely guilty of not knowing history.

That certainly would be a charitable explanation of their gross oversight/mistake.

But there’s something else in the study that makes this benign interpretation implausible. The study explicitly notes that Singapore is a super-prosperous developed nation with a very low tax burden – way below the supposed minimum requirement identified by the OECD.

Singapore has the highest GDP per-capita of the six countries and one of the lowest tax-to-GDP ratios. …The low tax-to-GDP ratio is explained by lower income tax rates (particularly on corporate income) and VAT rates, compared to other Asian countries. …The tax-to-GDP ratio in Singapore is lower in 2014 relative to 2000, driven by the decrease of individual income tax rates and corporate income tax rates.

Here’s a chart from the report showing that taxes consume less than 14 percent of economic output in Singapore.

Needless to say, there’s nothing in the report to square the circle and justify the claim about the supposed link between higher taxes and economic development. Nothing to explain why Singapore manages to be so rich with such a small burden of government. It’s as if the bureaucrats hoped that nobody would notice that numbers in the study undermined their ideologically driven claim that tax burdens should climb in Asia.

Indeed, I wonder if Hong Kong was omitted from the study simply because that would have further undermined the OECD’s preposterous assertion that higher taxes are a route to economic development.

P.S. Having low taxes and a modest burden of government certainly is part of what can make a nation rich and successful, but the real goal should be to have a good mix of free markets and small government. Singapore does that, ranking #2 in Economic Freedom of the World.

Other Asian nations, by contrast, may have modest fiscal burdens, but the potential economic benefit is undermined by statist policies in areas such as trade, regulation, monetary policy, and property rights. This certainly helps to explain why countries such as Indonesia (#79), Malaysia (#62), and the Philippines (#80) have much lower scores for overall economic liberty.

P.P.S. I’m not sure why the OECD would produce such sloppy research. If they simply wanted to create a false narrative, why didn’t the bureaucrats omit Singapore and simply hope nobody knew the numbers from that country (or the historical numbers for North America and Western Europe)? My suspicion is that the senior political types at the OECD wanted to produce a study that would be helpful for certain politicians  in the region (i.e., allow them to justify higher tax burdens) and they figured a lot of people would only pay attention to the press release.

P.P.P.S. The OECD certainly has a track record of dishonest research.

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Most folks in Washington are still digesting last night’s debate between Tweedledee and Tweedledum. If that’s what you care about, you can see my Twitter commentary, though I was so busy addressing specific issues that I failed to mention the most disturbing part of that event, which was the total absence of any discussion about the importance of liberty, freedom, and the Constitution.

But let’s set aside the distasteful world of politics and contemplate U.S. competitiveness. Specifically, let’s examine America’s position in the latest edition of the World Economic Forum’s Global Competitiveness Report. This Report is partly a measure of policy (sort of like Economic Freedom of the World) and partly a measure of business efficiency and acumen.

The bad news is that we used to be ranked #1 and now we’re #3.

The good news is that being #3 is still pretty good, and it’s hard to beat Switzerland and Singapore because they have such good free-market policies. And that’s where America falls short.

Indeed, if you look at the top-10 nations and the three major measurements, you’ll notice that the United States ranks extremely high in “efficiency enhancers” and “innovation and sophistication factors,” both of which have a lot to do with the private sector’s competitiveness. But we have a mediocre (at least for developed nations) score for “basic requirements,” the area where government policy plays a big role.

Moreover, if you look at the the biggest obstacles to economic activity in the United States, the top 4 deal with bad government policy.

The tax treatment of companies is easily the main problem, as you might expect since we rank #94 out of 100 nations in a study of business tax policy.

Let’s now look at the indices where the United States scored especially low out of the 138 nations that were ranked.

America’s lowest scores were for exports (#130) and imports (#134), though I take issue with the Report‘s methodology, which is based on trade flows as a share of GDP. The problem with that approach is that the United States has a huge internal market, equal to about 22 percent of the world’s economic output. That’s why our trade flows aren’t very large relative to GDP. Being surrounded by two major oceans also probably has some dampening effect on cross-border trade flows. Yes, America is guilty of some protectionism, but I think our ranking for trade tariffs (#33) is the more appropriate and accurate measure of the degree to which there is a problem.

America also got a very bad score (#128) for government debt, though at least we beat Italy (#135), Greece (#137), and Japan (#138). In case you’re wondering, Hong Kong was #1, as you might expect from a well-run jurisdiction with small government and a flat tax.  Though I must say that it is rather disappointing that the Report doesn’t include rankings for the overall burden of government spending. After all, government debt is basically a symptom of an underlying problem of a bloated public sector.

And there also was a very low score for the business cost of terrorism (#104), which is probably an unavoidable consequence of being the world’s leading superpower (and therefore a target for crazies). That being said, I imagine America’s score could be improved if we weren’t engaging in needless intervention – and thus generating needless animosity – in places such as Syria and Libya.

