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The State of Economic Freedom, Part 2: Success Stories

Tuesday, August 6, 2013

What do Rwanda, Brazil, Texas, Peru, Mexico, and Panama all have in common?

Earlier this summer, the Bradley Foundation convened a panel of distinguished individuals on the occasion of the Foundation’s awards ceremony in Washington. All the panelists were past recipients of the Bradley Prizes given for “strengthening the institutions, principles, and values that nurture and sustain the American Experiment and the West.” In the first installment of this two-part series, we excerpted their responses to a question posed by moderator Clint Bolick about the state of economic freedom here and abroad. In this installment, we excerpt their responses to a question about economic freedom success stories around the globe and the lessons we can learn from them.

- The Editors

Clint Bolick: If you could point to a single state or country as a success story over the past ten years, what would it be, and what are the lessons that we could learn from them?

Gary Becker: Rwanda experienced a genocide about a decade ago, and perhaps a third of the population was killed. Since 2002, however, Rwanda has turned things around and has been growing about 6 to 7 percent per year. It is one of your high growth countries. It’s landlocked and has no natural resources. So how have they done it? I met recently with the president of Rwanda. Now, he’s not a full democrat, but he has the right attitude. He’s done it in three ways. One, there’s no longer this ethnic fighting. There is a greater emphasis on the rule of law – not as much as what we have here, but a greater emphasis. And finally, there is a greater role for private enterprise. He was proud to say the private sector produces about half of their output. Now, we would say that’s still too small, but ten years ago, it was perhaps a tenth of their output, so that is big progress. And a further development that is close to my heart is their great investment in education, not for a small elite, but for a widespread education with minimum schooling legislation that is actually being enforced. They started with six years of required education and they have moved to eight. So what’s the result: a very poor country that has come up very well.

There’s a broader lesson here. In the modern world, with enormous trade and communication, you don’t have to get things 100 percent right for a poor and less developed country to grow rapidly because you can gain a lot from the technologies and capital that have been developed in the United States and other rich parts of the world. So all you have to do is get things pretty much right and you can do it. That’s what China did starting in 1980 and that’s what Rwanda is doing now. Now, there are a lot of things we would object to, but it’s a tremendous success story, particularly if we go back a decade ago. People would have written off a small, landlocked country with very few natural resources. And by wise policies, it has managed to turn itself around.

"These economic issues have ethical consequences and ramifications, not for the elite that enact them, but for the people who have to endure them."
- Victor Davis Hanson

Victor Davis Hanson: We often talk about blue California and red Texas, and we cite statistics on regulations and taxes and growth and population increases versus exoduses. But from an ethical and moral human view, when you live in a state such as California that has a vast technocracy, a very well paid public sector that sets the rules, and a redistributionist economy, it filters down to real people. When I go to Texas and see the infrastructure of the highways or the freeways versus the 99 that haven’t changed in California in 40 years, or when I look at a Texas public school that’s not rated 49th only ahead of Mississippi as the schools in California are. I know people who teach in the Texas system. It’s not a perfect system, but I spent 22 years in a California state university system. Over those 22 years, professors increased by 2 percent and administrators by 212 percent. The remediation rate of incoming freshman when I started in 1984 was 32 percent, and when I retired in 2004, it was 57 percent. What I’m trying to get at is, in a state like California, these policies have real consequences. Every day when you get up, you get up on a freeway and take your life in your hands when the traffic has increased eight times and the infrastructure has not, because it’s gone towards pensions or for the one-third of all welfare recipients in the United States that live in California. Or if you put your children in the public schools, as I did, and you find out that the eighth grade reading program that you had 30 years ago is now the high school senior reading program, it has real consequences.

Everyone tries to argue about statistics, but on the ground level, it’s really a moral issue that young people growing up in California will not have the same ethical or moral choices as someone in Texas will. By any natural criteria, whether we look at weather or natural resources, California should be just as competitive. In fact, in many ways it’s much more richly endowed. These economic issues have ethical consequences and ramifications, not for the elite that enact them, but for the people who have to endure them.

Clint Bolick: So then, in your opinion, California is not the example for the test case that we ought to emulate?

Victor Davis Hanson: Well, you know, it was. I just read an article in the 1911 Big Creek Project, when Henry Huntington, the nephew of Collis Huntington, went up into the Sierra Nevada and in two years, in a series of brilliant dams at Huntington Shaver Florence, he created 1,000 megawatts, powered all of Los Angeles, created green power for a trolley system, created enormous recreation for the Central Valley, put one million acres of farmland into production, and stopped the flood plain of the San Joaquin River. He did it in forty-four months employing forty-four thousand workers. It’s an ecological masterpiece; didn’t alter the environment. And when I think about what California used to be and what good it did, and I look at the high speed rail, where it’s a 300 billion dollar budget, 20 years, and now it’s going right by my home… The only good thing about regulation is that sometimes it’s stopped in lawsuits. But I don’t know who would want to pilot high speed rail when they’re going to draw from employees who are rated 49th in the country in their public schools.

