Scott Sumner  

Why is Greece such an economic success?

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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.


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COMMENTS (27 to date)
Jim Glass writes:

Perhaps it's the "Seychelles model" write a little larger.

Greece has a really small economy even in its good times, about 1/3rd the GDP of New York City, and gets the tourist-vacation overflow of all of Europe (and hey, from a lot of Americans too, my parents took a vacation trip there.)

In which case it makes perfect sense for the Greek voters to want to stay in the Euro and be tied as closely as possible to Europe, with as few trip-deterring transaction costs (such as exchange rates) as possible.

Now, if only Greece could make itself to Germany as Florida has to New York, attracting not only temporary vacationers but masses of German retirees, permanently bringing their incomes and their votes and culture with them, maybe the place could straighten itself out.

Brent writes:

It seems like burning through so much borrowed money would also help its GDP numbers stay in the 'developed world'.

Scott Sumner writes:

Jim, Good point, although I sometimes wonder when I see GDP/person numbers for New York, how much it is inflated by business types producing income on Wall Street, but living in the suburbs.

Brent, I think that borrowing led to a property boom that inflated their GDP numbers around 2007. But even today, with construction deeply depressed and government spending cut back, their GDP per person is still (barely) in the developed country zone. It's surprisingly high for such a statist economy.

E. Harding writes:

"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."

-And Canada's isn't? What about Norway's? Chile's? Russia's natural resource rents as a percentage of GDP are less than 20% -well above Canada's and Norway's, but just a little above Chile's. And Russia's GDP per capita (PPP, though not nominal) is still higher than that of Chile. Also, Chile and Russia are both counted as high-income countries by the World Bank (Malaysia, for some reason, is not).

"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's normal score is in the upper 50s-lower 60s:
http://www.heritage.org/index/visualize
Greece's recent score has suffered badly from skyrocketing gov't spending as a percentage of GDP (due, obviously, to collapsing NGDP). Its tax freedom ranking has continued to improve.

Greece has no manufacturing exports to speak of (unlike Spain) and must survive mainly on services, including tourism. I remember seeing somewhere that it has higher service exports as a percentage of GDP than Portugal. So Greece's success must rest on its penetration into high-value added services, as well as thriving tourism.

Russia, China, and Belarus (outliers on the high GDP per capita side) and Georgia, Kyrgyzstan and Macedonia (outliers on the low side) also have their mysteries. I guess it may be the human capital.

E. Harding writes:

Also, for reasons unknown, Greece's exports (in nominal Euro) peaked in December 2012. For reasons known, Greece's imports (in nominal Euro) peaked in July 2008.

Anon writes:
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.

Except the Cavaliers were consistently either #1 or #2 in the NBA futures markets. Even with their rash of injuries in the playoffs, they never fell under second. (My point being they didn't really exceed expectations as you imply).

E. Harding writes:

@Anon
Sumner did not talk about expectations for the Cavaliers, he talked about their "low level of healthy talent". Different things entirely.

Anon writes:

@E. Harding

Sumner did not talk about expectations for the Cavaliers, he talked about their "low level of healthy talent". Different things entirely.

Same thing.

Any team's strength will be based on their level of talent (coaching effects have consistently been found to be relatively insignificant). The betting markets obviously thought the Cavaliers had sufficient healthy talent to be second favorites.

E. Harding writes:

I've just thought of something else: Greece became what it is today through the tireless efforts of Andreas Papandreou, the anti-Pinochet, who helped create a second Greek lost decade, ran up the national debt, raised the natural rate of unemployment, and kept inflation sky-high. Today, Greece, relative to the E.U. 15, is in the same place in RGDP per capita terms as it was in the early 1960s, before the economic boom under the Junta. Greek convergence with the rest of Europe ended in the late 1970s, and it actively fell behind in the 1980s. Clearly, as Andreas was the anti-Pinochet, blaming neoliberalism for the post-1980 economic stagnation in various countries (including Communist ones!) is simply being unconscionable.

Sven writes:

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Foobarista writes:

My guess is it has something similar to China: "beneficial" corruption. Corruption in a democracy allows you to politically have your cake and eat it too; you can have lots of fancy laws and populist nonsense that looks good in the papers, while corruption allows free-range capitalism to function quietly and pay for it all (or not so quietly if the corruption is big enough).

Unfortunately, Greece took the "cake" too far with too much populist nonsense + cheap euro-backed cash.

ThomasH writes:

One might come to a different conclusion. If Greece had done OK notwithstanding many sub-optimal policies, some of the "reforms" that led to a large decline in NGDP may not have been necessary to generate the surpluses needed to make the debt at the time manageable. Greece needed a program that, as the public sector produced a surplus, private consumption and investment and exports expanded.

For the first, ECB could have re-financed Greek banks' loans to the private sector and Greece could have a tariff on imports/subsidy on exports to mimic a devaluation. (The excess of import duty over export subsidy would contribute to the public sector's surplus.) The tariff/subsidy scheme is of course not ideal, subject to corruption, etc., but may have been and may still be the least-cost way of being part of an un-optimal currency union.

