It Is My Very Great Honor to Be with You Today, to Take Part in Africando 2003, and Especially

“The Index of Economic Freedom and Millenium Challenge Accounts: Creating an Environment Where Free People Prosper” Remarks by Bridgett Wagner, The Heritage Foundation AfrICANDO 2003 – July 24, 2003

It is my very great honor to be with you today, to take part in Africando 2003, and especially to have the opportunity to meet leaders from Africa and the Caribbean. We are pleased to have you here in Miami, and I hope I might have the opportunity in the future to welcome you to Washington, DC and to The Heritage Foundation.

My assignment today is to talk about the Heritage Foundation’s Index of Economic Freedom and the factors of economic growth – and, as our research has confirmed over the past nine years, economic growth and economic freedom are directly related. And, I will also outline the principles behind the Millenium Challenge Account proposal of the Bush Administration and give you a brief update on how this proposal is proceeding.

First, I should tell you that The Heritage Foundation is a public policy research institute that is devoted to promoting free markets, individual liberty, and limited government. Our aim is to shape the policies of our government, and we do this by publishing articles and books, hosting briefings, speaking at conferences and meeting one-on-one with elected officials and their advisers.

We accept no government funding or contracts, and we are supported by the voluntary contributions of some 200,000 individual, foundation, and corporate donors. We are not affiliated with a political party – and in fact, we have been known to sharply criticize the policies of both parties when we disagree.

We support free trade, protection of property rights and the rule of law as being the greatest engines of economic development and wealth creation in our own country and for the rest of the world. And, we have criticized policies of tariffs and price supports in the European Union and of our own government.

We believe that it is through individual action that we have seen the greatest advances in civilization – whether in architecture or painting or science or literature or technology or industry or agriculture. It is through individual genius that we make great leaps forward. Government can never duplicate the variety and diversity of individual action.

As John Stuart Mill wrote in 1859, “ The worth of a state, in the long run, is the worth of the individuals composing it…a state which dwarfs its men in order that they may be more docile instruments in its hands even for beneficial purposes, will find with small men no great thing can really be accomplished.” 2

This principle was certainly shown to be the case during the period of Soviet communism. And as we have seen since the fall of the Berlin Wall, those countries that have abandoned central planning, have limited the role of their government, established the rule of law and protected private property have flourished.

In making such changes one country –Estonia – has become one of the freest and most prosperous countries in all of Europe and, in fact, in the world. Its former Prime Minister, Mart Laar, was with us in Washington just last week to talk about changes in the European continent that have been brought about by these liberated and now dynamic economies. Last year he spoke to us about the changes in his country and said:

“…[A]fter 50 years of Soviet occupation, Estonia was in ruins. Our economy was a shambles, the spirit of our people spoiled by the socialist heritage. Shops were empty of goods, and money no longer had any value. Fuel prices rose by more than 10,000 percent over one year, while inflation was running more than 1,000 percent per [year]. People stood for hours and hours in lines to buy food.

“Within 10 years, Estonia … changed beyond recognition…[It] is now a modern and vibrant young country, integrating with Western structures like the European Union and NATO with astonishing speed.”

Experts and politicians have asked how they did it, and the former prime minister pointed to one key factor:

“In some transition countries, the importance of the rule of law has not been understood, and this has been a huge mistake. No kind of general understanding, best effort, or wishful thinking can replace a sound and constantly improving legal environment. There can be no market economy and democracy without laws, clear property rights, and a functioning justice system.”

However, he went on to note that the most basic and vital change of all had to take place in the minds of people. “In the era of socialism,” he said, “people were not used to thinking for themselves, taking the initiative, or assuming risks. Many people had to be shaken free of the illusion common in post-communist countries that, somehow, somebody else was going to come along and solve their problems for them. It was necessary to energize people, to get them moving, to force them to make decisions and take responsibility for these decisions” – in effect, to take on the “I can do” spirit so evident at this conference and in the work of the Foundation for Democracy in Africa.

“To achieve this change,” the Estonian prime minister pointed out, “we had to wake up the people. First, competition had to be supported. In 1992, Estonia abolished all import tariffs and became one big free trade zone. Foreign competition pressed local enterprises to change and restructure their production. At the same time, Estonia stopped all subsidies, support, and cheap loans to enterprises, leaving them with two options to die or to begin working efficiently. Surprisingly, a lot of them chose the second option. 3

They also reformed their tax code so that it would not penalize those who did wake up and succeed and become prosperous. And, they leapt forward through the introduction of technology – advances gained not through foreign aid, but through trade.

They recognized the danger of extensive reliance on aid. As the former prime minister pointed out: “Shipments of outdated computers to any transition country can secure them a permanent seat in the Third World. ‘Trade, not aid,’ was proclaimed by Estonia in 1993!

