Economic freedom saves lives

The Chilean earthquake has been on my mind since I turned on the TV Saturday morning. It demonstrates the life-and-death benefits of a functioning economy, society and political system, conclusions reinforced by an email I received Tuesday from one of the friends I made during my 2008 trip to Santiago.

As a native Californian, the collapsed freeways in Santiago — while the rest of the city survived intact — reminded me of similar photos from the three major California earthquakes during my lifetime: 1971, 1989 and 1994.

Here earthquakes are a way of life. Just before lunch on Wednesday, my 5th floor office swayed due to a 3.4 earthquake 9 miles away. Since becoming a state, California has eight major earthquakes:

• Ft. Tejon (LA), 1857, 7.9
• Hayward (Bay Area), 1868, 6.8, killing 30
• Owens Valley (Eastern Sierra), 1872, 7.4, killing 27 and leveling the town of Lone Pine
• San Francisco, 1906, 7.8, killing more than 3,000 people
• Long Beach (LA), 1933, 6.4, killing 115
• Sylmar (LA), 1971, 6.6, killing 65
• Loma Prieta (Bay Area), 1989, 6.9, killing 63 and causing $6 billion in damage
• Northridge (LA), 1994, 6.7, killing 60 and causing more than $13 billion in damage

The major quakes in the 20th century brought dramatic improvements in California’s building codes to make new construction among the safest in the world. One place that’s comparably prepared is Japan — and the other is Chile.

The Christian Science Monitor compared California and Chile’s preparation in an article Monday. While it’s much less wealthy, Chile has had stronger earthquakes that California in the past 200 years, including the strongest earthquake of the 20th century — if not recorded history — the 9.5 earthquake of 1960.

Bret Stephens of the WSJ noted Tuesday that Chile’s 8.8 earthquake was 500 times stronger than Haiti’s but the death toll was 1/200th as large. His explanation:

Chile also has some of the world's strictest building codes. That makes sense for a country that straddles two massive tectonic plates. But having codes is one thing, enforcing them is another. The quality and consistency of enforcement is typically correlated to the wealth of nations. The poorer the country, the likelier people are to scrimp on rebar, or use poor quality concrete, or lie about compliance. In the Sichuan earthquake of 2008, thousands of children were buried under schools also built according to code.

He attributes this outcome to Chile’s economic growth, which in turn he credits to the success of Friedmanism. However, I think Chile’s successful institutions run deeper than that.

However you slice it, Chile is a unique bastion of freedom in South America if not the Western Hemisphere. In January, it became the first Latin America country to join the OECD. According to the latest WSJ study, its economic freedom is slightly behind the US and slightly ahead of the UK. According to Transparency International, corruption is nearly as low as for the US, ahead of Spain and far ahead of the rest of the continent (except Uruguay). By fiscal measures, it’s the best run country in the hemisphere.

On Tuesday night, I got an email from one of those friends in Chile — ironically, an American expat from Texas who (unlike the Chileans) had never experienced a major quake before. Nathan Young wrote:

It was definitely a traumatic experience for us all, and probably the scariest of my life. I awoke right before it hit … In a matter of seconds the bed started softly shaking. As Chile is on a major fault zone, I thought nothing of this as it is quite a frequent occurrence. However, that lighter shaking quickly progressed into violent throws. I live in a 20 story apartment building on the 8th floor and the entire complex began swaying back and forth, moaning and popping, it was deafening. Glasses were breaking, windows rattling, walls splitting, I felt the entire building was about to fall down on me. I was able to scramble to make my way awkwardly to the front door and got down the stairs to the first floor when it finally stopped.
…
I am amazed at how quickly the Chilean economy is getting back on track. In the top 10 for largest earthquakes of all recorded time, and yet two days later everyone returned to work, with the majority of supermarkets open for service as well.
…
Overall I have been very impressed with the way the government and economy itself is recuperating. Most of the city already has electricity again, though looting is taking place in some of the same older and poorer parts of town. I was at a lunch with some friends today and while we were there some hoodlums taking advantage of the chaos and began robbing many of the stores in the central part of Santiago. They shut down the majority of that sector and began patrolling with cops and dogs afterwards.
…
Have some friends here for a wedding that we actually ended up celebrating that same Saturday after the earthquake. Quite a bit more somber though and the reception was discontinued, though it was good to try and begin reflecting and advancing.

Far from the devastation, the FT reached a similar conclusion about the country’s resilience — first to the global recession and now the earthquake:

[Chile] withstood the global slowdown far better than many of its neighbours because of the policy of saving profits from sky-high copper prices. It has some $16bn of that cash still available – about 12 per cent of GDP – which will provide a handy reserve as Sebastián Piñera, new president, sets about rebuilding the roads, bridges, ports and 1.5m homes affected.
…
“Chile should have no problem financing things. It has fiscal savings and international financial institutions are ready to finance Chile, whose leverage is very low,” said one analyst at a bank in Buenos Aires who declined to be named.

So transparency, accountability, strong political and economic institutions don’t just provide economic growth — they save lives. If not from earthquakes or hurricanes, then from tropical diseases, basic sanitation, and infant mortality. Other countries that aspire to the OECD and developed country status have an excellent role model, whether they realize it or not.