Scott Sumner writes:

E. Harding. No, Canada and Norway are certainly not pushed into the high income category by their mineral wealth. They'd easily be there without it.

Let's say Russia would be almost 20% poorer, around $20,000/person. That's clearly middle income, it's below Argentina.

But labels don't matter, I gave a $25,000 cutoff, and showed that Greece was a huge outlier.

And Greece was the most statist developed economy back before the crisis, so there's nothing new here.

Anon, None of that refutes the claim that they made it to the finals with shockingly little healthy talent. Maybe markets understood that Lebron could carry a team, or that the NBA East was far inferior to the West. Yes, there are explanations for everything if you look hard enough, even for Greece.

Thomas, If a talented athlete runs "OK" with lead weight tied to his ankles, wouldn't he run much better without the lead weights.

Kevin writes:

I'm curious how much of their low score is due to excessive spending (and low taxes), how much due to corruption, and how much to excessive regulation.

If the main feature pushing it low is excessive regulation it would imply tome that the reform programs being proposed should focus much more on market reforms than fiscal issues. (I sort of assume that fixing corruption is at best a long term process...)

Or at least that's what occurs to me on reading this...

E. Harding writes:

"No, Canada and Norway are certainly not pushed into the high income category by their mineral wealth."
-And I never said anything to the contrary (though I did say their per capita incomes are inflated by their huge mineral wealth, which they are, even if by less than in Russia).
"Let's say Russia would be almost 20% poorer, around $20,000/person. That's clearly middle income, it's below Argentina."
-I don't believe for a second Argentina doubled its per capita RGDP between 1998 and today. Must be that underestimated inflation that has been known to be going on since 2007.
"But labels don't matter, I gave a $25,000 cutoff, and showed that Greece was a huge outlier."
-No doubt.
"And Greece was the most statist developed economy back before the crisis"
-True. But before the 1980s? Possibly, but I doubt it was such a big outlier before then. On the Fraser level of economic freedom, Iceland, Italy, and Israel were all lower than Greece in 1980.

Anon writes:
Anon, None of that refutes the claim that they made it to the finals with shockingly little healthy talent. Maybe markets understood that Lebron could carry a team, or that the NBA East was far inferior to the West. Yes, there are explanations for everything if you look hard enough, even for Greece.

If markets understood that Lebron could carry the team then doesn't that imply that Lebron is enough talent? Unless you're arguing that talent is binary and that they had a dearth of players that could be designated as "talent". But that's a rather strange argument to make - a team of Lebron + replacement level players could easily beat a team where every player is just barely above the "talent" cutoff (which is pretty much exactly what we saw and the markets predicted).

Kent Gatewood writes:

If all of Greek external debt vanished, how much would the Greeks need to borrow or have given to them?

Rob writes:

So who is Lebron James in this analogy? David Blatt certainly played the role of Tsipras.

Hazel Meade writes:

So, what are the prospects for serious economic reforms in Greece to bring it into the 60-75 range?

As far as I can tell, they've proposed selling some state assets and more enforcement of taxes. The latter won't do anything to improve their ranking though.

It certainly seems like if Syriza stays in power, there's very little chance of any real labor market reform.

Floccina writes:
Why is Greece such an economic success?

Maybe because Greece had a big head start on the rest of the low economic freedom countries?

Thomas Sewell writes:

Per Floccina, coming to make a similar point:

"There is a great deal of ruin in a nation." - A. Smith

E. Harding writes:

"Maybe because Greece had a big head start on the rest of the low economic freedom countries?"
-As I've said, Greece rapidly converged towards the E.U. 15 average until 1973 and proceeded to converge less rapidly until the late 1970s, when convergence ended and divergence started to take hold.

SaveyourSelf writes:

Solid Argument. Well done, Scott.

Neila writes:

Greeks always make a way out --for themselves and everybody else-- of any situation. Good or bad. They will be there tomorrow.

http://www.heritage.org/index/visualize?countries=greece&type=0 says Greece only fell below average in 2012. It wasn't really that different from other countries before that.

Also the ranking somehow falling by a lot during crisis suggests they mix policies and outcomes.

Anthony writes:

Government corruption is probably an indicator of greater actual economic freedom than formal economic freedom. In heavily-regulated environments, the ability to buy one's way around some rule increases the economic actor's freedom - it's essentially just another tax, instead of a prohibition.

Also, indices like Heritage's tend to look at the formal rate of taxes, rather than what's actually collected; widespread tax evasion in Greece is evidence that the actual tax rate isn't nearly as high as the formal tax rate, and thus Greece is freer than it looks on paper.

So how free is Greece, really? More so than it looks on paper, but how much?

E. Harding writes:

@Tomasz, it was very different from other countries with a GDP per capita of over $25000 not relying on petroleum. "Other countries" includes third-world ones. You're not getting Scott's argument.

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