No. 1157 Delivered March 2, 2010 June 29, 2010 Economic Freedom in the “Bolivarian Andes” Is Melting Away James M. Roberts Abstract: In the past, “Bolivarian” referred to those Andean countries that had been liberated by Simón Bolívar. Today, for the three countries in the Andes that are Talking Points following Hugo Chávez’s “Bolivarian Alternative” path— • Index of Economic Freedom scores for the three Bolivia, Ecuador, and Venezuela—it has come to signify countries in the Andes that are following Hugo declining economic freedom. A closer look at those Chávez’s “Bolivarian Alternative” path—Bolivia, countries’ scores on the 10 indicators in The Heritage Ecuador, and Venezuela—continue to show Foundation’s 2010 Index of Economic Freedom will declining economic freedom. In fact, they are shed light on exactly how and why their economies are fail- among the worst performing countries in the ing to deliver the prosperity that their populist leaders have 2010 Index in all of Latin America. repeatedly promised and failed to deliver. The performance • A common pattern among the three Boli- of market-friendly and democratic countries such as Peru, varian countries is that they all suffer from Colombia, and long-time Latin American economic free- institutional weakness and do not have dom leader Chile is proving that Andean governments can clearly established rules of the game. All deliver true economic and political freedom to their citizens three countries have recently adopted new if leaders govern with the correct mix of policies favoring constitutions that concentrate power in the private property, rule of law, and market-based democratic executive and favor government interven- institutions. tion in the economy. • The best performer in the Andes is Chile, with the highest 2010 Index score in Latin America. In vivid contrast with the other There is dramatic news in the 2010 edition of The countries in the “Bolivarian Andes,” one of Heritage Foundation’s annual Index of Economic Free- Chile’s biggest strengths is its regard for the dom: For the first time, the United States has dropped rule of law and the protection of property from “free” to only “mostly free” and the United King- rights. These are the two institutional essen- dom has dropped out of the top ten. What is less tials upon which the economic development shocking, however, is that the Index scores for the and prosperity of any country depend. three countries in the Andes that are following Hugo This paper, in its entirety, can be found at: Chávez’s “Bolivarian Alternative” path—Bolivia, Ecua- http://report.heritage.org/hl1157 dor, and Venezuela—continue to plunge. In the past, Produced by the Center for International “Bolivarian” referred to those Andean countries that Trade and Economics (CITE) had been liberated by Simón Bolívar. Today, it has Published by The Heritage Foundation 214 Massachusetts Avenue, NE come to signify declining economic freedom. Washington, DC 20002–4999 (202) 546-4400 • heritage.org Nothing written here is to be construed as necessarily reflect- ing the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill before Congress. No. 1157 Delivered March 2, 2010 While it is not surprising, it is sad that the leaders of policies favoring private property, rule of law, and of those countries—Presidents Evo Morales, Rafael market-based democratic institutions. Correa, and Hugo Chávez, respectively—as well as Chart 1 shows these diverging performances the people who support them do not seem to realize graphically. Chile has scored highest throughout the that their statist “Bolivarian” policies are doomed to period, while Colombia’s score has improved steadi- failure. A closer look at those countries’ scores on ly in reflection of the tough economic reform mea- the 10 indicators in the Index when compared to the sures implemented by President Álvaro Uribe over only successful economies in the Andes—Peru, the past half-decade. Meanwhile, all three Bolivari- Colombia, and especially Chile—will shed light on an countries in the Andes have registered a progres- exactly how and why their economies are failing to sively downward trend in their scores and now sit at deliver the prosperity that their populist leaders the bottom of the rankings—both in their own have repeatedly promised and failed to deliver. region and among worldwide Index scores. Bolivia, Ecuador, and Venezuela are among the A common pattern among the three Bolivarian worst performing countries in the 2010 Index in all countries is that they all suffer from institutional of Latin America. Several of the other poor perform- weakness and do not have clearly established rules ers in the region—such as Cuba and Nicaragua— of the game. All three countries have recently adopt- are also governed by statist regimes. Meanwhile, the ed new constitutions that concentrate power in the performance of market-friendly and democratic executive and favor government