Transcriber: Leonardo Silva Reviewer: Ruy Lopes Pereira
Good afternoon. Thank you for the invitation.
I'm going to be speaking about economic freedom and human progress.
Let's start with this.
This is a very important graph which shows the progress of humanity
since the year zero.
And the late economist Angus Maddison
went on to calculate what was the per capita income of humanity
since the year zero to the year 2000,
and this is what he found.
He found that during basically 18 centuries,
the per capita income of humanity, the level of wealth created by Man,
was basically stagnant.
It was the equivalent of less than one dollar per day,
less than one dollar per day, [up until] the 1800s.
So, something happened in the 1800s, between the late 1700s and 1800s,
where mankind started producing wealth, started creating wealth,
and people began growing richer, nations began getting wealthier.
So, back then, as you can see,
we also started experiencing a significant decline in poverty.
In 1820, 85% of the world's population lived with less than one dollar per day,
and since then, it has been decreasing dramatically,
and now, for the first time in history, there is serious discussion
that we might live in a world without extreme poverty within 30 years.
So, we have experienced tremendous progress in the last 200 years.
What is behind this creation of wealth?
What is behind this dramatic decline in poverty levels
in the last 200 years?
One of the first observers of this phenomenon
was an ethics professor in Scotland, named Adam Smith.
Adam Smith wasn't an economist because, back then,
there was no economics.
He was an ethics professor, and he wrote a book in 1759
about "The Theory of Moral Sentiments."
That was about philosophy. That was the topic of his first book.
And within this book, he mentioned something
about what was, until then, a very new phenomenon,
which was nations being wealthier.
And remember, the level of income of humanity
had basically been stagnant for 17 centuries.
And he wrote the following.
He said, "Little else is requisite to carry a state
to the highest degree of opulence from the lowest barbarism,
but peace, easy taxes, and a tolerable administration of justice,
all the rest being brought about by the natural course of things."
Adam Smith was back then identifying the factors that, according to him,
were behind this dramatic increase in living standards that he was witnessing
and that, until then, was something new to humanity.
A couple of decades later,
he wrote a new book called "The Wealth of Nations",
where he expanded on this concept.
He expanded on the ideas, the factors behind the creation of wealth.
And he added a few more.
Besides low taxes and tolerable administration of justice,
he added free trade, for example, and that was The Wealth of Nations,
which is his most famous work.
But one interesting thing about Adam Smith's earlier observation
is that he was identifying the ideas that would later be developed
into the concept of economic freedom.
What is economic freedom?
The idea of economic freedom was developed in this work.
In the late 1970s,
the economist Milton Friedman, along with some of his colleagues,
began debating about a way to measure economic freedom.
Since the times of Adam Smith,
we knew what factors were behind the creation of wealth,
we knew what factors were behind the development of countries,
but Milton Friedman wanted to somehow measure this,
if there was a tangible measurement
to compare countries and the economic policies of the different countries,
and see how compatible they were with these concepts of economic freedom.
So, they produced an index, an economic freedom index.
It's like the FIFA index for football, you know,
for ranking countries according to how good they are,
and Brazil is always like top in the chart.
Well, in this case, they created an economic freedom index,
and they identified five big components of economic freedom.
One of them is the size of government.
You know, if you have a country with low taxes,
if you have a country with low spending, a government with low spending,
as a share of the GDP, as a share of the size of the economy,
if you have a country where the government doesn't engage in public companies,
if it doesn't have public companies -
In our countries, it is pretty common
that the government owns airlines, telecommunication companies,
refinement companies, etc.
Well, that reduces economic freedom.
So, the smaller the government, the better, according to this index.
Then, you have the legal system and property rights.
Here, what you look at is that there is a government, of course,
but this government should protect people, and should protect the property of people.
So here, you look at the reliability of contracts.
Here, you look at the integrity of the judicial system,
whether it is independent or not.
You look at whether the military interferes in politics or the judiciary.
You look at the protection of private property.
You look at the cost of crime, and so on.
Basically, you look at whether a country has a tolerable administration of justice,
as Adam Smith described 200 years earlier, the rule of law.
Then, you look at sound money.
Here, you look at whether a government corrupts the currency of the country.
You know, many governments, when they don't have money,
they go to the central bank and they ask the central bank to print money
in order to finance themselves, and that creates inflation.
Well, here, you look at inflation rate.
You look at whether people have access to foreign currencies.
Usually, when governments create inflation,
they prevent people from escaping inflation by owning foreign currencies.
You also look at freedom to trade internationally,
whether people have the freedom to trade,
whether Brazilians have the freedom to trade with Costa Ricans,
whether Costa Ricans have the freedom to trade with Americans,
without paying enormous taxes.
I know that, for example, bringing computers to Brazil
is extremely expensive because you have to pay taxes.
You look at the tariffs, those taxes, the level of taxation of foreign goods.
You look also at the barriers to the movement of capital,
whether you can move money easily between countries,
or whether you have to face capital controls.
You also look at the freedom to travel,
whether you have to get a visa, or whether you have to face other hurdles
in order to travel to other countries.
And finally, you look at regulations,
business regulations, trade regulations, labor market regulations,
how easy it is to hire people, how easy it is to fire people,
how easy it is to start a business,
how easy it is to get a loan from a bank, etc.
So, these are the big components of economic freedom.
As you can see, they relate
to what Adam Smith was identifying 200 years earlier
as the causes of economic development.
So, if we look at this index, which ranks 154 economies,
we can see that, for example,
the countries with the freest economies,
those countries that are most open to trade,
that control inflation, that have small governments,
low taxes, rule of law, sensible regulations,
they have, by far, the highest income per capita,
they have, by far, the highest living standards.
And why is so?
Because these countries grow faster.
