Economic Freedom

Estonia, that’s who.

In the 2006 Index of Economic Freedom (click on the thumbnail at right to read the whole chart), Estonia places 7th in the world — and the United States is in a three-way tie for 9th. Estonia’s Baltic neighbors Latvia and Lithuania come in at 39th and 23rd, respectively. Clearly little Estonia is doing something right, as I’ve been personally observing for more than ten years now…

In this morning’s Wall Street Journal, Mary Anastasia O’Grady (the co-editor of the 2006 Index) has an op-ed piece ($) specifically lauding Estonia’s economic miracle. Some highlights:

From “Wish They Could All Be Like Estonia ($)":

With the 1989 fall of the Berlin Wall the world witnessed a backlash against the overintrusive state. A rallying cry in favor of economic liberalization went up around much of the globe. Some governments — notably in Eastern Europe — used the momentum to push deep, structural reform. Others — notably in Latin America — bungled the opportunity.

Is there any way to explain why it is that some countries have been able to restructure their economies so radically while others have been left in the clutches of special interests?

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Chile has been in various stages of economic reform since the 1973 coup that ousted Salvador Allende, who was threatening to take the country over the communist cliff. The return to democracy in 1989 brought about a series of left-of-center governments that, while boasting that they had not turned back the economic liberalism of the Pinochet dictatorship, slowed the pace of reform dramatically. The current socialist presidency of Ricardo Lagos even reversed liberalization in labor markets.

Meanwhile in Estonia, as former Prime Minister Mart Laar likes to explain, the post-Soviet period has been marked by rapid, deep reform. Communism was so reviled that policy makers, almost instinctively, chose its direct opposite and promptly enshrined the preference in law.

The results may explain why political support for economic liberalism continues in Estonia, while in Chile free markets are under assault even by center-right politicians. The difference is the rate of change of progress for citizens. In 2004, with reforms kicking in, Estonia’s per capita GDP was almost $7,500, nearly double what it was in 2001 — $3,951, when the country ranked 14th in the Index of Economic Freedom. In Chile, after 30 years of reform, per capita GDP remains below $5,900, edging up only slightly from $4,784 in 2001, when Chile ranked 13th.

The tale of two small nations tells a wider global story. Is it any wonder for example that Brazilians, who after almost two decades of being told they are converting to a market economy, widely reject the notion? Improvements have occurred, for instance in monetary stability, but the country is still ranked “mostly unfree,” with a per capita GDP of $3,500. Maybe Mr. Laar could pay them a visit.

Mart Laar has been getting a lot of good press in the past few months, world-wide. As has Estonia itself. And with good reason — each time I visit, I am impressed afresh with the vibrance of its rollicking economy. And as well with what I read of the process by which the country’s leaders make economic decisions, and by the decisions themselves. The changes in Estonia in just the 10+ years I’ve been visiting it are simply amazing — and contrasts with its neighbors (especially Russia) are especially astonishing.

It’s good to see their accomplishments being recognized…