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Ron Nehring

Secret to a successful economy? Not a secret at all.

The secret to a prosperous economy actually isn’t a secret at all.

Around the world, we can see that countries with laws, regulations and cultures that respect the principles of property rights, a fair judicial system, low and predictable taxes and regulations, among a few, prosper. Countries that fail to be governed by these principles are less prosperous.

The Index of Economic Freedom, developed by our friends at The Heritage Foundation, provides a single number to understand to extent to which any country is positions its people for success through sound policy. The higher a country’s score and ranking in the Index, the more, over time, its people will prosper.

Not surprisingly, the economic basketcases of the world can be found at the low end of the index, with scores under 50. North Korea, Cuba and Venezuela round out the bottom three.

For policymakers in the United States and abroad, creating the conditions for prosperity is, literally, a matter of raising one’s score and ranking in the Index of Economic Freedom. Reduce taxes and make regulations lower and more predictable? The score goes up. Try to placate the country’s labor unions by making it more expensive to hire workers? The score goes down.

In today’s global economy, governments are keen to make their country more appealing for foreign investors. What do investors look for? Return on investment is of course key, but so are, for example, property rights. What good is investing in a factory if there is a risk the government will come in and take it away? How about access to a fair judicial system to resolve potential disputes? Or sound monetary policies, so returns are not destroyed by inflation.

Despite the overwhelming weight of evidence in support of the need for sound economic policies, we continue to see countries trying to get away with compromising on sound economic principles, seemingly hoping there will be no consequences.

Let’s take a look at Peru. In the 1970’s the country’s leftist military government expropriated large swaths of land, a Zimbabwe-style “reform” with similarly disastrous results – it issued “land bonds,” investment instruments it made available on the global market. Some American pension funds invested in these bonds, assuming they would be backed by the Peruvian government. They weren’t.

Fortunately, the country’s equivalent of the Supreme Court ruled the government could not get away with its scheme to avoid making good on its obligations. Since the ruling, however, the government has been playing games and using every tactic it can find to avoid complying with the court’s ruling.

When governments use legal maneuvering to avoid making good on its obligations, it sends a signal to others in the economy, including potential investors, that it may be better if they invested elsewhere.

Venezuela provides an even clearer example. President Nicolas Maduro continues to take the country down the path chosen by his radical left wing predecessor, Hugo Chavez. The virtual abolition of property rights, arbitrary and heavy regulation, and rigid labor laws contribute to making this country the worst place in the western hemisphere to do business. The currency is worthless, inflation is at third world levels, and severe shortages for basic goods are common throughout the country.

How many companies and investors are making new investments in Venezuela today? I doubt even one.

At the top of the index, one finds Hong Kong, Singapore, New Zealand, Switzerland and Ireland in the economically “free” category. Each of these countries enjoys a high standard of living – the result of a strong private sector economy made possible by business owners, investors, entrepreneurs and workers working together under sound principles.

Creating a strong national economy takes time, and reversing years of mismanagement and bad policy can be politically challenging. Nonetheless, the path forward for countries genuinely interested in creating the conditions of prosperity is clear.