Profiles in prosperity

Special Report | The relationship between political freedom and economic success: The top 10 economic powerhouse nations show more freedom equals more prosperity, just as those at the bottom show economic misery that results from political repression

Issue: "Global shame," June 15, 2002

Imagining he was addressing the workers of the world, Karl Marx declared, "You have nothing to lose but your chains." Ironically, the overthrow of Marxist rule has tested his promise better than Marxist domination ever could. For the first time a former Soviet state this year broke into the top 10 nations in the Index of Economic Freedom. Estonia, with 1.5 million people and a little less land mass than West Virginia, tied with the United States, Luxembourg, Ireland, and the Netherlands for fourth spot in this year's index.

"Economic freedom and prosperity go hand in hand," says Index editor Gerald P. O'Driscoll Jr. That seems self-evident to many Westerners, but countries like China and Cuba continue to seek prosperity without loosening the one-party vise grip.

To prove the point, the 10 nations at the bottom of the Index demonstrate that decrepit dictators lead their countries to financial ruin. North Korea ties for last place with Iraq. Rounding out the list of economically regressive states are Libya, Cuba, Laos, Iran, Turkmenistan, Uzbekistan, Belarus, and Zimbabwe. Six of those countries (North Korea, Cuba, Laos, Turkmenistan, Uzbekistan, and Belarus) are communist holdovers. Three are one-party dictatorships with Marxist tendencies (Iraq, Libya, and Zimbabwe). Iran, despite the gains made by reformers in 2000 parliamentary elections, is dominated by hardliners who value Islamic purity over human freedom.

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When it comes to economics, it's actually the politics, stupid. Even plentiful natural resources can't compensate for predatory government. Turkmenistan, for instance, is the fourth-largest oil producer in the Caspian basin and the 11th leading owner of natural gas reserves in the world. It is among the top 10 of the world's cotton producers. But the former Soviet republic did not leave behind communist rule when it left the Soviet Union. Communist Saparmurat Niyazov is president for life. Government has privatized less than half of 1 percent of business enterprises. All key industries remain state-owned.

Zimbabwe, once one of southern Africa's wealthiest and most stable nations, under the 20-year reign of Robert Mugabe has slipped into economic crisis. Mr. Mugabe stole presidential elections earlier this year, even jailing his opponent on trumped-up treason charges. His policy of confiscating white-owned farms means many once-prosperous commercial operations have closed altogether.

How did Estonia escape that plight? It and the other Baltic states were the first to openly break from the Soviet Union. The government set back clocks one hour in an early sign of defiance so Estonians could go to work at the same time as European neighbors instead of Moscow's masses. Political opposition was well established by the time of the 1991 Soviet breakup, and the country quickly declared itself independent. Estonia signed a free-trade agreement with the European Union before the last Soviet troops left in 1994. Previously high levels of church attendance returned, with Lutherans outpacing state-sponsored Russian Orthodoxy. Once freed, Orthodox churchgoers handed Moscow a further snub, choosing to affiliate with the Eastern Orthodox church after the Soviet Union breakup.

But landing an economic score tied with the United States required further liberalizations. Estonia adopted a flat tax on both corporate profits and individual income in 1999. That year it also eliminated tariffs and today is essentially a duty-free country. Government expenditures equal 36 percent of gross domestic product (by comparison, U.S. government expenditures are 30 percent of GDP). The flat income-tax rate is 26 percent (top U.S. federal income-tax rate is 40 percent, with the average American paying a 28 percent marginal tax rate).

Another surprise success story is Mozambique. It survived civil war, catastrophic flooding in 2000 and 2001, and a debilitating AIDS rate to rank No. 2 behind Azerbaijan on the most-improved list. Per capita GDP rose in one year from $144 to $198 (per capita GDP in Estonia is $4,000; in the United States it is $32,000).

While the United States consistently scores among the top five most-free nations, it has never in the eight-year history of the Index surpassed this year's top three: Hong Kong, Singapore, and New Zealand.

Hong Kong dominates the chart each year with its duty-free port, low tax rates, openness to foreign investors, and strong property rights. Surrounded as it is by repressive neighbors, those givens should not be taken for granted.

The United States landed in a five-way tie, followed by also-tied Australia, Chile, and the United Kingdom. U.S. scores actually slipped from last year. Property rights "are under assault," said the report. U.S. courts "are proving increasingly ineffective in protecting property from regulatory takings." The Index also criticizes the United States for abandoning its leadership role in international trade. Currently the United States is in technical violation of NAFTA while litigating a dispute over whether to allow Mexican long-haul trucks into the United States. And since the Index came out it has increased both farm and steel tariffs on imports.


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