WSJ.com - Wish They All Could Be Like Estonia

WSJ.com - Wish They All Could Be Like Estonia: "With the 1989 fall of the Berlin Wall the world witnessed a backlash against the overintrusive state. A rallying cry in favor of economic liberalization went up around much of the globe. Some governments -- notably in Eastern Europe -- used the momentum to push deep, structural reform. Others -- notably in Latin America -- bungled the opportunity.

Is there any way to explain why it is that some countries have been able to restructure their economies so radically while others have been left in the clutches of special interests?"....

As they do every year, the index authors observe the average per capita income of countries in each category. Not surprisingly, over the years, they have found a strong relationship between economic freedom and prosperity. Yet there is something more that can be observed in this pattern: Countries that liberalize quickly and thoroughly achieve resounding successes, politically and economically. Conversely, gradualism risks stagnation and even reversals, because the benefits are not evident enough to impress the electorate and generate a momentum in their favor.

Take, for example, the difference between the wealth of "repressed" economies and "mostly unfree" economies. The per capita GDP of the former is $4,239 while of the latter it is a tad lower at $4,058. This suggests that reforms that move a country one step up in economic liberty, on average, produce no material benefit to the population.

The jump from "mostly unfree" to "mostly free" yields a much better return but still leaves a country not particularly well-off. "Mostly free" countries have a per capita GDP of $13,530, while "free" countries have, on average, a per capita GDP of over $30,000.

This matters the most in democracies, where leadership needs to produce results if liberalization is to stick. Clearly, it's not the absolute income level that generates support for reforms but the growth in living standards that seems to hold the key. Halfhearted measures generate immense resentment from the "losers" of the old system but often don't yield large enough gains to create a constituency to support the changes.