Working Paper 16 Economic Freedom and Growth: The Case of the Celtic Tiger * BENJAMIN POWELL Abstract 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 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. We find 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. * Benjamin Powell (M.A., George Mason University) is a Social Change Fellow at the Mercatus Center and PhD candidate in economics at George Mason University. He has been a visiting fellow at the American Institute for Economic Research. The ideas presented in this research are the author’s and do not represent official positions of the Mercatus Center at George Mason University. Economic Freedom and Growth: The Case of the Celtic Tiger∗ Benjamin Powell Department of Economics George Mason University And Social Change Fellow Mercatus Center 8261 White Pine Dr. Manassas Park VA 20111
[email protected] PAPER ABSTRACT 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.