Introduction
In December 2008, downtown Athens experienced three nights of street battles, arson and looting that became headlines in the international press. The pictures of these riots brought suddenly into the spotlight the reality of a Greece that struggles and seems increasingly deprived of any positive prospects in the aftermath of the recent financial crisis, at a time that the global economy seems to gradually recover. This picture is in sharp contrast to the constant and high growth rates of a Greece that managed to join the euro zone a decade earlier. But a closer inspection of the fast growing Greek economy in the past 15 years and the failing economy that teeters on the edge of bankruptcy and freefall today reveals that what initially appears as a unique international paradox is, in the end- and once all the details have been carefully put together – simply a rather straightforward textbook case of modern economics and political economy. That is because Greece combined until now strong economic performance – that is, rapid GDP growth and strong productivity growth –with a very poor performance and pathologies on many other fronts.
These failings range from a massive public debt, poor labor/product market institutions and low competitiveness to poor environmental protection, underperforming educational system and high levels of corruption.
It is all these weaknesses that, when the global credit party ended, led Greece very close to technical default and to bankruptcy.
In this context the aggregate behavior of the macro economy and the individual behavior of the separate agents that form the aggregate macro economy can be explained by existing theories. At the same time, benchmarking exercises that compare data from Greece with data from other countries are delineating a setting that can reconcile all the stylized facts that initially may have appeared as deviations from the predictions of the standard tools of economic and political analysis. We show in parallel how the case of Greece is unique: the factors that have contributed to the strong economic performance of the past years have made the extraction of rents even more lucrative in this documented environment of weak institutions and weak governance.
Thanks to the factors that had contributed to strong growth, the weakened institutions and the predatory behavior of aggressive rent-seeking groups have not led to the expected decline of the prosperity of the economy. Such decline could have reduced the ability of these groups to reward those that support them and to actively promote their goals with the help of plentiful resources.
The facts presented furthermore dispel any hopes that the country will automatically revert to the strong growth rates of the past. They also reveal that only a determined reform effort to address the weaknesses and failings that persisted all these years will successfully solve both the urgent problems faced currently by the economy (in particular, the public sector finances) and the significant challenges faced by a severely damaged society that must also deal with the rapidly deteriorating prospects of an already weak job market in an uncompetitive economy. By describing the details of this reality we are also able to present an overview of the problems that reform-minded politicians encounter in Greece today.
As a result we can lay out the facts that can help determined politicians to formulate realistic and well-targeted reform strategies. Crucially, we aim to provide a political economy explanation of how numerous “redistributive interest groups” use the weakness as well as the “closeness” of the Greek institutions in order to increase their rents. In particular, we will go to argue that the numerous rent-seeking groups curtail competition in the product and services markets, increase red tape and administrative burdens and actively seek to establish opacity in all administrative and legal processes. We also argue that they do so in order to form an environment in which they will be able to increase the rents they extract. At the same time we demonstrate how these groups actively seek to ensure that the “rule of law” fails to such an extent that the society will not be able to hold them accountable for their actions. We will go to document salient aspects of the Greek political system that – when compared with similar aspects of the political systems of other countries – strongly point to the reason for Greek politicians’ inability to champion reforms and effectively confront the designs of these predatory interest groups. This analysis also shows how the broad design of the political system is related to the perpetuation of the current status quo. This status quo includes the failing of the “rule of law” and the Greek judiciary as will described in a context of weak governance. The latter includes both the adoption of laws that do not serve the broader interests of society well and the functioning of an executive that is at the same time not held accountable and that rationally accepts the violation of existing laws.
We will proceed with a detailed presentation of a wide range of available evidence that includes the attributes of product markets, the business environment, the impact of the EU and EMU accession together with the deregulation of key markets in a given institutional and political setting. All these elements help to explain the paradox of past strong performances coupled with weak institutions that undermine the growth prospects of the country now that the impact of the drivers of the past performance have petered out. We move on to relate one aspect of Greece’s institutional failings – namely, the unfavorable business environment and uneven playing-field created by the government intervention in the functioning of product markets. We consider the weak performance of the Greek labor market, the realities faced by salaried labor with respect to self-employment, the realities of the distribution of the tax burden in Greek society and how they relate to the fragile position of Greek public finances.
We will also discusses the reality faced by Greek companies with regard to their tax burden, as well as their profitability and ability to compete on the global markets. We present data that documents the coexistence of, on the one hand, restrained profitability and high and increasing prices and, on the other hand, the low competitiveness of the economy and the high administrative burden imposed by the government. Putting gradually together the pieces of the puzzle allows us to proceed further and to put in context the challenges faced by the Greek financial system and certain stylized facts of the Greek pension system. It also enables us to document the relationship between the inability of the Greek government to control its expenditure and the current fiscal challenges faced by the country. Finally, we can see how the examples of reforms introduced in other countries that had experienced severe crises could help Greece today.
We also present a more detailed analysis of the harmful impact that government regulations have on the market for freight transportation and of certain government policies that impose unnecessary burdens on the Greek private sector. Finally, an analysis of the potential effect of liberalizing shop opening hours, as well as of the arguments usually used against such initiatives, constitutes a good example of how policies that could benefit the wider public are not adopted in Greece as a result of insufficient documentation and a tendency to cater to the interests of organized groups.
