“Mr. Isaczai highlighted that the country which was devastated by war following the invasion of 2003 now has increased confidence in its institutions and is moving towards greater stability.

He said Iraq has seen a reduction in poverty from 20 per cent in 2018 to 17.5 per cent in 2024-2025 and that preliminary reports suggest the country now ranks high on the Human Development Index, which measures life expectancy, education and standard of living.

Additionally, an improved security environment has enabled five million internally displaced people (IDPs) to return home, while those remaining in camps do so mostly because of housing or civil identification issues. 

Finally, he noted an ‘important milestone’ when the country held parliamentary elections last year with a 56 per cent voter turnout – a 12 per cent increase from the previous national vote – with around a third of the candidates being women.”

From United Nations.

“China on Thursday split off a Belgium-sized island with an economy comparable to a mid-sized country from the mainland for customs processing, part of a bid to join a major trans-Pacific trade deal and establish a new Hong Kong-style commercial hub.

Officials hope that turning the southern province of Hainan into a duty-free zone will spur foreign investment, with goods that achieve at least 30% local value add able to move on into the world’s second-largest economy tariff-free. Foreign firms will also be able to operate in service sectors that are restricted on the mainland.

China is also seeking to boost its free-trade credentials to convince members of one of the world’s largest free-trade deals, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), that it can meet the bloc’s high standards for trade and investment openness through pilot projects such as the Hainan Free Trade Port.”

From Reuters.

Summary: Many people assume that markets breed dishonesty, but the opposite is true. Commerce depends on trust. Repeated exchange and reputation make honesty not just virtuous, but profitable. When trade is open and competition thrives, deceit is punished and integrity is rewarded. By contrast, heavy regulation invites corruption and favoritism. A truly commercial society, grounded in voluntary exchange and mutual accountability, is also a more honest and trustworthy one.

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In my previous essays, I argued that a trade society is both a prosperous and trust-based society. Trust and trustworthiness in society revolve around norms of honesty. Dishonesty breeds distrust and frays the threads of our social fabric. Some may worry that dishonesty is the lifeblood of a commercial society: a system that runs on lies, with an every-man-for-himself attitude and shady opportunists around every corner. In fact, greater honesty is best achieved through reputational pressures and the mutual accountability that is fostered by frequent exchange; frequent exchange is enabled by the removal of corrupting restrictions.

In his Lectures on Jurisprudence, the Scottish economist Adam Smith described the commercial society in the following terms:

Whenever commerce is introduced into any country, probity and punctuality always accompany it . . . Of all the nations in Europe … the most commercial, are the most faithfull to their word … A dealer is afraid of losing his character, and is scrupulous in observing every engagement … When people seldom deal with one another, we find that they are somewhat disposed to cheat … When the greater part of people are merchants they always bring probity and punctuality into fashion, and these therefore are the principal virtues of a commercial nation.

In Smith’s view, fear of reputational damage and unemployment prevents fraud and dishonesty. He believed that success within a commercial society stems from “prudent, just, firm, and temperate conduct” and “almost always depends upon the favour and good opinion of … neighbours and equals; and without a tolerably regular conduct these can very seldom be obtained. The good old proverb, therefore, that honesty is the best policy, holds, in such situations, almost always perfectly true.” For Smith, the market in many ways makes us accountable to each other: repeated dealings and fear of reputational damage incentivize honest behavior. And plenty of empirical evidence supports his outlook.

Laboratory experiments demonstrate that trade teaches participants whom to trust and whom not to. Dishonest behavior is punished in the marketplace, providing an incentive for participants to be honest in their dealings. For example, one study found that adding market competition to the experiment reduced sellers’ over-diagnosis of high-quality treatment (when lower-quality would suffice) and increased buyer trust. Another experiment found that introducing market competition into one-off exchanges boosted trust and efficiency to match that of trading networks built on repeated interactions. Adding market competition and private reputation information in one experiment tripled trust and trustworthiness while increasing efficiency tenfold. By practicing honesty to protect their reputations, trade participants eventually internalize honesty as a habit.

Conversely, trade restrictions lead to greater dishonesty. For example, Transparency International’s Corruption Perceptions Index (CPI) measures the perceived levels of public sector corruption across numerous countries using multiple surveys of business people and country experts (Figure 1). Various studies that rely on the CPICPI have shown that a greater amount of international trade and foreign direct investment and low levels of state control of the economy curtail corruption. High levels of regulation—including regulation on trade—tend to be a strong predictor of corruption. Even seemingly small adjustments to trade procedures can make a difference. For example, the World Bank’s 2020 Doing Business report found that “economies that have adopted electronic means of compliance with regulatory requirements . . . experience a lower incidence of bribery.” That includes digital trade reforms such as electronic single-window systems, e-payments, paperless clearance, online certificate issuance, and more.