What happened in those in the 1700s and 1800s
is that the world economy began growing.
We started experiencing economic growth.
And the world economy has grown so fast.
Just to understand how much it has grown,
in 1820, the entire world economy
was the size of the economy of South Korea right now.
So, that's how much the size of the pie has expanded.
And those countries that have grown the most economically
are the ones that have freer economic policies.
Also, the countries with the freest economic institutions
are the ones that are nearer to abolishing poverty, to getting rid of poverty.
Poverty is almost nonexistent
in economically free [countries],
whereas the least free economies
still have a sizable chunk of their populations living under absolute poverty.
And we understand poverty here
as people living beneath the equivalent of 1.25 dollars a day.
If you look at human development indicators,
many people say, "Well, there are things that are more important
than just per capita income.
You have to take into account life expectancy.
You have to take into account access to healthcare.
You have to take into account access to education.
And sometimes, it doesn't correspond to whether you have money or not
to have sensible access to these services and goods."
Well, the UN Human Development Index,
which is produced by the UN every year,
they produce this index, and if you compare both indexes,
[you'll see] that the countries with the freest economies
have the highest human development standards.
For example,
if you compare life expectancy and economic freedom,
you'll see that people in the freest economies tend to live 20 years more
than the people who live in the least free economies.
Child mortality is significantly lower in those countries.
It's almost ten times lower in the freest economies
than in the least free economies.
And let me mention an example which is very telling.
It's the example of India
because, if you look at these numbers just in graphs,
you don't understand the magnitude of the human cost
of not implementing policies that have to do with economic freedom
in different countries.
You know, when India became independent,
in the late 1940s, from Britain,
it adopted a very closed economic model.
It wasn't a Soviet economy,
but it followed many of the top-down economic controls of Soviet economies.
The commanding heights of the economy, the big industries,
were owned by the government; you had high public spending.
The economy was closed to international trade.
India wanted to be self-sufficient, producing goods and services.
There were high regulations on entrepreneurs,
and India experienced a very low rate of economic growth
for 30 years after independence.
It was approximately 3.5% a year.
You might think that 3.5% is respectable
for a large country like India,
whose population was also growing very fast.
That meant that incomes were stagnant.
The per capita income was basically stagnant.
The population was rising as fast as the economy.
So, you have hundreds of millions of Indians living in poverty,
for most of India's history.
In 1981, the government started opening up the economy.
It started privatizing some industries.
It opened up a little bit to international trade.
It dismantled some controls on businesses.
And growth picked up a little bit. It went on from 3.5% to 5% a year.
And it grew 5% a year for most of the 1980s,
and then, in 1991,
Manmohan Singh, who, I think, until the last couple of days,
was the Prime Minister of India, because there is another guy coming in,
but Manmohan Singh was then the Finance Minister of India -
he's now the Prime Minister -
and he engaged in a more aggressive program of economic liberalization.
They privatized more industries, they opened up to foreign investment.
They got rid of the License Raj,
which was the name of this regulatory system that prevented people
from opening up their own businesses,
and India's growth rate skyrocketed,
and we have witnessed in the last decade, at least,
that India grew, on average, like 7% to 8% a year.
And we have seen that hundreds of millions of Indians
have escaped poverty in recent years.
So, my colleague Swaminathan Anklesaria,
who works at the Cato Institute with me,
he's Indian and he went on to make an experiment.
And he asked, "What would have happened to India
if the timid reforms of 1981 had taken place in 1971?"
Remember, those weren't the aggressive reforms of 1991.
Those were the timid ones.
And, "What would have happened to social indicators in India,
if that 5% growth rate we enjoyed in the 1980s,
if we had had it in the 1970s,
and the 7%-8% growth rate that we enjoyed in the 1990s and the 2000s,
if we had enjoyed it in the 1980s, the 1990s, and the 2000s?"
Well, what he found was startling.
He found that [14.5] million children would have survived
because of a lower mortality rate.
India's child mortality has decreased significantly since the 1980s
because of economic growth, because the country has gone richer.
Well, if those reforms had taken place ten years earlier, just a decade earlier,
14.5 million children would have survived.
Just look at how many kids died
because of the reforms being delayed ten years.
I don't want to belittle the Holocaust, that was a terrible human tragedy,
but this is 12.5 times the number of Jews that were killed by Hitler,
in World War II.
He also found that 261 million Indians would have become literate,
if these economic reforms had taken place a decade earlier.
109 million Indians would have escaped poverty.
So, we see, in a huge country like India,
the magnitude of implementation of economic freedom,
of reforms that relate to economic freedom:
open borders, lower taxes, rule of law,
sound monetary policies, low inflation, and sensible regulations.
And then,
just like my colleague Swami produced his study,
there have been literally dozens, if not hundreds, of economic studies
since the times of Adam Smith,
that show the correlation and the causation
between economic liberty and progress.
You can find the economic freedom index online,
at freetheworld.org .
You can download it completely.
You can see which are the countries that most enjoy economic freedom.
Most of them tend to be small countries.
Number one is Hong Kong,
that is followed by Singapore, Switzerland, New Zealand.
You have Canada, you have Australia, you have Finland,
and you see that there are no determinants
for having institutions that correspond to economic freedom.
You don't have historical determinants, you don't have ethnographic determinants,
you don't have cultural determinants.
The countries that are most open
tend to be from all over, from all walks of life.
You have Chinese, you have Europeans, you have Anglo-Saxons.
Chile is number 11, so you even have a Latino country there.
And you can see that these countries that have engaged in opening up their economies
are the most prosperous, are the ones that provide better standards of living
to their populations.
So, I encourage you to look at this index, learn more about economic freedom
and why, as the example of India shows, it's literally a matter of life and death.
Thank you very much.
(Applause)