Australia is a very wealthy country compared to many other places in the world. According to the World Bank, Australia has the 21st highest GDP per capita in the world.
But why? Why is Australia, and other similar countries like the United States, Germany, Japan and New Zealand, prosperous, whilst other countries are not?
Is it because Australia is blessed with natural resources? Australia is blessed with natural resources, but so is the Democratic Republic of Congo, yet the Global Finance Magazine believes it to be the poorest country in the world based on GDP per capita between 2009 and 2013.
Is it because Australia is possesses a large amount of fertile land that is suitable for agriculture? Australia is lucky to have so much agricultural land, but so is Zimbabwe, yet the Zimbabwean government estimates 25% of Zimbabwean children die of malnutrition.
The reason why Australia is prosperous compared to the Democratic Republic of Congo, Zimbabwe and many other countries is because Australia has free markets and secure property rights.
We will talk about what free markets and property rights are in more detail later on. But the main reason why they are important is because they allow entrepreneurs the freedom to innovate, create and solve problems secure in the knowledge that they will be able to keep the fruits of their labour.
Typically, western countries are amongst the richest nations on earth because they have maintained these institutions. This includes Australia, the United Kingdom and the United States.
Individual rights such as property rights are protected for Americans in the Constitution of
the United States of America.
But other countries such as Japan, Singapore and South Korea have benefited from free markets and secure property rights. To enter this part of the website, you will have clicked on an image of a colourfully lit city. That city is the Chinese city of Shanghai. China introduced some elements of the free market and more secure and clear property rights over the previous four decades. As a result, as this IPA article in OECD Insights explains, more than 680 million Chinese people have been able to lift themselves out of poverty.
Botswana was the third poorest country in the world when it gained independence in 1966. However, as the Heritage Foundation in the US points out, the government of Botswana has maintained a commitment to free markets and secure, stable and clear property rights. As a result, Botswana was a middle income country by the mid 90s and one of Africa’s few success stories at the time (but despite often getting bad press, Africa is growing all the time – twice as fast between 2000 and 2010 than the previous decade).
Indeed, over a billion people around the world rose out of poverty between 1990 and 2015 – more people than at any other time in history. It is no coincidence that this comes at a time of growing economic freedom globally. In its Economic Freedom of the World report for 2015, the Cato Institute found that economic freedom has increased significantly since 1980 with regards to security of property rights, freedom to trade internationally, the rule of law, regulation and other factors.
These findings are supported by the Heritage Foundation’s 2015 Index of Economic Freedom. The graph below shows that countries rated by the Heritage Foundation as more economically free have greater GDP per capita.
While China has played a major part in the success of recent decades, it is not the only beneficiary of economic growth underpinned by the emergence of freer markets and more secure property rights. World Bank economist Martin Ravallion believes growth in developing countries has lifted 280 million people out of poverty since 2000.