Figure 1. Corruption Perceptions Index scale

More recently, a 2023 study looked at firm-level data across 138 countries and confirmed that the imposition of more red tape in public services—such as import licenses—is associated with a greater tendency to pay bribes, particularly in nondemocratic countries. Similarly, a recent study found that India’s trade liberalization since the early 1990s, especially tariff reductions, significantly reduced the economic advantages of politically connected firms by decreasing their reliance on political favoritism. It appears that the friendlier a nation’s economy is to trade, the less corrupt it tends to be. Economic restrictions and regulations allow corruption to grow, instead of the economy. By reducing barriers, more trade is unleashed, which in turn promotes the “probity and punctuality” that Smith described.

When the level of economic freedom within countries is compared to their level of corruption, economically-free countries come out looking relatively clean. And the scores of the freest countries are more than twice as high as those of the least free countries (Figure 2). That’s because various aspects of economic freedom—including trade openness—are associated with less corruption. Freer trade makes reputation king, mitigating corrupt incentives and embedding honest norms throughout society.

Figure 2. Economic freedom and corruption

As a case in point, East Germany suffered under severe trade restrictions prior to the fall of the Berlin Wall. After testing randomly selected German citizens on their willingness to cheat at a die-rolling game, researchers found that those who had East German (communist) roots were significantly more likely to cheat compared to those with West German (capitalist) roots. It was also shown that the longer the person had exposure to communism and its trade barriers (i.e., those who were at least 20 years old when the Berlin Wall fell in 1989 compared to those who were only 10 years old), the greater their likelihood to cheat.

These findings are supported by the work of the Mercatus Center’s Virgil Storr and Ginny Choi, who discovered a significant difference in attitudes between members of nonmarket and market societies: More than double the number of nonmarket residents versus market residents believe that avoiding fares on public transport, cheating on taxes, and bribery are justifiable. Those from nonmarket societies are also more accepting of theft compared to those from market societies (Figure 3).

Figure 3. Market versus nonmarket societies on dishonest behavior

Follow-up studies by other researchers have drawn similar conclusions about market societies and honest behavior. For example, a 2023 study surveyed residents in both market and nonmarket societies on their attitudes toward claiming government benefits to which they are not entitled, avoiding fares on public transport, and cheating on taxes. After controlling for a number of variables, they found that those with greater exposure to markets were less likely to justify these dishonest actions. What’s more, individuals who preferred markets (“market thinking”) were also less likely to justify dishonesty. The researchers concluded that there is “a universal association between markets and morality” and “a robust association between an increase in market exposure and an increase in civic morality.”

Even within communist countries, research shows that the more trade-oriented areas tend to be the least corrupt. A study in China Economic Review employed the National Economic Research Institute (NERI) Index of Marketization, which measures five major fields of Chinese marketization with 23 indicators. Examining different provinces in China, the authors’ analysis found that deregulation and trade reduce corruption: a 1 percent increase in the marketization index leads to a 2.72 percent reduction in corruption. Regions that increased trade openness by 1 percent experienced a 0.35 percent reduction in corruption.

Overall, the evidence overwhelmingly suggests that open economies stifle the spread of corruption and reinforce honest habits through reputation-building exchange. The removal of trade barriers allows for more commerce to take place and, consequently, more reputations to be a stake—a powerful incentive to keep honorable reputations intact. The most enduring way to achieve this is through genuinely honest conduct. A commercial society is, at its core, a society of integrity: it limits the opportunities for corruption and encourages honest behavior in the process. The norms of commerce—Smith’s “probity and punctuality”—settle in like a kind of glue, helping to bind society together.

Listen to the podcast or read the full transcript here.

Joining me today is my colleague Marcos Falcone, a policy analyst focusing on Latin America at the Cato Institute’s Center for Global Liberty and Prosperity. He joins the podcast today to discuss the dramatic recent election win of President Javier Milei, who has led his party to a landslide victory in Argentina.

Let’s start with a bit of a history lesson. Argentina has a long history that has not always been a history of progress. Could you walk us through some of that background?

Argentina is one of very few countries in the world, and perhaps the only one, to have gone from being a developed country to a developing country. During the late 19th and early 20th centuries, Argentina was among the richest economies in the world. It was second to the US in terms of the net number of immigrants received. It also had extremely low taxes, low public spending, and very few regulations.

