For those who confuse correlation with causation, a friend would joke that playing basketball in the NBA makes you taller. Previous articles have shown that greater economic freedom correlates with longer life expectancy, higher incomes, greater happiness and higher levels of generosity. While the data clearly show the correlation, how do we know economic freedom causes these positive outcomes rather than prosperous countries having more freedom?
Heritage Economic Freedom Index Rankings vs. Prosperity Measures (2019)
The first way to check is to look at history. In the 1940’s and 1950’s, three countries were divided between Communist and Free – Korea, Germany, and China. In all three cases, the economically free portion of the country far exceeded the Communist portion in all measures of economic success. This occurred despite both parts of each country having similar economic performance at the time the country was split. As time progressed, the economic performance difference continued to expand.
Some people argue that communist countries shouldn’t count because “it’s not real communism” or that it’s not democratic. Again, history provides great examples of how economic freedom comes before prosperity in democratic societies. One such country is Ireland. At the start of 2024, Ireland was one of only four economically free countries in the world in the Heritage Economic Freedom Index along with Singapore, Switzerland and Taiwan. They have one of the highest per capita GDPs in the world. This was not always the case. In the early 1990’s, Ireland was relatively poor compared to the rest of Western Europe. Over a five year period starting in 1996, they made radical changes in economic policy which moved Ireland from “Moderately Free” to “Mostly Free” to “Free.” Following the changes, the economy expanded rapidly giving their economy the nickname the Celtic Tiger. Since 1996, life expectancy in Ireland has increased from 75.76 years to 82.96 years, and constant per capita GDP has tripled from $30,064/yr to $91,783/yr.
Conversely, history also provides examples in democratic societies where economic freedom is removed. Argentina provides one such example. In 1900, Argentina was the fourth wealthiest country in the world. Tragically, people voted for a government that severely restricted economic freedom. Over time, their income level has dropped over 60 spots in the world rankings. Today, half of the population lives in poverty. At the start of 2024, Argentina’s economic freedom index ranked 145 out of 184 countries, and their economy is listed as “Repressed.”
The good news is that past economic mistakes can be overcome by reducing economic barriers. In late 2023, Argentina elected a Libertarian president who is actively working to increase economic freedom by cutting regulations, increasing property rights, reducing tariffs, cutting government spending, and privatizing state run businesses. This effort will serve as another test case for economic freedom coming before prosperity. If the changes are allowed to remain in place over time and further improvements are made to economic freedom in Argentina, I will make two predictions:
- The Argentine economy will grow rapidly bringing prosperity back to the country.
- Socialists and statists will credit this economic growth on something other than economic freedom.
For those willing to look at the data, Argentina will serve as another example of economic freedom leading to prosperity. There is a simple formula for countries to be prosperous: a country needs economic freedom plus time.