Here are two indices that deserve special attention. As you can see the United States gets a poor score for wasteful spending and a terrible score for the punitive taxation of profits.

With this information in mind, let’s now remind ourselves about last night’s debate. Did either candidate propose to control spending and reduce pork-barrel programs? Nope.

Did either candidate put forth a realistic plan to lower the corporate tax rate? Hillary’s plan certainly doesn’t qualify since she wants a bunch of class-warfare tax hikes. And while Trump’s plan includes a lower corporate rate, it’s not a serious proposal since he is too timid to put forth a plan to restrain government outlays.

And since neither candidate intends to address America’s looming fiscal crisis, it will probably be just a matter of time before America drops in the rankings.

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At the risk of oversimplifying, libertarians want to minimize the level of government coercion is society. That’s why we favor both economic liberty and personal liberty. Simply stated, you should have the right to control your own life and make your own decisions so long as you’re not harming others or interfering with their rights.

That’s a philosophical or moral argument.

There’s also the utilitarian argument for liberty, and that largely revolves around the fact societies with more freedom tend to be considerably more prosperous than societies with lots of government.

I’ve repeatedly made this argument by comparing the economic performance of market-oriented jurisdictions and statist ones.

Let’s look at some new evidence. Based in Lausanne, Switzerland, the Institute for Management Development is a highly regarded educational institution that publishes an annual World Competitiveness Yearbook that basically measures whether a nation is a good place to do business.

So it’s not a measure of economic liberty, at least not directly. And the quality of governance matters for the IMD rankings (presumably based on something akin to the European Central Bank’s measure of “public sector efficiency“).

But you’ll notice a clear link between economic liberty and competitiveness.

Here are the top-10 nations. (you can look at the rankings for all nations by clicking here).

As you might suspect, there’s a strong correlation between the nations that are competitive and those that have smaller governments and free markets.

Indeed, three out of the top four jurisdictions (Hong Kong, Singapore, and Switzerland) rank in the top four for economic liberty according to Economic Freedom of the World.

And I’m happy to see that the United States also scores very highly, even if we only rank 17 out of 157 for economic freedom.

Indeed, every country in IMD’s top 10 other than Sweden is ranked in the top quartile of EFW.

You also probably won’t be surprised by the countries getting the worst scores from IMD.

Congratulations to Venezuela for being the world’s least competitive nation. Though that might be an overstatement since IMD only ranks 61 jurisdictions. If all the world’s countries were included, Venezuela presumably would beat out North Korea. And maybe a couple of other squalid outposts of statism, such as Cuba.

It’s also worth noting that Greece gets consistently bad scores. And I’m not surprised that Argentina is near the bottom as well (though it has improved since last year, so hopefully the new government will continue to move in the right direction).

By the way, it’s worth noting that economic freedom is a necessary but not sufficient condition for competitiveness. Jordan, for instance, ranks in the top 10 for economic freedom but gets a low score from IMD, presumably because the advantages of good policy don’t compensate for exogenous factors such as geopolitical risk and access to markets.

The moral of the story, though, is that free markets and small government are the recipe for more prosperity. And those policies are probably even more important for nations that face exogenous challenges.

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At the risk of stereotyping, the Chinese people are remarkably productive when given the chance. Hong Kong and Singapore are dominated by ethnic Chinese, and those jurisdictions routinely rank among the world’s top economies.

Taiwan is another high-performing economy with an ethnic Chinese population.

Ironically, the only place where Chinese people don’t enjoy high average incomes is China. And that’s because there’s too much statism. If you peruse the indispensable Economic Freedom of the World from Canada’s Fraser Institute, you’ll see that China is ranked #115 out of 152 jurisdictions, which is even below nations such as Greece, Haiti, and Vietnam.

As I explain in this interview, China’s politicians are undermining prosperity with a system based on cronyism rather than capitalism.

China’s in the news, of course, because of recent instability in its financial markets. And I’ve taken advantage of the opportunity to give my two cents on this issue (see here and here).

But I was making the same criticisms even when China’s economy was perceived as a big success. I wrote in 2010 that America didn’t need to fear the supposed Chinese economic tiger. I pointed out in 2011 that China was way behind the United States.

And I was at least somewhat prescient when I warned about a bubble in the Chinese economy in this 2011 debate.

Though plenty of folks on the left actually argued that China’s state-controlled economy was something to mimic. Writing for Reason, Ronald Bailey cites some of their silly statements.

As the world watches China’s Communist Party leaders try to order markets around, my mind turned to those pundits who earnestly recommended that the United States emulate the brilliant beneficient Chinese planners in running our economy. The most fulsome China booster was New York Times columnist Tom Friedman. …So enamored of China’s industrial policy was Friedman that in 2010 he likened Chinese economic planning boldness to making “moon-shots.” …And then there is the inevitable Robert Reich. Reich, who is a former Clinton Secretary of Labor, has never been right about anything when it comes to economic policy prescriptions. For example, Reich was convinced in the 1980s the Japan would bury the United States due to the planning acumen of that country’s savvy bureaucrats. …Just shy of 30 years later Reich sang the same stale tune in 2011, only instead of Japanese planners, he was praising the wonders of Chinese industrial planning… As late as 2012, Richard D’Aveni, a Professor of Strategy at Tuck School of Business at Dartmouth College, declared in The Atlantic that “The U.S. Must Learn From China’s State Capitalism to Beat It.”