But, of course, international ideological trends also affected Argentina. Nationalism, corporatism, and fascism began to rise in popularity, Juan Domingo Perón came to power in 1946, and Argentina started to diverge from the rest of the world. Whereas much of the world opened up to trade during those years, Argentina became a highly closed, protectionist economy and missed out on all the benefits of trade that increased dramatically after the end of the Second World War.

When Argentina became a closed economy, special interests began to emerge, including trade unions and crony capitalists, who depended on Argentina remaining a closed economy, which in turn made it harder to re-liberalize Argentina’s economy. Governments couldn’t, for example, lower public spending, because people were counting on it. They couldn’t open borders because industries were dependent on them being closed. They couldn’t deregulate labor relations because of the unions. And so, we started to drift into a declining path.

On a happier note, Argentina also has a very long intellectual tradition of classical liberal thought. Could you tell us about that?

The architect of the Argentinian constitution was a classical liberal called Juan Bautista Alberdi. He was a lawyer, but like many intellectuals of the 19th century he wrote about many things, including economics and moral matters. The constitution he designed, which closely followed the example of the US Constitution, went into effect in 1853. It has suffered changes, but really no major changes were implemented until the mid-20th century. So, for almost 100 years, Argentina retained this very classical liberal constitution that greatly benefited the country.

Liberty was also at the forefront of Argentina’s politics and culture. At the end of the 19th century, both the ruling elite and the opposition had classical liberal ideas. The socialists, for example, were very much against protectionism and the creation of a central bank, because they thought it would be bad for workers. However, as fascism and communism began to rise in popularity, this classical liberal environment started to fade away, to the point that we had a Supreme Court that basically allowed the military to seize power in 1930. From that point, it would be over 50 years before Argentina had a fully democratic regime once again.

Still, even during the 20th century, Argentina had a very strong classical liberal tradition. For example, Alberto Benegas Lynch, who is a Cato adjunct scholar, founded a university called ESEADE, where classical liberal thought was spread. We saw the founding of various think tanks in the 1980s and 1990s within the classical liberal tradition, such as my previous employer, Fundación Libertad. We began to rebuild the classical liberal culture that had been lost in Argentina for so long, which also contributed to the rise of Javier Milei, who started out speaking at forums at classical liberal think tanks. I actually met him over 10 years ago.

So, Argentina initially had a strong classical liberal tradition, which it lost for a while but has now regained. And that’s one of the reasons why I’m actually optimistic about the future of the country.

Let’s talk about Milei’s victory. Walk us through what was going on going up to the election and the election itself, and why that outcome took so many people by surprise.

Javier Milei won the presidency in 2023, when many people thought that was impossible. Politicians in other parties actually thought that they were taking advantage of Milei’s presence because he would take votes away from their opposition. But we have to understand the context of Argentina to understand why Milei became popular. In 2023, Argentina had an annual inflation of over 200 percent, on the verge of hyperinflation. And the country hadn’t grown in about a decade.

Everyone who wanted to do business in Argentina knew that this was next to impossible because of how regulated the economy was, and there were also unbearable situations in daily life. For example, rent control was so stringent that many landlords decided not to rent their places, and this caused prices to go up. Ryan Bourne and I interviewed one person who told us that back in 2023, it was so expensive to find a place to live that it could be cheaper to live in a hotel.

So Argentina had been trying interventionist policies for a long time, and they were not yielding good results, and Javier Milei arrives, wielding a chainsaw, saying, “we need to cut spending, we need to slash public spending, we need to lower taxes, we need to deregulate, we need to open up the economy, and we need to dollarize.” And after he wins the presidency, so many people say, “A libertarian can’t last long into office. He will have to resign after a month if he tries to do what he says.” And well, Milei has been president for almost two years now, and many of the radical reforms that he announced have not caused any sort of upheaval.

I think that the most important reform was balancing the budget. Argentina had a 200 percent annual inflation rate because it was running deficits, and nobody trusted Argentina to pay back its debt, so all the government could do was print money. In just one month after taking office, Milei had balanced the budget—something everyone else had said was impossible. Ten days into his presidency, Milei repealed the rent control laws. One year after that decision went into effect, we saw prices going down in real terms by about 30 percent. We saw the supply of apartments triple in the city of Buenos Aires.

