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TheeconomiccrisisinGreece:Atimeofreformandopportunity
CostasMeghir Dimitri Vayanos NikosVettas1YaleUniversity,University
CollegeLondonandIFS
LondonSchoolofEconomics,
CEPRandNBER
AthensUniversityof
EconomicsandBusinessand
CEPR
5August2010
Abstract
1CostasAzariadis(WashingtonUniversityatSt.Louis),HarrisDellas(BernUniversityandCEPR),
YannisIoannides(TuftsUniversity)andChrisPissarides(LondonSchoolofEconomicsandCEPR)havealsocontributedtothisarticleandagreewithitscontent.Anumberofothercolleagueshaveprovidedadditionalvaluablecommentsandsuggestions.
ThisarticleexplainsthecausesoftheGreekcrisis,aswellasthekeyreformsthat
areneededtogetGreeceoutofthecrisisandmakeitprosperous.Reformsare
ontwomainfronts:thosedesignedtoimprovethegovernmentsfinancesand
thosedesignedtoimprovecompetitiveness.Someofthereformsthatweoutline
inthisarticlearepartoftheagreementbetweenGreeceanditslenders(EU/IMF);
atthesametime,weseektodescribeamorecomprehensiveandlongrunreformagenda.WepresentmanynumbersandfactsabouttheGreekeconomy,
andusesimpleandselfcontainedargumentsaccessibletononeconomists.
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TableofContents
IntroductionSection1:ThePublicDebt
Whenwasthepublicdebtaccumulated? Howdidthepublicdebtaffecttheeconomy? WhyisGreeceheavilyindebtedtoforeigners? HowcanGreecerepayitsdebt?
Section2:TheGovernmentsFinances WhatisthemainsourceofGreecesdeficits? Taxevasion:whatareitscostsandhowtofightit? Shouldthepublicsectorbemadesmaller? Howtofightcorruptioninthepublicsector? Whyisreformofthepensionsystemessential?
Section3:Competitiveness Whyiscompetitivenessimportant? HowcantheGreekeconomybemademorecompetitive? Whatkeyreformsareneededintheproductmarket? Whatkeyreformsareneededinthelabourmarket?
ConclusionReferences
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IntroductionGreeceisatacriticaljunctureofitsrecenthistory:theeconomicpoliciesofthelastthree
decadeshavebroughtitclosetobankruptcy,butbankruptcycanbeavoidedandgrowthcan
resumeifimportanteconomicreformsaremadeandrigorouslyimplemented. Forthereformstosucceed,asocialconsensusisimportant.Inparticular,theremustbegeneral
agreementonwhyreformsareneededandwhatreformsshouldbemade.Yet,consensusis
missing.SomeopposethereformsthatGreecehasagreedonwithitslendersonthe
groundsthattheyaremisguidedorthattheyimplyalossofnationalsovereignty.Others
defendthereforms,butonthegroundsthatthesearethepricetopayforavoiding
bankruptcythussuggestingthatifGreeceslendershadaskedfordifferentreformsthey
wouldhavedefendedthoseinstead.Andalargefractionofthegeneralpublicisleftunsure
aboutwhetherGreecewillmanagetoexitthecrisis,andhowthereformswillhelpachieve
thatgoal.
Inthisarticlewewouldliketohelpbuildasocialconsensusaroundthereformprocessby
explainingwhatkeyreformsareneededtogetGreeceoutofthecrisis,andwhythese
reformscanmakeGreeceprosperous.Understandingwhatthenecessaryreformsare
requiresunderstandingthecausesofthecrisis,andweexplaintheseaswell.Weseekto
explaintheissuesinamannerthatissimpleandintuitive,yetscientificallyprecise.
MuchofthedebateaboutGreecescurrentproblemshasfocusedontheshortrun
managementofthecrisis.WillGreecebeabletorepayitsdebt,orwillithaveto
restructure?WillGreeceexittheeuro,andshoulditdoso?WilltheEuropeanUnionandthe
EuropeanCentralBankdecidetoofferfurtherassistancetoGreece?Discussionofthese
issuesispointlessunlessGreeceundertakesthetypeofreformsthatweoutlineinthis
article.Ifreformsarenotundertaken,Greeceisboundtodefaultandthecrisistodeepen.If
insteadreformsareundertaken,themanagementofthedebtwillbecomemucheasier:
Greecewillbeabletoborrowatmuchlowerinterestratesasitslenderswillbecomemore
assuredaboutitsabilitytorepay.2 Moreover,reformsarenecessarynotonlyforrepaying
thedebt,butalsoforGreeceslongrungrowthandprosperity.EvenifGreecesdebtwere
tomagicallydisappearovernight,thesamereformswouldbeneeded;orelseGreecewould
finditselfwithanewdebtproblemagainsoon.
