What is the best way improve economic performance and boost living standards? If you listen to politicians, they would like us to think that adopting Policy A or repealing Policy B.
There are five major policy areas, each of which counts for 20 percent of a nation’s grade.
- Size of government
- Monetary Policy
- Rule of Law/Property Rights
Or, market-oriented nations vs. those that tend to fall into regimes based on statism, or socialism for a more familiar term. As a comparison, looking a two South American countries such as Chile and República Bolivariana de Venezuela can help. Both are South American countries of similar size and population which 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 World Bank published a lengthy report on Puzzles of Economic Growth in 2016 which explains how neither country enjoyed much success in the 1970s, tough oil-rich Venezuela at least benefited from rising energy prices. Currently, Chile has surpassed Venezuela thanks to pro-market reforms.
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. From the World Bank Report:
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.
More more liberty to engage in voluntary exchange, as well as less government red tape has allowed Chile to prosper. The opposite is the case with socialist Venezuela.