Part III
What’s to be done?
By Nicholas Pirounakis, Ph.D. *
To a very large extent what Greece needs to do to put her house back in order is implied in any serious and informed analysis of what caused the Greek crisis in the first place. In this – the third – part of the series we’ll attempt to provide a blueprint. We will not focus on the need for Greece to stay in the Eurozone (and the EU!), or effect a larger ‘haircut’ of her debt (including ‘official sector’ debt this time) than the recent PSI deal; we’ll focus instead on the reforms her creditors demand.
In this connection, crucial questions emerge. Does Greece want to reform herself? Can she? If so, how best can she go about it? After all, no amount of financial help from overseas will secure Greece’s future unless the country manages to become more productive, internationally competitive and efficient.
Without such a leap, even if the debt miraculously disappeared, in five years’ time Greece would again be heavily indebted – not least, because she would still have to deal with her rapidly deteriorating public services (health care, education, police protection, the judiciary), and other challenges, like waste, energy and water management, or the rapidly escalating inability of her social security system to pay pensions.
Sadly, although many of the reforms Greece’s creditors demand are long overdue, the troika’s program has singularly failed to incorporate them in a coherent whole. On their part, the Greek governments of 2009-2012, along with most of Greece’s political class, have also failed to work out such a program. The fact is that they never had a clue as to what makes a modern economy successful. In so failing the Greek side’s incompetence and irresponsibility in statesmanship became starkly clear. Its mentality was epitomised in ‘statism,’ the belief that (badly applied) Keynesian policies can be as effective in a globalized economy as they could, perhaps, have been in the protected economies of the past; that the state ‘creates’ economic development; that they must spend as if there is no tomorrow; that they must control the private sector to asphyxiation; and, of course, exchange votes for political favors as a matter of course.
One of the troika’s two main errors was that it appeared to attach much more importance to the need to consolidate Greek public finances than to the need to effect reforms in the real economy. A more even split would have been much more sensible. Its second main error was that it accepted too willingly the Greek side’s insistence on more and higher taxes rather than effecting cuts in government spending and reducing public sector size. This deepened the recession and, fatally, did so by strangling the side of the economy – the private sector – on which Greece’s hopes for development depend. Of course public sector cuts would have also deepened the recession; the difference is that Greece’s public sector is the main source of her problems, and its reduction would have in the medium- to long-term allowed Greece to ‘see light at the end of the tunnel’. There is an asymmetry here which Greece’s political class was unwilling to see or exploit: you tax more in order to preserve a bloated and inefficient public sector and the result is recession without hope; you reduce government spending and public sector size, the result is recession followed by recovery.
Greece’s private sector is not free of serious problems either. Its operation is burdened and distorted by the state’s inefficiency and corruption which naturally spread across the entire economy. It is also characterised by lack of competition, caused by ‘closed-shops’ and frequent instances of collusion and price-fixing among firms, particularly in the energy, transport and retail sectors. Also, some private firms have flourished on the basis of shady dealings they have had with the state rather than on merit. Important sectors have for too long been enticed to rely on government (or EEC/EU) subsidies and have consequently turned complacent and uncompetitive – e.g., farming. Sure enough, many occupations and firms have benefited from restrictive practices and do not welcome change. Such a private sector, however, cannot help Greece become internationally competitive and develop. Thus, although it’s mainly the private sector that has any chance of achieving this, it must first be appropriately reformed.
Necessary political reforms
In Greece any package of radical reforms needs to be introduced as a ‘big bang’ in order to succeed. For example, you cannot reform the judiciary, wait for 10 years to see that this particular reform works, then proceed to the next one. In Greece the ‘package’ would also need to start with the political sphere on account of the size and role of her public sector.
There’s been a lot of talk in Greece since the crisis began about how selfish, corrupt and incompetent most Greek politicians are. The truth is that in any democratic system which lacks appropriate checks and balances the political game tends to degenerate into an exchange of votes for favors; far more so and quickly, in fact, where democracy is unsubstantiated by a strong middle class. A politician who will not ‘play’ will not be re-elected, so all who stay in politics ‘play.’