Someofthereformsthatweoutlineinthisarticlehavebeendiscussedbefore,but
successiveGreekgovernmentshavechosentoignorethedebateuntil,ofcourse,they
wereforcedintoitbythecrisis.Thisiseitherbecauseoflackofvisionandcourage,or
becauseofvestedinterestinthestatusquo,orbecauseoflackofunderstandingofthe
economicrealities.Itistimethatsuchpopulismandlackofleadershipofthepastis
2Moreover,thedecreaseininterestrateswillbeimmediateeventhoughreformscantaketimetobefully
implementedbecausetheratesatwhichGreececanborrowtodaydependonlendersbeliefsaboutitsabilitytorepayinthefuture.
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replacedbypoliticalcourageguidedbytheprinciplesofmoderneconomics,sothatGreece
canresumegrowthandunleashthegenuineproductivecreativityofwhichthereismuch
amongGreeks.
Section1ofthisarticleexplainswhenGreecesvastpublicdebtwasaccumulatedandhowit
affectedtheeconomy.Sections2and3outlinethekeyreforms,whichareontwofronts:
reformstoimprovethegovernmentsfinances,outlinedinSection2,andreformsto
improvecompetitiveness,outlinedinSection3.Eachsectionstartswithquestionsand
answersthatsummarizethemainpoints.Someofthesepointsstandinsharpcontrastto
commonlyheldviewsabouttheGreekeconomyandthereformprocess;wehighlightthese
viewsandexplainwhytheyareincorrectinboxesspreadthroughoutthisarticle.
1.ThePublicDebt Whenwasthepublicdebtaccumulated?Debtincreasedsharplyduringthe1980s,
andfurtherincreased,atalowerpace,duringthe1990sand2000s.
Howdidthepublicdebtaffecttheeconomy?Debttriggeredadecreaseinproductiveinvestmentandanincreaseinconsumption.
WhyisGreeceheavilyindebtedtoforeigners?BecauseGreekcitizenswereconsumingbeyondtheirmeanswithmoneythattheirgovernmentwasborrowing
fromforeigners.
Whenwasthepublicdebtaccumulated?Letsfirstexplainthedifferencebetweendebtanddeficit.Inanygivenyear,thegovernmenthassomerevenue,e.g.,arisingfromtaxes,and
someexpenditure,e.g.,topaypublicservants.Iftheexpenditureishigherthanthe
revenue,thenthegovernmenthasadeficitandneedstoborrow.Thisgeneratesdebt.
Moreover,ifthegovernmenthasaccumulateddebtoverpreviousyears,becauseitwas
runningdeficitsduringthoseyears,adeficitinthecurrentyearfurtherraisesthedebt.Note
thattherelationshipbetweendebtanddeficitgoesinbothdirections:notonlyadeficitina
givenyearraisesdebtaccumulatedoverpreviousyears,butalsodebtaccumulatedoverpreviousyearsraisesthedeficitinthecurrentyear.Thisisbecauseinterestpaymentson
debtthathasaccumulatedoverpreviousyearsareanexpenditureduringthecurrentyear,
andaddtothatyearsdeficit.
Table1describesthehistoricalevolutionofthedeficit.Foreachdecadewereportthe
deficit,expressedasapercentageofthesizeoftheGreekeconomyandaveragedoverthe
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tenyears.SizeismeasuredbyGDP,thetotalvalueofgoodsandservicesproducedin
Greece.3
Table1:Governmentdeficit(Source:OECD)
Decade 19601969 19701979 19801989 19901999 20002009Govt.deficit
as%ofGDP
0.6 1.2 8.1 8.4 5.9
Duringthe1960sand1970sthegovernmentwasessentiallybreakingeven.Thedeficit
increaseddramaticallyduringthe1980s:ineachyearduringthatdecade,government
expenditureexceededrevenuebyanaverage8.1%ofGDP.Thedeficitremainedhighduring
thenexttwodecades.
Theevolutionofthedeficitisreflectedintothatofthepublicdebt.Table2reportsthe
publicdebtattheendofeachdecade,expressedasapercentageofGDP.