During the 2025 midterm election a couple of weeks ago, there was some pessimism that maybe the Peronists were going to win. Many people, including political analysts, were saying that Milei’s changes were so profound that people would not tolerate them, and this fueled a run against the peso. But Milei won over 40 percent of the vote, and this is bringing a new wave of optimism to Argentina because, since Milei previously only had about 15 percent of seats, there were many reforms that he couldn’t make. Now, while Milei still doesn’t have a majority, he needs fewer alliances to pass the reforms that he wants.

Let’s talk about some of those policies.

It seems like the priorities of the Milei administration will be to pass tax reform, social security reform, and labor reform.

In Argentina, taxes are not just high, but also very complicated and superimposing, meaning you have taxes on taxes. To give you an example, the last Doing Business report by the World Bank, which came out in 2020, said that a business in Argentina that paid all of the taxes it was legally required to pay would end up paying 106 percent of its income. That means you’d be better off not doing any business at all. So, you can imagine how complicated the tax system is in Argentina, because obviously, businesses can’t pay 106 percent of their income. The Milei administration could only make very limited changes up to this point because, constitutionally, he needs Congress to legislate over tax matters.

Argentina also has a very high degree of informality in its labor market because it’s very expensive to hire employees legally, and it can be even more expensive to let them go because of litigation. Businesses, particularly small and medium enterprises, are constantly trying to avoid litigation because they know, due to the way that the judicial system is set up, if they face a lawsuit by a former employee, they’re going to lose. This needs to stop, and the Milei administration knows this and is going to push for labor reform.

When it comes to social security, Argentina has the common problem of an aging population. We have the typical Ponzi scheme, where if the base keeps growing, then there’s no issue, but if the population pyramid is no longer a pyramid, there’s likely not going to be enough people in the future to pay for those who are paying taxes today. Now, this is aggravated in Argentina’s case because of populist policies. For example, beginning in the 21st century, over a million pensioners were integrated into the system without having made any payments to social security beforehand at all. We’ve also had an increasing amount of fraud over the past two decades. It’s statistically impossible to have as many disabled people as Argentina seems to have. We see towns in Argentina in backward provinces where maybe 50 percent of all people are cashing in a disability payment. Those are the kind of things that the Milei administration will try to tackle.

I would also like to see more far-reaching trade liberalization and dollarization, because Argentina will eventually have another left-wing or Peronist administration. We’re in a democracy, governments change, and we haven’t really seen that the Peronist economic agenda is becoming more reasonable. So, we need to protect people, and particularly the assets of the people, and the best way to do that is dollarization.

Let’s talk a little bit more about dollarization because this is such an important policy issue in Argentina.

Milei promised to dollarize the economy back in 2023 in the context of near hyperinflation. Now, while annual inflation is still over 30 percent, the problem has become less salient, and it seems as though maybe you don’t need to dollarize if you can just get inflation back under control. But we have this problem, which we just saw before the recent elections, where whenever there’s uncertainty about the future in Argentina, you have a run against the peso, and people rush to buy dollars. This basically stops all economic activity because people don’t want to make decisions amid all the uncertainty. And what ends up happening is that the people who benefit are those with dollars, who are usually the richest ones, and the poorest suffer the most because they have the national currency that is constantly losing value. And in many cases, the people who have dollars don’t even invest them; they just keep the physical dollar bills, so this also takes money out of the financial system.

Argentines don’t need to live like this. We have seen examples of successful dollarization processes that have defended people against populist governments. Ecuador dollarized its economy 25 years ago, and after dollarizing, it had a left-wing administration led by Rafael Correa that lasted for ten years. Many people thought he could have been another Chavez. He wanted to turn Ecuador upside down and implement all sorts of interventionist policies. But the dollar was more popular than he was, and he couldn’t de-dollarize, so even though he did a lot of damage to the Ecuadorian economy, dollarization protected the value of their assets.

What are some of the potential implications for the broader region? Do you think that this renaissance of classical liberal or libertarian policy could catch on throughout Latin America?

I think Argentina could become an example that other countries in Latin America can imitate. In recent years, we have had different administrations in countries like Brazil, Chile, and Colombia that have gone left-wing, and in many cases, in more extreme ways than in the past. And in Latin America, presidents who are not left-wing tend to be more conservative or nationalistic. So, Argentina is relatively alone in the region, but I hope that Milei becomes a sort of beacon that can help libertarian politicians in other countries rise to prominence.

We are seeing that in Chile, where even though the most popular figure right now is a communist, you also have a libertarian candidate who might go to the runoff against the communist and potentially win. And that could undo a lot of the bad policies that Chile has recently engaged in.