intervention in the countries such as Peru, Colombia (the most economy. This does not incentivize any entrepre- improved country regionally in the 2010 Index), neur to prosper and generate prosperity for others. and long-time Latin American economic freedom A deeper look at each of the Bolivarian countries’ leader Chile are proving that Andean governments scores reveals the failures they have in common and can deliver true economic and political freedom to how they differ from economic freedom leader their citizens if leaders govern with the correct mix Chile. The statist policy errors they share have “Bolivarian” Means Less Economic Freedom Three Andean nations following Hugo Chavez’s “Bolivarian Alternative”—Bolivia, Ecuador, and Venezuela—have scored progressively worse in the Index of Economic Freedom, while three market-driven nations in the same region have seen their scores improve. “Bolivarian” Policies Market-Friendly, Democratic Policies 80 70 Chile 60 Colombia Peru 50 Bolivia Ecuador 40 Venezuela 30 1995 2000 2005 2010 1995 2000 2005 2010 1995 2000 2005 2010 1995 2000 2005 2010 1995 2000 2005 2010 1995 2000 2005 2010 Source: Terry Miller and Kim R. Holmes, 2010 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2010), Appendix: Index of Economic Scores 1995–2010. Chart 1 • HL 1157 heritage.org page 2 No. 1157 Delivered March 2, 2010 resulted in exceptionally low scores on the indicators shown in Table 1. Indicator Scores by Country (Out of 100) Bolivia (146th out of Chile Bolivia Ecuador Venezuela 179 Ranked Countries) Investment Freedom 80 15 25 5 Bolivia is one of the countries that Property Rights 69 10 20 0 fell the most in its economic freedom Freedom from Corruption 85 30 20 19 score from 2009 to 2010. It registered Source: The Heritage Foundation, Index of Economic Freedom, Economic Freedom Compo- declines in nine of the 10 freedoms. nent Scores, All Countries (2010), at http://www.heritage.org/index/Explore.aspx. All of these indicator scores combine Table 1 • HL 1157 heritage.org to show Bolivia’s institutional weak- ness. Recently held democratic elec- tions were marred by numerous credible allegations growth. The inefficient judicial system lacks trans- that supporters of the Morales government commit- parency and is plagued by corruption. Laws and ted human rights violations and intimidated and regulations to combat official corruption are inade- prosecuted the few remaining politicians from quate, enabling politicians to pressure businesses opposition parties in the Senate and among the state and investors for bribes and payoffs. governors. Morales’ ruling MAS party has used its Government control of Ecuador’s strategic greater concentration of power in the past few years resources has scared off foreign investors, and the to exert nearly totalitarian power over almost every new constitution pushed through by President dimension of economic freedom, opening the door Rafael Correa has concentrated the state’s power wider to corruption. The new constitution engi- even more and increased the government’s intrusive neered by President Morales is hindering long-run 1 role in the economy. The entrepreneurial environ- growth and industrial diversification. The lack of ment is made even worse by burdensome regula- an institutional framework within which businesses tions. Starting a business takes longer than the have incentives to operate has crowded out both world average; closing one is a lengthy process. domestic and foreign private direct investment. Labor regulations making dismissal of employees Although Bolivia’s economy has grown at an difficult disincentivize new hiring and hinder pro- average nominal rate of 4.9 percent in recent years, ductivity growth. this growth is due mainly to higher commodity Although government spending has remained prices for hydrocarbons and minerals, which are relatively low, it has risen rapidly since 2007. Mon- Bolivia’s main exports. Real economic growth is etary freedom has been severely undercut by actually negative; inflation rates have averaged 11.8 domestic price controls on staples from bread and percent between 2006 and 2008 as a result of exten- chicken to coffee. The fact that only public or mixed sive price controls. enterprises are allowed to provide public services is Ecuador (147th out of another cause of price distortions. 179 Ranked Countries) Venezuela (174th out of As with Bolivia, Ecuador’s score dropped again in 179 Ranked Countries) 2009, with declines in eight of the 10 freedoms Venezuela is the worst among the three Boli- reflecting steadily weakening government institu- varian countries. It ranks 174th out of 179 coun- tions. High inflation in recent years has turned tries, and its Index score has dropped steadily since Ecuador’s small amount of nominal economic President Hugo Chávez took power in 1999, with growth into either very low or negative real GDP 1. For more on constitutional changes in Bolivia, see James M.