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Economic Freedom: Venezuela Worst

By Chronicle staff | Latin Business Chronicle

03.10.05 | Venezuela has the least-free economy in Latin America, while Chile and Costa Rica have the freest, according to the latest ranking of economic freedom worldwide by the Cato Institute.

Thanks to low scores for legal structure, security of property rights and business regulations, Venezuela is once again ranked as the least-free economy in Latin America by the Cato Institute, a Washington, D.C.-based think tank.

On a scale of 1 (worst) to 10 (best), Venezuela scored 1.4 points for legal structure and property rights and 2.4 points for business regulations, according to the Economic Freedom of the World: 2005 Annual Report published by Cato in conjunction with the Fraser Institute in Canada.

The overall score of 4.3 resulted in Venezuela falling six places compared with las year's report and ranking as the third-worst country worldwide, only better than the economies of the pariah states Zimbabwe and Myanmar. Venezuela's economy was worse than countries like the Democratic Republic of Congo, Algeria and Syria.

Cuba was not included in the survey.

A seperate survey - released in January by the Heritage Foundation - showed Venezuela as the second-worst in Latin America in terms of economic freedom, trailing Cuba. That survey also showed Chile as the freest economy.

Venezuela is the only Andean country to fall in the latest Cato ranking, which comes as the government of President Hugo Chavez has intensified its campaign to expropriate local and foreign-owned property (see our special report Chaveznomics).

"A Venezuela without private property is a Venezuela without freedom, without democracy, without dignity and without a private sector," Fedecamaras, Venezuela's business federation, said last week in a statement condemning the expropriations. "A Venezuela without a private sector is a Venezuela condemned to starvation and poverty."

However, despite the recent wave of expropriations, they were not used as the basis for this year's report, which used data from 2003.

Nevertheless, the results show that Venezuela is gradually worsening its situation. The Cato/Fraser data for 1999, the first year of the presidency of Chavez, Venezuela ranked 77th worldwide, head of Latin American countries like Colombia, Brazil, Haiti and far head of Congo, Algeria and Syria.

The survey uses thirty-eight different components and sub-components that measure the degree of economic freedom in five areas: (1) size of government; (2) legal structure and protection of property rights; (3) access to sound money; (4) international exchange; and (5) regulation.

While Chile has long been known to have the freest economy in Latin America, Costa Rica managed to share that honor thanks to an overall imrpovement of 0.3 points in its score and managing to get higher points than Chile in areas like size of government, legal structure/security if property rights and labor market regulations.

Although Venezuela's economic freedom declined, it was not the worst in terms of overall deterioration. The Dominican Republic fell by a whopping 19 places. followed by Brazil (down 14 places), and Haiti (down 10 places). However, those declines were not so much the result of declining scores as the fact that other countries improved their scores.

The Dominican Republic, for example, saw its overall score decline from 6.6 last year to 6.3 now, largely as a result of a lower score in the category "access to sound money."

Other countries that declined their ranking include Argentina, Bolivia, El Salvador, Mexico, Nicaragua and Panama.

Costa Rica had the strongest increase - jumping 11 places to rank 20 this year. Its overall score improved by 0.3 points thanks to improvements in six categories, especially legal structure/security of property rights. It did, however, decline its score in terms of business regulations.

Other countries that improved their rank significantly include Peru and Ecuador (up 6 places each) and Colombia (up 4 places). Also Bolivia, Chile, Guatemala and Honduras improved their ranking.

Overall, eight countries improved their ranking, while 10 fell and one (Uruguay) kept its rank.

Since the survey started in 1985, several Latin American nations have made significant progress. They include Bolivia, Brazil, El Salvador, Nicaragua and Peru.

Interestingly enough, a small government doesn't necessarily mean that a country scores high. Case in point: Bolivia, which ranked 26th in the category "size of government," but fared poorly in all other categories, especially "legal structure and security of property rights," where it placed 104th.

"Bolivia makes an interesting case study," Cato says. "It shows that reasonably sized government is not enough to reap the benefits of economic freedom. The institutions of economic freedom, such as the rule of law and property rights, as well as sound money, trade openness, and sensible regulation are required. "

The Cato report argues that economic freedom has an effect beyond improving GDP per capita and growth rates. It also helps reduce political violence and unrest.

"Markets provide political leaders with more accurate signals and make it more costly for them to use threats to mislead potential opponents. This improves the effectiveness of bargaining, expands the area of mutual gain, and thereby reduces the likelihood of military conflict," Cato says in the report.

Related sites

  • Cato Institute   Economic Freedom of the World: 2005 Annual Report

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