Ancient Athenians were aware of this vulnerability of democracy. They knew that individuals are susceptible to corruption. Rather than rely on the off-chance that virtuous politicians might be elected, they introduced institutions that made systematic corruption extremely difficult – institutions that involved transparency, accountability, and placed limits on politicians’ power. In modern times political systems with a philosophy close to the Athenian ideal are the American and the British, to name but the best, perhaps, examples.
In Greece nine critical and long over-due political/institutional reforms are (1) a constitutional ban on the central government, prefectures and municipalities running systematic budget deficits, (2) repeal of the virtual immunity from prosecution that the current constitution affords ministers, (3) complete transparency on all public appointments and projects, (4) abolition of the permanent tenure regime for civil servants accompanied by the introduction of meritocratic procedures, (5) a constitutional ruling that MPs cannot be ministers, (6) a stop to funding political parties with public money but also transparency on private funding, (7) a constitutional provision that the rights to protest, march or strike cannot be exercised in ways that block essential services or the fundamental rights of others, (8) affording greater protection to private property which is presently often encroached upon due to, for example, excessive taxation, or expropriation without appropriate or prompt compensation, (9) allowing private universities to operate. Some of these things are not directly political, but since they all involve politically controversial changes in the current constitution they end up being so.
Excessive taxation and the middle class
There is one particular reform whose importance is so great that deserves a section unto itself. This is taxation, which bestrides politics, fiscal consolidation, and middle class ‘structuration.’
Taxes reduce efficiency. ‘Tax something, there will be less of it,’ the motto goes. Additionally, two desirable properties of taxation are that it must be ‘fair’ and take ‘ability to pay’ into account. Both fairness and ability to pay have been grossly neglected by the Greek state since 2010, whereas in the past it was probably fairness that suffered most as the tax system allowed tax evasion to flourish. (But then why shouldn’t people evade taxes if they can when, despite decades of profligate spending of borrowed money by governments, the level of state services is so abysmal?) Government tolerance of tax evasion continues to this day, but it has been ‘married’ to horrendous disregard for people’s ability to pay the many new taxes imposed. As for efficiency, a look at the construction industry is telling: crippling property taxation has helped bring the sector to its knees, and property prices continue to decline.
But there is another side to all this, which is more worrying from a long-term perspective. It is about what property taxes in particular do to Greece’s middle class. Most Greek households, taking advantage of a historically very wide distribution of land ownership and other favorable factors, managed over the post-war decades to build wealth portfolios made up predominantly of real estate. Even in advanced Western countries houses are the most valuable material possession most people ever get to have. Real estate wealth, in other words, and also the possibility that such wealth can serve to enhance the life chances of people’s children, is the basic element in the way a middle class comes into being (which, admittedly, also requires a certain measure of income, education, and culture). In turn a strong middle class is a sine qua non for a strong society. Historical experience, from ancient Athens and republican Rome to Victorian Britain and modern America, suggests as much.
The way the Greek middle class has been burdened of late with a new series of unrealistically high property taxes means that hundreds of thousands of Greek households who thought they had a secure wealth portfolio are now facing expropriation. According to Kapa-Research, a Greek consultancy, 18.1% of Greece’s property owners felt in January 2012 that they could not pay these real estate-related taxes, and 32.7% that they probably could not. Even if the state does not confiscate or auction away their properties, they’ll have to sell at hugely discounted prices because of taxes. The property market is already going downhill, and so will banks’ property portfolios. The result is a fast downsizing of Greece’s middle class, impoverishment, aversion to investing in real estate ever again in Greece, and widening inequality between haves and have-nots. Social cohesion will suffer; so will law and order, and Greeks’ faith in their country.
To avoid all that, it is imperative to abolish all wealth property taxation immediately, including inheritance taxes, and reduce other transfer taxes. This would allow the Greek middle class to preserve some hope for the future; would improve economic optimism dramatically; would raise real estate investment, something essential considering construction’s low-import content; and would be an incentive to improve state finances in the only sound way – i.e., through cuts. Other tax reductions are also necessary, like VAT, but property taxation reform is key.
