Through observations and common sense, Smith recognized that the most prosperous nations are not those with the most powerful armies or the biggest governments, but rather those that protect the property rights of citizens and open their borders to commerce. Allowing and facilitating the exchange of goods and services is necessary — but not sufficient — for a country to progress.
Smith’s analysis and the fabulous theoretical demonstrations of David Ricardo on the mutual benefits of trade also have extensive statistical support.
One of the most comprehensive statistical studies on the effects of economic freedom and prosperity is the Index of Economic Freedom, compiled annually by the Heritage Foundation and the Wall Street Journal. The study measures 10 key factors in assessing a country’s respect for the “fundamental right of every human to control his or her own labor and property.”
Just like a lottery winner can be rich without working, there are privileged nations that possess valuable national resources and a high standard living. There are, for example, Arab countries that are rich in oil. There may also be nations that experience a temporary rise in prosperity as a result of a rise in the value of exported products, as is currently the case in Latin America.
That being said, there is overwhelming evidence to support the positive relationship between economic freedom and long-term prosperity of a nation. It is no coincidence that countries like Chile, Colombia, Uruguay, and Peru, which have a high scores, are the fastest growing at a regional level, while countries like Haiti, Bolivia, Ecuador, Argentina, Venezuela and Cuba (in descending order) have the worst scores.
In the 2014 edition of the index, however, Bolivia obtained a score of 48.4 out of 100 — 158th out of the 178 countries studied and in the “repressed” category of nations.
Currently, Bolivia and Ecuador enjoy certain economic stability as a result of gas and oil prices, but there is no doubt that this situation is temporary and volatile. Inevitably, the lack of economic freedom will bring them closer to Argentina, Cuba, or Venezuela.
This article originally appeared on Javier Paz’s blog and is republished with permission.
Translated by Estefanía Uribe.