Saturday, July 4, 2015

Big Government, not 'austerity', has brought Greece to its knees

By Kristian Niemietz of IEA. Excerpt:
"Between the late 1970s and the early 1990s, government revenue surged from under 25 per cent of GDP to over 35 per cent, but client states are expensive to maintain, and government favours fuel demand for more government favours. So the money was never enough, and the shortfall was made up by borrowing and printing more of it. Government debt increased from less than 20 per cent of GDP to more than 100 per cent, and inflation jumped from less than 5 per cent to more than 10 per cent, while growth largely stalled.

The Greek economy had become a rent-seeking economy, in which economic activity is not about creating wealth, but about extracting wealth from others through the political process. If you’re afraid of dog-eat-dog capitalism, you haven’t seen dog-eat-dog socialism yet.

A particularly popular form of favouritism has been to restrict entry into various professions. This benefits incumbents, because it wards off competitors, and drives up the value of their licence. But their gains come at the expense of consumers and of would-be entrants. Every country has some protected sectors, and as long as there aren’t that many of them, it does not matter hugely. But when over a hundred professions are closed off, as is the case in Greece, the cost to consumers becomes unbearable, even before taking into account the decline in labour mobility and productivity.

At the same time, the economic policy fundamentals – essentially, the rule of law and the quality of institutions – have been undermined, or at least utterly neglected. In the World Bank’s "Ease of Doing Business" rankings, Greece ranks 155th out of 189 countries in the crucial “enforcing contracts” category, just a few places above Zimbabwe and Sudan. In the "registering property" category, Greece comes out 116th, behind Pakistan, Ethiopia and Cambodia. The Fraser Institute’s "Economic Freedom" index shows a similar picture. In all-important categories like "judicial independence", "impartial courts", "protection of property rights" or "reliability of the police", Greece looks more similar to Latin American than to the rest of Europe."

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