NCPA - National Center for Policy Analysis

Economic Freedom And Its Rewards In Latin America

March 29, 1996

Chile is not the only country in Latin America where free market economic reforms are generating prosperity.

In Argentina, economic freedom has also increased substantially in two ways -- the government is spending less on goods and services, and marginal tax rates have been lowered.

  • The Argentine government's consumption spending (not including recently growing transfer payments) has fallen to only 5.1 percent of gross domestic product (GDP) from 12.6 percent in 1975.
  • Argentina's top tax rate, which was 62 percent for incomes over $96,000 in 1984, is now 30 percent for incomes over $120,000.
  • As a result, Argentina's real per capita GDP grew by an average of 4.8 percent between 1990 and 1994.

Regrettably, economic policies in Venezuela and Brazil have regressed over the past 20 years, and those countries have paid a high price.

  • In 1975, Venezuela's economy was the fifth freest in the world -- but by 1995 it tied with India and Kenya for 63rd place.
  • From 1974 to the present, its top tax rate increased from 20 percent (on incomes of more than $270,000) to 30 percent (which kicks in at incomes of only $40,000).
  • With inflation averaging 40 percent during the past five years, strict price controls were imposed.
  • Thus, between 1985 and 1994, real GDP per capita grew only 0.2 percent annually.

In Brazil, which has over half of South America's population:

  • Annual money supply growth averaged over 1,000 percent between 1992 and 1994 -- resulting, inevitably, in high inflation.
  • Government spending on goods and services climbed from 10.6 percent of GDP in 1975 to 16.5 percent in 1993.
  • Real per capita GDP dropped an average of .6 percent annually between 1980 and 1990.

Happily, however, Brazil was able to slash inflation to 23.2 percent in 1995. Also, reforms are allowing the sale of state-owned mining and electricity enterprises (oil production and telecommunications operations are still state-owned).

Economists James Gwartney, Robert Lawson and Walter Block -- in their study, "Economic Freedom of the World, 1975-95" -- demonstrate a strong direct connection between economic freedom and economic well-being by ranking countries in four categories: money and inflation, government operations and regulation, takings, and restrictions on international exchange.

  • For a one-point increase in economic freedom, on a scale of zero to ten, a country can raise its growth rate by one percentage point.
  • With compounding, a growth rate of 2.5 percent a year makes GDP higher by 28 percent at the end of ten years.
  • Increase that growth rate to 3.5 percent a year, and GDP would rise by 41 percent.

Thus, the U.S. has the fourth-freest economy in the world at 7.6 percent. Canada scores ninth at 6.9 percent. Argentina and Chile have laudable 6.3 percent and 5.8 percent scores respectively.

Source: David R. Henderson (Hoover Institution), "Why Some Latinos Prosper, and Others Don't," Wall Street Journal, March 29, 1996.


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