ACHIEVING PROSPERITY IS NOT ROCKET SCIENCE

Suppose you were appointed global economic czar, and your task was to bring the world's per capita income up to the level of Ireland – which is almost that of the US. Would you:

(A) Insist the world's rich nations transfer substantial wealth though massive foreign aid to the poor nations?

(B) Insist all nations adopt policies that would make them as economically free as the top 10 freest economies today?

If you answered "A," welcome to the Kofi Annan, Jacques Chirac, Gerhard Schroeder school of willful economic ignorance. Graduates of this school are well represented among international institutions, such as the World Bank, and the Organization for Economic Cooperation and Development; the political left; and the media elites in such places as the New York Times editorial pages, the BBC and National Public Radio.

If you answered "B," go to the head of the class. This shows you have a good understanding of both history and economic reality about what works and what doesn't.

In their effort to roll back economic ignorance, the Heritage Foundation and the Wall Street Journal produce an annual Index of Economic Freedom. Their 2006 Index, the 12^th edition, has just been released, and again it shows in stark and unambiguous terms that income, economic growth and opportunity are highly correlated with economic freedom.

The economically freest societies are the most prosperous, and the most economically repressive societies are the poorest.

The principal authors of the Heritage/WSJ Index — Marc Miles, Kim Holmes and Mary Anastasia O'Grady — use commonly accepted definitions of economic freedom, including trade and capital flow restrictions, levels of taxation, size of government relative to the economy, price stability, levels of economic regulation, protection of private property, etc.

Ireland 30 years ago was among the poorest countries in Europe. It then made a major shift toward freeing up its economy – e.g., its maximum corporate tax rate is only 12.5% — and now ranks #3 (behind #1 Hong Kong and #2 Singapore) out of 157 countries in the index. As a result, today Ireland has the second-highest per capita income in Europe (next to Luxembourg which is #4 on the list) and is far ahead of the old leaders like # 19 Germany and # 44 France.

(Note, when I refer to per capita income, I do so using the Purchasing Power Parity measure which accounts for local price differences.)

In Eastern Europe, #7 Estonia is economically the freest and #92 Romania the least free though the latter is now making progress. Both countries started out at roughly the same level 16 years ago, but now Estonia has almost twice the per capita income of Romania. Much of the credit for Estonia being the most successful transition country goes to its brilliant and able free-market former prime minister, Mart Laar.

China, Taiwan and Hong Kong make an interesting case study. They are all inhabited by Chinese in the same part of the world. In 1947, they were all equally poor, but #1 Hong Kong started its economic reforms in the 1950s, and a decade later #37 Taiwan began major reforms, but #111 China did not begin its reforms until the late 1970s.

The result is that Hong Kong has a per capita income almost threefold that of China (accomplished without natural resources or foreign aid), and Taiwan has more than 2 ½ times the per capita income of China.

In central Africa, we have the contrast between #30 Botswana and neighboring #154 Zimbabwe. Botswana, a relatively free market democracy, has roughly tenfold the per capita income (without U.S. aid) of repressive Zimbabwe, despite having started at about the same level of development.

Latin America gives the interesting contrast of free Chile at #14 and repressed Cuba #150. Chile's per capita income is now about 2 ½ times Cuba's, though Cuba was far richer than Chile before Fidel Castro came to power, received massive aid from the old Soviet Union, and gets massive aid now from Venezuela.

Mexico at #60 has a per capita income about one-quarter the US at #9. It is a reasonable assumption that had Mexico been as economically free as #12 Canada, its per capita income would be high enough that Mexicans would prefer to stay in Mexico rather than move to the US.

On the other hand, the biggest recipients of development aid over the last quarter-century, for the most part have gone nowhere economically. Egypt at #129, the biggest recipient of development aid in the last quarter-century, is a prime example: Ireland’s per capita income is 18 times that of Egypt’s!

The lesson is clear for all who will remove their ideological blinders: The road to prosperity is economic freedom, not development aid. International institutions and major donor countries should stop handouts and pressure laggard countries to make free market reforms. But then, of course, international aid bureaucrats would be jobless. What a pity.

Richard W. Rahn is director general of the Center for Global Economic Growth, a project of the FreedomWorks Foundation.