Enhancing competitiveness
The next level of reforms concerns factors that enhance the ability of both the public sector and the private sector to operate efficiently, i.e., with the least cost or waste of resources; the ability of the public sector to offer good services to all, and direct welfare to those actually needing it; the ability of the private sector to operate, produce, and adjust quickly. It also concerns factors that enhance the quantity and quality of factors of production needed by both sectors.
It seems, therefore, that the following should top the relevant reform agenda for a Greek government with the desire or mandate to save the country:
(1) Decouple the operation of businesses from social policy aims; give companies complete freedom to hire & fire workers in response to economic exigencies, but also install a comprehensive system of unemployment benefits and retraining.
(2) Radically reform the social security and health-care system:
- Only one social security organization (SSO).
- Only one health-care-funding organization.
- Pensionable age for most at 65-68 years; decrease of employers’ contributions; decrease of the spread between highest and lowest pensions; SSO pension in the nature of a minimum.
- Parallel introduction of funded system, with role for private insurance.
(3) Complete the creation of Greece’s Land Registry, and fully computerize it, as this would allow investors to invest faster and without subsequent legal hassles, and strengthen economic agents’ property rights.
(4) Ovehaul the Tax Service’s computer systems and processes as the present situation leaves a lot to be desired, obtain the best relevant software, and, at last, start clamping down on tax evasion through cross-checking rather than through the horribly bureaucratic device of obliging people to collect hundreds of receipts. Use the system to speed up firms’ and people’s dealings with the Tax Service, and to minimize physical contact between it and the public.
(5) Simplify the tax code, and put it in place for a long, long time. The thrust of the law should be ‘almost exclusive emphasis on VAT, income, and capital-gains taxation – low tax rates – abolition of wealth and inheritance taxes’.
(6) Open up closed-shop professions in all walks of life (education included); speed up the process of permit-granting to new businesses; reduce amount of government-related paperwork involved in investing (including house-building) and the operation of enterprises. In this respect copy, if you must, what other countries are doing, from the UK to Turkey. As for opening up professions, some question how allowing, e.g., more taxis on the streets would help Greece’s recovery, when currently most taxis have difficulty finding customers. Well, rather than embarking on an economic treatise on the benefits of lower prices and such, let’s just say that the symbolic effect of abolishing closed-shops would be tremendous: the message would be that at last Greece is embracing competition.
(7) Cut the organic-cum-political link between higher education and the public sector. Ideally the state should allow true independence to universities of all kinds, oblige public-sector ones to charge fees, and offer support only to good students unable to pay. And to bring all universities and colleges (public, private, Greek, foreign) on an equal footing, give professional certification to graduates of disciplines involving the public interest (e.g., doctors, lawyers, engineers, accountants, teachers) only subject to successful performance in special post-degree exams. By publishing the results of such tests, the state (or other authority supervising the procedure) would also show urbi et orbi which universities and colleges are the best.
(8) Turning to schools, revolutionize teaching by stressing critical thinking rather than memorization. And create, or encourage the private sector to create, a layer of education between high school and university, whose role will be to produce technicians and low- to medium-level professionals, to fill a much necessary slot between unskilled workers and university graduates. High value-added economic development absolutely requires such personnel, as Germany’s experience proves.
(9) Simplify the legal system and speed up decisively and visibly the meting of justice. When disputes between private persons, or between such and the state, take sometimes decades to be resolved (e.g., in cases involving confiscation of land by the Archaeological Service), human and private property rights are encroached upon or in effect nullified. This is bad for investment and entrepreneurial activity.
Notice that wage reductions are not a part of the package. According to S. Gavroglu, of the National Labour & Manpower Institute, between 2010q1 & 2011q3 total labor costs in Greece fell by 14.3% (most of it in the private sector), although between 2000q1 & 2010q1 they had increased by 54.1% vs 28.7% for Portugal and 18.6% for Germany. Admittedly, high wages for no or little work in large parts of the public sector should be cut (in line with reductions in the sector’s size & bureaucracy level), but effecting such cuts across the board, and, worse, imposing them on the private sector is almost certainly counter-productive as it denies the struggling Greek economy much needed effective demand.
