The US can learn from market reforms in countries like Bulgaria

Richard Rahn, The Washington Times

The growth of former communist countries is the envy of the world. Once again, there is more evidence that economic freedom leads to success. Many of the former communist countries of Central and Eastern Europe and the Soviet Union have made tremendous economic progress since they became free nearly three decades ago.

The first few years after the fall of communism (1989-1992) were very difficult, as countries struggled to make the transition to a free-market capitalist economy, which many of them achieved by 1995.

The success of market reforms in Eastern Europe

Ironically, the United States could learn some lessons from the success of former communist countries. Recently, James Guartney, a highly regarded economist and scholar (and longtime lead author of the annual Economic Freedom in the World report), presented a comprehensive study of the successes and failures of 25 of the former centrally planned economies of Central and Eastern Europe and the Soviet Union.

The results of this study, and many others, have shown that economic policies that lead to more economic freedom and less government involvement help countries at all stages of development. The accompanying table shows the change in economic freedom and Gross Domestic Product (GDP) per capita for five selected countries—all of which I have traveled to many times and which are examples of more successful countries. All of which now have real per capita incomes that are two to three times higher than they were 20 years ago.

More economic freedom = more wealth

Incomes are also much higher (if measured correctly) than they were under communism. The Baltic countries – Estonia, Lithuania and Latvia – are the three biggest success stories, all of which are now in the world’s top 10 for economic freedom. This is remarkable, as they had virtually no economic freedom when they were under Soviet control.

In 1995, for example, Estonia had a per capita income that averaged just 33 percent of that of the top 21 countries. That figure has now risen to 62 percent. Similar increases have occurred in Lithuania and Latvia. Trade and foreign investment have increased, and poverty and corruption have been significantly reduced. Along with the growth in economic freedom, civil liberties and political rights are now at their highest levels in Estonia and Lithuania, according to Freedom House’s annual rankings. Again, only almost 30 years ago, these countries had barely any civil liberties and no political rights.

Romania got off to a slow start in economic reform, but has made remarkable progress over the past 15 years and now ranks 20th (out of 159 countries) in economic freedom. The country introduced a 16 percent flat tax in 2005 and significantly reduced customs tariffs (by an average of 5 percent) and other trade restrictions. Romania has curbed corruption, which is still too high. And while political rights and civil liberties have improved, they are still not at the top level.

Bulgaria's progress

Bulgaria was stagnant until 1997, when it introduced a currency board to stem hyperinflation and accelerate economic reform. In 2008, the country adopted a 10 percent flat tax on income, both personal and corporate. Customs tariffs were significantly reduced when the country joined the European Union in 2007. GDP per capita grew by an average of 4.36 percent between 2000 and 2015, in part due to vast improvements in economic freedom. Bulgaria now ranks near the top in both civil liberties and political rights.

Bulgaria's main problems are corruption, as well as weaknesses in the legal structure and protection of private property. Poland is currently a middle-income country, as a result of an average growth of 4.11% in GDP per capita between 1995 and 2015 and a steady increase in economic freedom (moving up from the bottom third). The country became a member of the EU in 2004 and is now its fifth largest economy.

The US needs to reform, as happened in Eastern Europe

Poland also ranks highly in terms of civil liberties and political freedom. However, it still has problems with its legal system and the rule of law, including property rights. For more than two centuries, the United States has been a great global success story. But while the country used to be in the top three for economic freedom, it has now fallen to number 11, largely as a result of excessive regulation and a decline in the rule of law.

The increase in regulations and government presence has stifled the economy, leading to much slower economic growth and near-stagnation in average real income. The question is: Can the United States reform itself, as the centrally planned countries of the past did? There is no doubt what needs to be done—reduce government spending and taxes as a percentage of GDP, eliminate regulations that do more harm than good, and clean up the courts.

So far, the new administration has received “Excellent” on judicial appointments, “Very Good” on regulations and proposed tax changes, but has lagged on cutting spending, ensuring partial rule of law (the Justice Department is still part of the swamp), and has frankly floundered with some of its trade proposals. /BGNES

Original publication on Econ.bg

Image source: Frognews.bg

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