Allan Meltzer: I used to be on the lecture circuit, and I would be asked, “Are you an optimist or a pessimist?” I responded, “I’m an optimist: I believe the worst will happen, just not right away.” Later, I read Immanuel Kant, and I made his statement the running theme in my book Why Capitalism published by Oxford University Press in February of last year. What Kant said was “from timbers as crooked as those from which man has been made, you do not get straight boards.” I don’t want to bother with “better” and “worse” in absolute terms. Countries such as Mexico are absolutely better. Mexico is really doing very well and moving towards market and social freedom. The surprising cases at the moment for me are countries such as Peru and Brazil, moving towards market freedom under the leadership of strictly leftist governments. They elected leftist leaders, who turned out to be in favor of market freedom. That’s a great thing.

"America was built to a very considerable extent by entrepreneurs who started little companies that got big."
- Allan Meltzer

We in the United States are definitely on the wrong track. One statistic that tells you something is the Transparency International index that rates the United States 17th in transparency, and 17 percentage points behind Sweden. That’s not where the United States was, it’s not where we should be, it is where we should aspire to get back to. And we’re going to do that, if we can do it at all, by doing things about the heavy hand of government, which is taking away the freedoms and regulating so that small businesses have much less opportunity. America was built to a very considerable extent by entrepreneurs who started little companies that got big. That’s hard to do. When you read about what’s going on in the credit markets, you find out that at the low interest rate policy, those companies can’t borrow. Because the interest rate doesn’t pay for the risk, and the banks can make all the money they want by holding excessive reserves and collecting a quarter of 1 percent. Talk about corruption. Fifty percent of those, a trillion dollars of those excess reserves, are held by foreign banks who keep their money in the United States because we pay a quarter of 1 percent on reserves, and the Europeans don’t.

John Taylor: There are many success stories. I think what you’re hearing from the panelists is the reluctance to say one or two because there are so many examples where moving towards economic freedom works and doesn’t in the other direction. Milton Friedman, of course, talked a lot about Hong Kong as a great example. But we have so many now – Rwanda, Mexico, and Brazil. Roughly ten years ago, the United States tried to reform its foreign aid to developing countries, and it created something called the Millennium Challenge account. The idea was to take measures of economic freedom such as the ones put out by Heritage and Freedom House and effectively rank countries on the basis of these indices, and then alter the foreign aid on that basis. I was in the government at that time, and what was so remarkable to me was you’d have people, say the president of Rwanda, come, or the new president of Brazil, come and say “here’s how we’re doing on these things,” and so it became a kind of competition to do better on these measures that we all think are so important. So we’ve seen some results just in ten years, and if you go back with other countries, even longer than that.

Arnold Harberger: I’m going to mention Panama. I had my first experience with Panama back in the 1960s, when we had the Kennedy program of aid to Latin America. Under that program, they had to provide five-year plans, and these plans were submitted to the committee of nine wise men in Washington. The nine wise men evaluated these plans and put their stamp of approval on them in order for the aid to flow to Panama. The plan for Panama had been written by a student of mine and when the wise men had to evaluate that plan, they had a subcommittee with two real wise men and two ringers from the outside, and I was one of the ringers from the outside. We worked through the plan, and it was a pretty good plan. Over that decade, Panama had 8 percent cumulative growth, and had the highest rate of growth in the hemisphere. Well, when I looked at the data for cumulative growth in the period 2000-2011 prior to this meeting, who had the highest rate of growth in this hemisphere? Panama. They have continued to welcome international business and they are a major banking and investment center for the region. There seems to be no halt in their effort to transform themselves into a new Singapore or Hong Kong, which for a small country is a tremendous boon, and real standards of living have gone up enormously over this period from 1960 until now.

Clint Bolick is director of the Center for Constitutional Litigation at The Goldwater Institute in Phoenix (Moderator); Gary Becker is Professor of Economics and Sociology at The University of Chicago; Victor Davis Hanson is Martin and Illie Anderson Senior Fellow at the Hoover Institution; Arnold Harberger is Professor of Economics at the University of California-Los Angeles; Allan Meltzer is Allan H. Meltzer University Professor of Political Economy and Public Policy, Carnegie Mellon; John B. Taylor is Mary and Robert Raymond Professor of Economics at Stanford University.

FURTHER READING: At the 2013 Bradley Foundation awards, Yuval Levin spoke about “Conservatism and Gratitude.” Michael Barone writes “Mexico Becomes a Stable, Politically Diverse Neighbor,” Daniel Hanson blogs “Best Place for Business? Hong Kong, Again,” Mark J. Perry explains “How Chile Got Amazingly Rich: Free Trade,” Roger F. Noriega thinks “Brazil Is in a Class by Itself,” Josh Lerner looks at “Jamaica vs. Singapore,” and James Pethokoukis blogs "What's Gone Wrong with the U.S. Economy? Maybe It's Nothing More Complicated Than a Sharp Decline in Economic Freedom."

Image by Dianna Ingram/Bergman Group

Published with the permission of the Bradley Foundation.

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