A counter-argument here is that much of that ‘effective demand’ used to go to imports since the country had become accustomed to producing very little and relying on loan-financed imports. Partly for this reason, IOBE, a Greek think tank, stressed in Jan. 2012 that in Greece’s case structural reforms (like the above) should precede wage reductions (or they won’t lead to product price reductions), and, in the context of structural reforms, product market reforms (like promoting competition) should precede labor market reforms. Absence of such a time-plan, N. Zonzelos of IOBE says, was one big hole in the troika’s program for Greece. In short, to make Greece more competitive, lower wages are, with few exceptions, less important than dismantling closed shops, abolishing restrictive practices and state bureaucracy, and cracking down on cartels.
Promising sectors
The third level of reforms concerns identifying the actual sectors that are most likely to spearhead Greece’s economic recovery. Of course, it won’t be the state which will ‘develop’ those sectors, although the state might certainly help. In a free entrepreneurial environment, unencumbered by bureaucracy or crippling taxation, private firms and individuals are certain to identify the most profitable sectors themselves.
(1) It seems that over the short-term, and until other sectors begin to yield fruit, construction should come first. As said, it has a low-import content, and is also labor-intensive. At the moment Greece needs jobs. The sector can moreover be easily revitalised if wealth property taxation is abolished – not so much because such tax-lifting would automatically eradicate the current recession, but because the positive psychological shock-effect would be tremendous.
(2) Very close to construction as an immediately available ‘cash-machine’ is tourism. Greece has over the years allowed herself to be drawn into a situation where she’s been selling her tourist ‘product’ increasingly cheaply, increasingly depending on tour operators, and increasingly marring her beautiful land-, sea- and urban-scapes in the process (largely because of the inefficiency and corruption of her public sector, and the greed of many). Her tourist ‘model’ therefore needs to change in the direction of attracting higher-income tourism on the basis of preserving and improving her ‘scapes’, her tourist infrastructure, and related services.
(3) Can construction and tourism combine? Well, the idea here is to go beyond the obvious, namely that in order to have more hotels you need to build them first. But Greece’s comparative advantage is her climate, her sea and beaches, her historic heritage. She can pursue, therefore, a policy of attracting well-off pensioners from W. Europe and other countries, or wealthy people in general, by offering them settlements (clusters of houses) in attractive places to live in. For this to work, appropriate medical facilities must also be near-by, so this scheme would not only create building and catering jobs, but medical and nursing ones too.
Further down the timeline are the following sectors:
(4) Energy. Again as a result of her comparative advantage, Greece can become a net exporter of clean energy, and probably a technological innovator in the field.
(5) Agriculture. Greece cannot compete with the US or Canada in, say, wheat or corn production. But it can compete very well if it embraces ‘boutique’ agriculture, i.e., cultivating high-quality products for the local market (which it can indeed supply amply if Greek farmers take up farming seriously again) and for discerning customers abroad. To this end, Greek farmers need urgent and high-quality marketing support.
(6) Food processing. At the moment Greece’s strongest manufacturing sector is food processing. This could be enhanced through appropriate marketing strategies for overseas expansion, but also through abolition of competition-diminishing distortions in the primary production – manufacturing – retailing nexus.
(7) Education. Liberalization of Greece’s higher education sector is very likely to attract a lot of students from abroad, again for reasons related to Greece’s comparative advantage as defined above. Even if most public and private universities and colleges fail to complement this advantage with high-quality education, some (private) ones will; competition will force many more to improve, with obvious benefits for the younger generations and for the country’s economy.
An interesting study by McKinsey & Co. (Greece 10 Years Ahead, Nov. 2011) added more ‘rising stars’ to the list of Greece’s promising sectors: manufacturing of generic pharmaceuticals – aquaculture – medical tourism – elderly care – regional cargo hub development – waste management.
It is certain that if the three levels of reforms mentioned above materialize, Greece will recover, and become independent and wealthy (and we haven’t considered the possibility of oil and gas reserves south of Crete, which is often heard of lately).
The fear is that Greece’s political class is not up to the task, and that a majority of the country’s people are too misguided and misinformed to embrace it.
* Dr Pirounakis is adjunct professor of Economics at DEREE-The American College of Greece. He has a BA from DEREE, an MSc from the University of Strathclyde and a Ph.D. from the University of Glasgow.