Can countries get rich by free market reforms alone? One effect of the Greek crisis is that we might find out. The Eurogroup seems to think they can. It called (pdf) this week on Greece to implement a “bold structural reform agenda, in both the labour market and product and service markets, in order to promote competitiveness, employment and sustainable growth.”
This, though, runs into Ha-Joon Chang’s objection:
Free-trade, free-market policies are policies that have rarely, if ever, worked. Most of the rich countries did not use such policies themselves, whilst these policies have slowed down growth and increased inequality in the developing countries. (23 Things They Don‘t Tell You About Capitalism, p73)
He cites the fact that the US in the 19th century had massive trade barriers. We can add to this that two of the great growth success stories of recent years - South Korea and China - were built upon massive state intervention. And post-1945 growth in Japan and Germany was aided by hand-outs (pdf) from the US and prolonged by under-valued exchange rates - two advantages Greece lacks.
You might object to this that Britain had free market policies in the 19th century. True enough. But it did not grow quickly then. Between 1846 (the repeal of the corm laws) and 1914, real per capita GDP grew just 1.1% a year. Britain is rich because we grew slowly for a long time, not because we got rich quick.
There’s one other factor here that I’d mention which is under-appreciated - path dependency. Barring very radical change, relatively poor areas tend to stay relatively poor. My chart shows the point. It plots US states GDP per capita, as a percentage of the US total, for 1880 (p100 of this pdf) and 2010. The key thing here are the points in the lower part of the chart - which represent states which were relatively poor in 1880. You can see that, generally speaking, states that were relatively poor in 1880 - generally southern ones - were still relatively poor 130 years later. Of the 17 states with GDP per capita of 80% or less of the US average in 1880, only three had above-average GDP in 2010. And this, remember, is true for a much more effective fiscal union that the euro area has.
In other words, history matters. The habits and institutions that cause a region to be poor can cause it to stay poor, and the things that cause it to be rich keep it rich. One reason why Germany prospered after 1945 was that it had a great industrial tradition which it only had to rediscover. And Malcolm Gladwell would add that Japan and South Korea's history of rice cultivation inculcated habits of diligence that facilitated economic growth.
And herein lies the question. Mightn’t Greece today might be more like West Virginia in 1880 than Germany in 1945 in that it lacks the culture, institutions or human capital which facilitate relative growth? If so, aren’t managerialist top-down efforts to implant such features likely to fail?
Hysteresis, remember, is a Greek word.