Table2:Governmentdebt(Source:OECD)
Year 1980 1990 2000 2009
Govt.debtas%
ofGDP
26 71 101.5 115.1
Thehighdeficitsinthe1980sledtoadramaticincreaseindebt:from26%ofGDPin1980,debtroseto71%ofGDPin1990.Debtfurtherincreasedduringthenexttwodecadesin
responsetothehighdeficitswhichwerehighpartlybecauseoftheinterestpaymentson
theaccumulateddebt.
Howdidthepublicdebtaffecttheeconomy?Table3reportsconsumptionandinvestment,expressedasapercentageofGDPandaveragedovereachdecade.
Table3:Consumptionandinvestment(Source:OECD)
Decade 19701979 19801989 19901999 20002009Consumptionas
%ofGDP
77.2 85.1 90.1 88.8
Investmentas%
ofGDP
30.7 23 20.6 22.6
Comparedtothe1970s,consumptionwentupsignificantlyduringthe1980s,and
investmentwentdownbyaroughlyequalamount(8%ofGDP).ThismeansthatGreek
3
GDPincludessomeofthegoodsandservicesproducedinGreecesinformaleconomy.Theinformaleconomyaccountsfor2530%ofGDP(Katsios2006).
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citizenswereconsumingmore,whilelesswasspentonproductiveinvestment,suchas
factoriesandhighways.Botheffectswerecausedtoalargeextentbythedrasticincreasein
publicdebtduringthe1980s,andbythewaythegovernmentspentthemoneythatit
borrowed.Indeed,lessthan25%ofthemoneywasspentonproductiveinvestment,i.e.,
publicinfrastructures.Thebulkwasspentinsteadtoincreasethewagebillinthepublicsector,i.e.,morepublicservantsandhighersalaries,andtoincreasethepensionbill,i.e.,
morepensionersandhigherpensions(Rapanos2009).Therecipientsofthegovernment
moneyincreasedtheirconsumptioninresponsetotheirhigherincomes,andthisexplains
theincreasedconsumptioninTable3.Investmentdecreasedbecausefewerprivatesavings
wereavailabletofinanceit.Indeed,thegovernmentwasborrowingbysellingbondsto
Greekcitizens,whowereineffectdividingtheirsavingsbetweenbondsissuedbythe
governmentandbondsissuedbyprivatefirms.Asaconsequence,fewersavingswere
availabletofinanceproductiveinvestmentbyprivatefirms.Andsincemostofthemoney
thatthegovernmentwasraisingbyissuingbondswasnotspentonpublicinfrastructures,
theaggregateproductiveinvestmentbythepublicandtheprivatesectordecreased.
WhyisGreeceheavilyindebtedtoforeigners?Greecesexternaldebt,definedasdebtowed
toforeigners,was82.5%ofGDPin2009(Cabral2010).Thisisalargenumber:forexample,
itisabouttwentytimesGreecesannualspendingoneducation.
Howwasthelargeexternaldebtaccumulated,andhowdidpublicdebtcontributetothis?
Acountryaccumulatesexternaldebtwhenitsgovernmentorprivatesector(i.e.,firmsand
citizens)borrowfromforeigners.InthecaseofSpain,whoseexternaldebtisalmostashigh
asGreeces,muchoftheexternalborrowingwasdonebytheprivatesector:Spanishbanks
wereborrowingfromforeignbankstogiveloanstoSpanishcitizens,whowouldthenbuy
(whatturnedouttobe)overpricedhouses.InthecaseofGreece,theprivatesectordidnot,
inthenet,borrowfromforeigners:thesavingsofGreekcitizenswereenoughtocoverloans
totheprivatesector.Externalborrowingwasinsteaddonebythegovernment.Indeed,
Greecesexternalpublicdebt,definedasthepartofexternaldebtaccumulatedbythe
government,was89%ofGDPin2009(or79%oftotalpublicdebtinTable2).Thus,Greeces
externaldebtessentiallycoincideswithitsexternalpublicdebt.
Whenacountryborrowsfromforeigners,itconsumesmorethanitproduces.Theextra
consumptionisderivedfromimports,whichthecountrycanbuyfromforeignerswiththe
moneythatitborrowsfromthem.InthecaseofGreece,thismeansthatGreekcitizens
wereconsumingimportedgoodswithmoneythattheirgovernmentwasborrowingfrom
foreigners.Theborrowedmoneywasflowingfromthegovernmenttothecitizensthrough
variouschannels,e.g.,wagespaidtopublicservants,paymentstogovernmentsuppliers,
pensionspaidtopensioners.Inresponsetotheirhigherincomes,citizenswereconsuming
moreandintheaggregateGreecewasconsumingmorethanitwasproducing.
