The State of Freedom in Chile

Perhaps one would not know it for some of the articles that have appeared on this website, but libertarians have plenty of reason to be optimistic about Chile. The country’s economy consistently ranks as by far the freest in Latin America, reaching tenth place in the world in the most recent ranking. Free market type policies have lifted millions of Chileans out of poverty over a time span of mere decades while making its capital city a major hub for international business. And despite recent allegations of large-scale corruption regarding political campaign contributions, on the whole corruption is virtually unheard of.

FreedomSuch a success story literally sets Chile apart from every other nation on the continent, as evidenced by the fact that it is set to become its first developed country by the end of this decade. Yet its unrivaled success has all but silenced critics. On the contrary, it seems like the very prosperity that made Chile the envy of Latin America has lulled some would-be free market advocates to sleep, while proponents of state intervention are running on all cylinders. “Free” education and healthcare and Keynesian economic stimulus – read: more wealth confiscation – are just some of the talking points among those aiming to perfect society by way of scribbling words on pieces of paper.

Last March an OECD report made the headlines in Chile for categorizing the country as among the most unequal in terms of income distribution. Such reports provide the kind of ammunition used by interventionists to beat the drum for all manner of reforms, including the recently approved educational reforms. Given the relative lack of government meddling in daily Chilean life – at least on the scale people in most developed nations have become accustomed to – some are eager to seize every opportunity to promote the supposed virtues of government planning.

To be fair, much of this sentiment stems from resentment against the iron first with which economic reforms were implemented by Augusto Pinochet’s military junta. Looking to break with the socialist policies pursued by his predecessor Salvador Allende and its disastrous consequences, the commander and his ilk considered “the Chicago Boys” to be the only group of economists worthy of their trust. Taking his cues from them, the policies subsequently introduced succeeded in reversing the downward trend and revived an economy previously characterized by soaring inflation and deficits coupled with plummeting saving and investment rates.

Since its return to democracy in 1990 Chile has almost exclusively seen left-wing administrations. For the better part of this era, however, economic policies have generally favored the free market over central planning. It is precisely this trend that is a thorn in the side of those who wish to see more top-down decision making, their main spokesperson being Michelle Bachelet. Fortunately their rhetoric does not go so far as to demonize international trade or private property, but it does tend to blame the free market for inequality in just about every aspect of life. This flawed line of thinking is most prominently and frequently used to justify more state control of healthcare, education and the labor market.

The latter, of course, can hardly be said to be a uniquely Chilean phenomenon. Still, it is imperative to the cause of freedom to promote this understanding of the philosophy of liberty; that rather than foster inequality, voluntary trade has historically been – and still is – the most powerful force against it. Not to mention the fact that trade, not coercion, is simply the morally preferable thing to do.

How Economic Freedom can Create Economic Growth

When citing the economic growth of China and India as an example of how freeing up trade brings prosperity, a common counter-argument is that the vast size and populations of those countries skews the comparison with other (developing) countries. There are plenty of examples, though, of small countries prospering for the same reason. Arguably the two best examples are Hong Kong and Singapore; the two most economically free nations in the world today.

Despite (or because?) its small size and population of only 7 million, Hong Kong is the world’s 10th largest trading economy and is ranked the world’s most competitive country. Moreover, its unemployment rate of about 3 percent in recent years and extremely low tax rates by OECD standards would make many a European or North-American jealous.

Another economic powerhouse in East Asia, Singapore is less than one third the size of Luxembourg or about half the size of the city of Los Angeles and has a population of approximately 5.5 million. The Singapore economy grew by an average of 8.6 percent between 2004 and 2007. After contracting by 0.8 percent in 2009 as a result of the global financial crisis, it rebounded 14.8 percent a year later. Singapore is consistently in the top-3 most competitive countries in the world and its unemployment rate is far lower than that of most developed countries, at 2 percent or less. Tax rates are far lower than those of many other developed nations, GDP per capita is among the highest in the world and the country is known to have a remarkably corruption-free environment.

Though to say that economic freedom paves the way for prosperity may sound like stating the obvious to Economic Freedom Economic Growthsome, it is certainly not always put into practice. In fact, the words “economic freedom” are hardly ever uttered by those who seem to constantly be talking about “creating jobs”. When is the last time you heard a politician, economist or media outlet advocate for more economic freedom as a means to achieve prosperity? All too often low unemployment is imagined to be just one brilliant government program away. The pundits then proceed to debate which program would secure the most “new jobs”. No mention of economic freedom there.

Moreover, very few people seem to ask the question of what the goal is: to create new jobs or to boost economic growth? Do the two necessarily go hand in hand? An upcoming blog post will deal with that debate. For now, let’s get back to how economic freedom might relate to prosperity.

First off, we should ask ourselves: what is economic freedom? The index above referred to and published in Economic Freedom of the World names personal choice, voluntary exchange, freedom to compete and security of privately owned property as the cornerstones of economic freedom. It then uses 42 variables to construct a summary index which, in the interest of time, we will not go over here. Still, it is worth going over the cornerstones of economic freedom as determined by the authors of the report.

In an economic context, personal choice could refer to my freedom to buy a 32 ounce soda if (God forbid) I felt the need to do so, without mayor Bloomberg threatening to fine me or the person offering it to me. The principle of voluntary exchange holds that buyers and sellers should be free to engage in transactions on a voluntary basis, i.e. if people are forced to buy a product or service – Obamacare, anyone? – they are less economically free.

Freedom to compete is another essential part of economic freedom. For instance, if Apple obtains a patent for a particular product, its competitors are effectively barred from competing in that particular market unless it finds ways to produce a similar product. This, by the way, not only reduces economic freedom but also tends to keep prices artificially high by reducing the supply of the product in question.

Perhaps most important to economic freedom and consequently economic growth, is the security of private property. After all, it would be quite a stretch to claim that someone is free if his or her private property can be stolen at any time by criminals without any repercussion. Besides, this would pose a major disincentive for anyone to accumulate wealth. The same can of course be said about taxation, which is why it should not be surprising that the economically freest countries generally have low tax rates.

If only those elected “representatives” and heads of state pulling the levers of power understood that!