Why is Greece such an economic success?
By Scott Sumner
Greece is widely viewed as an economic basket case. This recent article in the Financial Times discusses some fanciful proposals to fix the Greek economy. I don’t doubt that Greece has performed poorly in recent years, but in one little known respect Greece is a shining star. In this post I will argue that it’s by far the most successful economy in the world, of its type.
The italicized phase “of its type” is obviously the gimmick that I’m going to use to make my contrarian argument. But in the end I do have a serious point to make.
The Heritage Foundation publishes an annual ranking of 178 countries, in terms of economic freedom. This ranking has some flaws, but it gives a ballpark estimate of how “market-oriented” an economy is. Unfortunately its 10 categories include corruption and government spending, which may be only tangentially related to market freedom. Nonetheless, it’s a useful place to start.
All the “normal” developed countries in the entire world except one have economic freedom index scores above 60. (By developed countries I mean IMF estimated GDP/person (PPP) for 2014 above $25,000. Seychelles is just barely developed but below 60. However it is a tourist island with less than 100,000 people. Equatorial Guinea is the other “developed” exception, but other than the massive oil production its citizens are desperately poor. So I excluded those two abnormal cases.)
Slovenia just clears the 60 hurdle with an economic freedom ranking of 60.3. This is a nice break point to use because Slovenia ranks 88, and there are 90 countries over 60, out of a total of 178 countries. Thus the 60 cutoff neatly divides the world in half, between more market-oriented and less market-oriented.
What are the odds that all the normal developed countries but one would just happen to lie in the market-oriented half of the distribution? Certainly astronomical.
I said that there was one normal developed country that was not in this group, not in the top 90. Greece has a score of only 54.0 and ranks a lowly 130 out of 178, far below any other normal developed economy. Greece is the only clearly non-market economy in the entire group of developed economies, with a GDP per person of nearly $26,000, even in its current depression. The highest middle-income economy in the non-market group is Russia (just below $25,000), which has a GDP/person inflated by its huge mineral wealth. The three countries directly above Greece in economic freedom are Niger, India and Suriname, the three right below are Bangladesh, Burundi and Yemen. It’s a strange neighborhood for a developed European country.
To summarize, given that Greece has chosen to use a non-market economic model, its done amazingly well. It’s done something no other sizable non-market economy has done–achieved developed country status without vast oil wealth. This may partly reflect its long-time inclusion in the EU, partly the fact that it is both small in population and has highly desirable tourist attractions, and partly the entrepreneurial skill of its citizens. But for whatever reason it is vastly outperforming expectations. Greece is doing shockingly well, given its economic model.
Then it all comes down to the model. How you feel about Greece depends on how you feel about the model they’ve chosen. For myself, I think any discussion of Greece’s predicament without mentioning the need for neoliberal reforms is like Hamlet without the Prince—totally missing the point.
Greece doesn’t need innovative thinking. Greece needs to adopt the sort of “plus 60” economic freedom model that every other successful developed country in the world uses. This isn’t rocket science. When you are the only developed economy with a highly statist economy, and your economy is doing more poorly than all other developed countries, it’s not hard to see what needs to be done. The hard part is getting it done.
My prediction is that if Greek reforms push its Heritage index number above 75 (that’s roughly the UK, Taiwan, Lithuania), then it will boom.
PS. Greece was also the lowest ranked of the developed countries in 2007 (in economic freedom), before the crisis. At that time Greece’s economy was doing very well. So Heritage can’t be accused of giving them a low ranking merely to make statism look bad. Also note that (ultra-conservative) Heritage ranks Denmark quite highly, even though they oppose their high tax model. So I do believe there is at least a substantial amount of objectivity in these rankings, despite certain flaws.
PPS. In the alternative Fraser/Cato ranking (from 2012) Greece does a bit better, scoring above Slovenia and Saudi Arabia.
PPPS. Greece is the Cleveland Cavaliers of countries. For non-NBA fans, Cleveland made it to the finals with a shockingly low level of healthy talent.