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TounderstandmorepreciselytheevolutionofGreecesexternaldebtduringthepasttwo
decades,weuseTable4.Wealsobringintothediscussioninvestmentandexports,from
whichweabstractedawayinthepreviousparagraph.
Table4:Tradebalanceandexternalborrowing(Source:OECD)
Decade 19901999 20002009
Tradebalance(exports
minusimports)as%ofGDP
10.7 11.4
Netborrowingas%ofGDP 4.1 10.2
Nettransfersreceivedfrom
foreignersas%ofGDP
5.9 2
ThefirstrowinTable4isthetradebalance,definedasexportsminusimports.Duringthe
pasttwodecades(andeveninthemoredistantpast,buttoalesserextent),thetrade
balancewasnegative,meaningthatGreecewasimportingmorethanitwasexporting.The
negativetradebalancealsomeansthatGreecewasconsumingandinvestingmorethanit
wasproducing.Indeed,theextraconsumptionandinvestmentwerederivedfromimports
thatwerehigherthanexports.(Moregenerally,thesumofconsumptionandinvestment,
minusGDP,isthenegativeofthetradebalance,asTables3and4confirm.)
Greececouldimportmorethanitwasexportingbecauseitwasborrowingfromforeigners.
Duringthe1990s,itwasborrowinganaverageof4.1%ofitsGDPperyear.Whilethis
borrowingrateishigh,itincreaseddramaticallyto10.2%duringthe2000s.Andnotsurprisingly,externaldebtincreaseddramaticallyaswell:from42.7%ofGDPin2000to
82.5%in2009.
Table4showsthatexternalborrowingincreasedbecauseGreecewasimportingevenmore
relativetoitsexports,andbecausetransfersreceivedfromforeignersdecreased.Twomain
effectsdrovethedecreaseintransfers.First,transfersfromtheEuropeanUniondecreased
ascountriespoorerthanGreecejoinedandfundsearmarkedforcohesionpurposeswere
reallocatedaccordingly.Second,Greecehadtomakehigherinterestpaymentsonitslarger
externaldebt.
Insummary,Greecebecamemoreindebtedtoforeignersduringthe2000sbecauseitwas
importingevenmorerelativetoitsexports,despitereceivingfewertransfersfromthe
EuropeanUnion,anddespitebeingalreadyindebt.Whysuchprofligacy?Partofthereason
wasthatinvestmentincreasedduringthe2000swiththeOlympicGamesbeingan
example.ButthemainreasonwasthatGreekcitizensbecamelesswillingtosaveduringthe
2000s,becauseinterestrateswerelowerandconsumerloansfrombanksbetteravailable.
Howdidthedecreaseinsavingsinteractwiththepublicdebt?Despitetheirlowersavings,
Greekcitizenswerestillsavingenoughduringthe2000stofinanceloanstotheirfellow
citizensandtoprivatefirms.Theproblemisthatsavingshadbecomeinsufficienttobuythe
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bondsissuedbythegovernment. Asaconsequence,thegovernmenthadtoturnto
foreignerstomeetitsfinancingneeds.Inthissense,theincreaseinGreecesexternaldebt
duringthe2000swascausedbythecombinationofthegovernmentslargeborrowing
needs,anditscitizensinsufficientsavings.
HowcanGreecerepayitsdebt?SomecommentatorshavearguedthatGreececannotrepayitsdebt,andthatitshouldrestructureitordefaultaltogether.Letusputthisdiscussion
aside,andassumeinsteadthatGreecewillaimtofullyrepayitsdebt.Howcanitaccomplish
thatobjective?
Repayingthedebtrequires,firstofall,toreducethedeficit.Recallthatthedeficitisthe
governmentsexpenditureminusitsrevenue,andonesourceofexpenditureistheinterest
paidondebt.Thecomponentofdeficitthatdoesnotincludeinterestpaymentsondebtis
knownastheprimarydeficit.Azeroprimarydeficitmeansthatthegovernmentbreakseven
intheabsenceofthedebtburdenbequeathedtoitbypreviousgovernments.Apositive
primarydeficitmeansthatthegovernmentcreatesanewdebtburden.
In2009,Greecesprimarydeficitwas8.5%.Clearly,withaprimarydeficit,andofsuchlarge
magnitude,itwillbeimpossibletoeverpaybackthedebt.Thedebtcanbepaidbackonlyif
thegovernmentstopsrunningaprimarydeficit,i.e.,doesnotcreateanewdebtburden
eachyear.Thegovernmentmustrunaprimarysurplus.