“As a result, Estonia made a jump to modern technology. Today, the government uses no paper; all members of the government use computers during meetings and sessions. One- third of Estonians use mobile telephones, many of them made in Estonia, and 44 percent of [its] exports are electronics. And, Estonia is ahead of many European Union countries in terms of Internet use.”

This is truly an economic success story. In fact, the Heritage Foundation’s 2003 Index of Economic Freedom shows that Estonia is now tied with the United States for #6 in the rankings of economic freedom!

What is the Index of Economic Freedom? The Index is a very practical guide to 161 of the world’s economies. It includes a country-by-country analysis and the most up-to-date data available on:

 Foreign investment codes  Taxes  Tariffs  Banking regulations  Monetary policy  Black markets  Wages and prices  And property rights

Data from the international development banks, the IMF, the OECD, WTO, Transparency International, Freedom House, Standard & Poor’s, the Economist Intelligence Unit and various government sources are compiled and verified with independent, internationally recognized nongovernmental sources.

The release of the Index each year is closely watched by the embassy community in Washington and widely reported in the international media. And, we’ve seen that corporate planners, investment fund managers and even foreign tourism ministries utilize our data in their work. Certainly we’ve seen the demand for this research product increase.

What characteristics do those countries that rank in the top tier of economic freedom have in common? First, I should say they enjoy prosperity and higher rates of per capita GDP. 4

But, how did these countries make it into that top tier? What factors seem to be most important? Heritage researchers and others, like Peruvian economist Hernando de Soto, have shown that protection of property rights plays a major role in generating wealth and higher living standards.

Using data from the World Bank, our researchers have shown that on average, GDP per capita is twice as high in nations with the strongest protection of property than in those providing only fairly good protection. 5

The commitment to protection of property rights does tell us a lot about the possibility of economic growth because it is in this environment that individuals can use freely what is theirs and enjoy the things that science, technology, and innovation can deliver to improve their lives. The bottom line: Without property rights, people cannot buy, sell, borrow and invest efficiently. Capital accumulates over long periods of time in places where it is effectively protected.

This brings us to the case of Africa. When it comes to measures of development, growth and prosperity, the African continent has puzzled many people. It is the richest of the seven continents in terms of natural resources. The entrepreneurial zeal of Africans is impressive, and it’s a force that we Americans see every day in our own communities.

The history of the continent is one of trade, but it is also one of conflict. War and conflict destroy human and physical capital and inhibit economic development. When conflicts reign future planning is impossible. Economic activities are reduced to the most immediate needs.

And corruption has caused capital to flee the continent. In fact, the National Bureau of Economic Research has reported that in 1999 over half of Africa’s wealth owners had relocated their wealth outside Africa.

Many African governments have resorted to interventionist measures to control the economy or benefit certain sectors. Import and export quotas, foreign exchange or wage and price controls, and bailouts to failing industries are not solutions. Liberalizing trade; lowering taxes, fees and barriers; reducing regulations; and freeing entrerprenuers to innovate and compete are.

But, as our Index of Economic Freedom has shown, these policies are not enough. They must be accompanied by the protection of property rights and the rule of law.

Our 2003 Index indicated that the situation in sub-Saharan Africa improved in the past year – with improvements in the banking and finance sectors. Monetary policy is still a challenge and the property rights situation is largely unchanged. Our analysts concluded their section on Africa by stating that without strong property rights, these countries will remain in poverty because investors will not consider investing in countries that are rife with corruption and where property rights are poorly protected.

This leads me to the Millenium Challenge Account. As envisioned by President Bush and his administration, the MCA would be a new performance-based foreign aid program that they hope would serve as a model to reform existing development assistance. As we know, traditional development assistance often has multiple -- and sometimes even conflicting objectives -- so results have been disappointing. Instead of trying to eradicate poverty, save the environment, protect US national security, develop trade unions and promote gender equality all at once, the MCA would focus only on economic development. 6

And because economic growth and development occurs in countries with sound policies, MCA aid would be distributed only to those countries most committed to governing justly, investing in health and education, and promoting economic freedom – the policies we have written about in our Index of Economic Freedom and are those we know are empirically related to economic development.

At this time, the proposal is moving through the U.S Congress, and political compromises have many concerned that we may end up with a program that looks more like a $5 billion increase in our current foreign aid programs than the transformational program that the Administration designed to be.

The Heritage Foundation has called on Congress to do three things to maintain the integrity of the original proposal:

1. Focus solely on economic development; 2. Establish a fully independent agency that would operate outside of the institutional objectives and operational structures of the existing aid programs; and 3. Include a sunset provision to force the program to produce results and serve as a model or shut down if it is shown to be ineffective.

If you are interested in learning more about the Index of Economic Freedom or the Millenium Challenge Account, I would encourage you to give me your card. We believe that we can learn from the successful example of others, and we know what are the key factors in establishing a vibrant and growing economy where free people can innovate and flourish.