Actually, Professor D’Aveni is right for the wrong reason. We can learn a lot from statist economies. But we should learn what to avoid, not what to copy.

To conclude, this post shouldn’t be perceived as being anti-China. I want there to be more prosperity in that country, which is why I defended China from an absurd attack by the IMF.

Moreover, I commend China for reforms that move policy in the right direction. And as I pointed out in the interview embedded above, China’s reforms in the 1980s and 1990s may have been limited, but they did help lift hundreds of millions of people out of abject poverty.

Since I mentioned the interview, one of the quirky parts of the discussion was whether politicians should be held criminally responsible for economic mismanagement. Here’s what I wrote a few years ago about an example of that happening in Iceland.

P.S. You probably didn’t realize that it was possible to see dark humor in communist oppression.

P.P.S. But at least some communists in China seem to understand that the welfare state is a very bad idea.

P.P.P.S. Some business leaders say China is now more business-friendly than the United States. That’s probably not good news for America, but my goal is to have a market-friendly nation, not a business-friendly nation.

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There’s a “convergence” theory in economics that suggests, over time, that “poor nations should catch up with rich nations.”

But in the real world, that seems to be the exception rather than the rule.

There’s an interesting and informative article at the St. Louis Federal Reserve Bank which explores this question. It asks why most low-income and middle-income nations are not “converging” with countries from the developed world.

…only a few countries have been able to catch up with the high per capita income levels of the developed world and stay there. By American living standards (as representative of the developed world), most developing countries since 1960 have remained or been “trapped” at a constant low-income level relative to the U.S. This “low- or middle-income trap” phenomenon raises concern about the validity of the neoclassical growth theory, which predicts global economic convergence. Specifically, the Solow growth model suggests that income levels in poor economies will grow relatively faster than developed nations and eventually converge or catch up to these economies through capital accumulation… But, with just a few exceptions, that is not happening.

Here’s a chart showing examples of nations that are – and aren’t – converging with the United States.

The authors analyze this data.

The figure above shows the rapid and persistent relative income growth (convergence) seen in Hong Kong, Singapore, Taiwan and Ireland beginning in the late 1960s all through the early 2000s to catch up or converge to the higher level of per capita income in the U.S. …In sharp contrast, per capita income relative to the U.S. remained constant and stagnant at 10 percent to 30 percent of U.S. income in the group of Latin American countries, which remained stuck in the middle-income trap and showed no sign of convergence to higher income levels… The lack of convergence is even more striking among low-income countries. Countries such as Bangladesh, El Salvador, Mozambique and Niger are stuck in a poverty trap, where their relative per capita income is constant and stagnant at or below 5 percent of the U.S. level.

The article concludes by asking why some nations converge and others don’t.

Why do some countries remain stagnant in relative income levels while some others are able to continue growing faster than the frontier nations to achieve convergence? Is it caused by institutions, geographic locations or smart industrial policies?

I’ll offer my answer to this question, though it doesn’t require any special insight.

Simply stated, Solow’s Growth Theory is correct, but needs to be augmented. Yes, nations should converge, but that won’t happen unless they have similar economic policies.

And if relatively poor nations want to converge in the right direction, that means they should liberalize their economies by shrinking government and reducing intervention.

Take a second look at the above chart above and ask whether there’s a commonality for the jurisdictions that are converging with the United States?

Why have Hong Kong, Singapore, Taiwan, and Ireland converged, while nations such as Mexico and Brazil remained flat?

The obvious answer is that the former group of jurisdictions have pursued, at least to some extent, pro-market policies.

Heck, they all rank among the world’s top-18 nations for economic freedom.

Hong Kong and Singapore have been role models for economic liberty for several decades, so it’s no surprise that their living standards have enjoyed the most impressive increase.

But if you dig into the data, you’ll also see that Taiwan’s jump began when it boosted economic freedom beginning in the late 1970s. And Ireland’s golden years began when it increased economic freedom beginning in the late 1980s.

The moral of the story is – or at least should be – very clear. Free markets and small government are the route to convergence.

Here’s a video tutorial.

And if you want some real-world examples of how nations with good policy “de-converge” from nations with bad policy, here’s a partial list.

* Chile vs. Argentina vs. Venezuela

* Hong Kong vs. Cuba

* North Korea vs. South Korea

* Cuba vs. Chile

* Ukraine vs. Poland

* Hong Kong vs. Argentina

* Singapore vs. Jamaica

* United States vs. Hong Kong and Singapore

* Botswana vs. other African nations

Gee, it’s almost enough to make you think there’s a relationship between good long-run growth and economic freedom!

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