Powell: Greece should learn from Ireland
Greece missed its $1.8 billion loan repayment to the International Monetary Fund on June 30, and voters rejected the austerity measures creditors are demanding as the price of another bailout on last Sunday’s referendum.
Greece has other choices if it can find the political will. The Greeks, as steeped in history as they are, could follow the path Ireland took nearly 30 years ago after years of fiscal mismanagement created similar circumstances. Instead of balking at change, Ireland took control of its destiny with far-reaching market reforms that cured its debt problems and triggered rapid economic growth.
Greece’s creditors — the IMF, European Union and European Central Bank — have demanded “austerity” reforms before. But the required budget cuts and tax increases have not promoted economic growth, merely belt-tightening, not true pro-market reform.
Greece would be better served by learning from Ireland, which experienced similar problems in the mid 1980s. Greece’s debt to GDP ratio today stands at 180 percent of GDP. Ireland’s debt to GDP ratio in 1986, when things were coming to a head, stood at 116 percent. Similarly, government spending today accounts for 52 percent of the Greek economy. In 1986 Ireland, it accounted for 55 percent of the economy.
Both countries created their debt problems by letting government spending grow out of control.
In 1987, Ireland slashed spending across many categories — health spending by 6 percent, education by 7 percent, and agricultural spending by 18 percent. Entire government agencies, bureaus and boards were abolished.
The economy started growing again, modestly at first. By 1990, government spending (excluding interest) had declined to 41 percent of GDP and the debt ratio had fallen below 100 percent of GDP again.
Ireland continued its reforms with multiple rounds of tax cuts throughout the 1990s. And by 1999, tax revenue had fallen as a percent of GDP to 31 percent of the economy, without piling up additional debt.
These reforms, coupled with Ireland’s existing, relatively-free trade policies, not overly-burdensome regulatory environment, and strong protection of contract and property rights produced spectacular results.
Ireland’s courageous reforms and the economic growth that accompanied them fundamentally transformed the economy by significantly reducing the burden of government. Greece could make a similar transformation if it had the political will to do it.
Benjamin Powell is director of the Free Market Institute and professor of economics in the Rawls College of Business at Texas Tech University. He wrote this for InsideSources.com.