The access to sound money score improved dramatically between 1980 and 2010 as inflation decreased to less than five percent and freedom to have foreign bank accounts increased.
Along with expanding foreign currency freedom, Chile also improved its score in freedom to trade internationally. Export taxes, previously a crippling barrier, were almost eliminated, allowing foreign competition into the market. According to Büchi, domestic saving has risen to 18 percent and the average tariff dropped from 105 to 57 percent. In 1979, a 10 percent uniform tariff was put in place.
Büchi notes that as a result of these reforms, Chile’s exports went from $3.8 billion to $8.1 billion from 1985 to 1989.
The regulatory burden also was decreased. The World Bank reports that it used to take up to 27 days to begin a new business in Chile; it now takes seven. Büchi mentions that investment rose from 11.3 percent of the GDP in 1982 to 20.3 percent in 1989. Domestic saving also rose during that time, from 2.1 percent of the GDP to 17.2 percent. As businesses experienced greater freedom to expand and develop, Chile saw more innovation with higher profits and savings.
So what does all this mean? Let’s take a look at per-capita economic output in the major Latin American nations. As you can see, Chile was near the bottom in 1980 and now leads the pack.
This has meant good things for all segments of the population. The number of people below the poverty line dropped from 40 percent to 20 percent between 1985 and 1997 and then to 15.1 percent in 2009. Public debt is now under 10 percent of GDP and after 1983 GDP grew an average of 4.6 percent per year. But growth isn’t a random event. Chile has prospered because the burden of government has declined. Chile is now ranked number one for freedom in its region and number seven in the world, even ahead of the United States.
The lesson from Chile is that free markets and small government are a recipe for prosperity. The key for other developing nations is to figure out how to achieve these benefits without first suffering through a period of socialist tyranny and military dictatorship.
Daniel J. Mitchell is a senior fellow at the Cato Institute. Julia Morriss is studying Law and Society at American University in Washington, D.C.
