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The Quality of Democracy and Economic Freedom in Latin America and the Caribbean

Posted on the 28 June 2013 by Center For International Private Enterprise @CIPEglobal


Sergio Daga is a CIPE-Atlas Corps Think Tank LINKS  Fellow serving at the Heritage Foundation. 

According to the latest Democracy Index from the Economist Intelligence Unit, only two countries in Latin America and the Caribbean are considered full democracies. More than half of them (58 percent or 14 countries) fall under the category of flawed democracies, while 7 countries live under hybrid regimes, and one still lives under an authoritarian regime. On the other hand, according to the latest edition of the Heritage Foundation’s Index of Economic Freedom, only one country in the region is considered mostly free (none is considered completely free), almost half of them (11 countries out of 24) can be considered living under a moderately free economy, 6 economies fall under the category of mostly unfree, and 6 countries are considered repressed economies. What is the relationship between the quality of democracy and the level of economic freedom in the Latin American and the Caribbean (LAC) countries?

There is a positive correlation between quality of democracy and economic freedom. Far from showing causality, the assumption here is that countries that now enjoy high quality of democracy are the ones that embark on political reforms. In a similar way, the countries that enjoy higher economic freedom are the ones that  tend to liberalize their economies, are more likely to implement market-oriented policies, and therefore are able to achieve greater levels of economic prosperity. I am assuming what CIPE’s Anna Nadgrodkiewicz stated in a blog posted on June 2008 as true, — “political and economic reforms are intertwined and mutually dependent rather than contrary to each other”.

As shown in the chart below, the countries in LAC with better quality of democracy tend to score higher in terms of economic freedom, and vice versa. As can be expected, Uruguay, Costa Rica, and Chile are the countries where the quality of democracy tends to be higher than in the others LAC countries, and also in these countries the level of economic freedom is relatively high. On the contrary, in Cuba, Haiti, and Venezuela the quality of democracy is low (or nonexistent) and their economic freedom is absent. The rest of the countries lay in between these two extreme cases.

The reason why countries that enjoy high quality of democracy tend to also enjoy relatively high levels of economic freedom is straightforward. In full democracies countries, such as in Uruguay and Costa Rica, political freedoms and civil liberties are respected, but these will also tend to be underpinned by a political culture conducive to flourishing a democracy.

The functioning government is satisfactory. Media is independent and diverse. There is an effective system of checks and balances. The judiciary is independent and judicial decisions are enforced, and there are only limited problems in the functioning of democracies. Therefore, the reason for why the countries in this category also tend to have higher economic freedom is because rule of law governs the decisions of politicians. The perception of corruption tends to be relatively low, and given the fact that the judiciary is independent, property rights are often respected. These are all part of the pillars that constitute the foundations of economic freedom in every country.

Policymakers in LAC can do more good by embarking in serious political and economic reforms that lead their countries to better democracies and freer economies. If done properly, reforms can help lead the way for nations to build prosperity.

CIPE Atlas Corps Think Tank LINKS Fellowship brings talented young professionals with strong research backgrounds to shadow researchers and experts at leading U.S. think tanks for six month. Sergio Daga is part of the inaugural class, serving at the Heritage Foundation as Visiting Senior Policy Analyst for the Index of Economic Freedom in Latin America. 

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