September, 2003

Economic Freedom and Growth: The Case of the Celtic Tiger

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Ireland had low rates of economic growth prior to the 1990s and then it achieved rapid rates of economic growth, converging and passing Europe’s per capita income level. This working paper traces the policies of the Irish government from the 1950s to present and relates these policies to the degree of economic freedom in Ireland. We find that as economic freedom increased, Ireland grew more rapidly. Specifically, the reforms made following Ireland’s fiscal crisis in the mid 80s, that slashed the government’s role in the economy, changed the institutional environment that entrepreneurs operate in. The government made credible commitments not to inflate or run large budget deficits, while continuing to cut tax rates following the initial reforms. Powell shows that the "Celtic Tiger’s" growth was achieved by reducing the government’s involvement in the economy and freeing private entrepreneurs and investors to pursue their own self-interest.