Howmuchofaprimarysurplusisneeded?Iftheprimarysurplusexceedstheinterest
paymentsondebt,the(total)deficitwillbenegative,andthedebtwilldecrease.Ifthe
primarysurplusisequaltotheinterestpaymentsondebt,thedeficitwillbezero,andthe
debtwillremainconstantovertime.
Whileanegativedeficitiseffectiveinreducingthedebt,evenazeroorslightlypositive
deficitcansuffice.Thisisbecausetherelevantquantityisnotdebt,butdebtrelativetoGDP.
IfGreecesGDPdoubledovernight,withoutanychangeinthepublicdebt,Greecewould
haveamuchsmallerdebtproblem.Indeed,payingforthedebtby,e.g.,raisingtaxeswould
becomemucheasier.Therefore,azeroorslightlypositivedeficitcansufficeinreducingthe
debtifGreececangrowitsGDPquicklyoverthenextdecade.
GreececanachieveandsustainhighGDPgrowthifitmakesitseconomymorecompetitive.
GainsincompetitivenessareallthemoreimportantbecauseofGreeceslargeexternal
debt.Indeed,acountrycanrepayitsexternaldebtbyexportingmorethanitimports.Since
Greeceiscurrentlyimportingmorethanitexports(Table4),largegainsincompetitiveness
arenecessarysothatexportsovertakeimports.
Greecescurrentproblemisthecombinationofhighdebt,highdeficitandlow
competitiveness.ItisbecauseofthiscombinationthatGreececouldonlyborrowatvery
highinterestratesinfinancialmarkets.MarketswerenotconspiringagainstGreece;they
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weremerelyreflectingeconomicrealityaswellasprotectingtheinterestsofthosewho
hadlenttheirsavingstoGreece.
Torepayitsdebt,Greecemustsucceedontwofronts.First,thegovernmentmustimprove
itsfinancesandturnasignificantprimarysurplus.Second,theeconomymustbecomemore
competitive.SuccessoneachfrontrequiresimportantreformsthatweoutlineinSections2
and3,respectively.Reformstargetedtowardsthegovernmentsfinancesincludeausterity
measures,suchastaxincreasesandcutsinpensionsandpublicservantswages.The
hardshipcausedbyausteritymeasureswillbearfruitonlyifthesemeasuresare
accompaniedbymoreradicalreformsdesignedtomakethepublicsectormoreefficientand
theeconomymorecompetitive.
ThereformsthatGreecehasagreedonwithitslenders(EU/IMF)aimatenablingittorepay
itsdebt.Somereformscontributetothatgoalbyimprovingthegovernmentsfinances,
whileotherreformsaimatraisingcompetitivenessandgrowth.Manyofthereformsare
necessaryandoverdue,asweexplaininSections2and3,andshouldbesupported. Atthe
sametime,itisimportanttogoevenbeyondthesereformsandthinkmoregenerallyhow
toraisethegrowthofGreeceandtheincomesofitscitizensinthelongrun.Thereforms
thatGreecehasagreedonwithitslendersdonotfocusonthelongrun,e.g.,noneconcerns
educationorbasicresearch,bothofwhichhaveasignificanteffectonacountryslongrun
growth.Thisisnatural:acomprehensivelongrunreformoftheGreekeconomyisnotthe
joboftheEU/IMFbutofGreeksthemselves.Someofthereformsthatweoutlineinthis
articleconcernthelongrun,andmoreattentionshouldbegiventoreformsofthattype.
2.TheGovernmentsFinances WhatisthemainsourceofGreecesdeficits?Governmentexpenditureis
comparabletotheEuropeanUnion(EU)average,butrevenueiswellbelow
becauseoftaxevasion.Inthissense,taxevasionisthemainsourceofGreeces
deficits.
Taxevasion:whatareitscostsandhowtofightit?Taxevasionpreventsthegovernmentfromprovidingahighqualityofpublicservices,introducesunfairness
intothetaxsystem,andsubsidizeslowgrowthactivitiesattheexpenseofhigh
growthones.TaxevasioniscommoninGreecenotbecauseitisinthegenesof
Greekcitizensbutbecausenotenoughincentivesareinplacetodiscourageit.
Shouldthepublicsectorbemadesmaller?Greecesmainproblemisnotthatthepublicsectoristoolarge,butthatthemoneyisspentinefficiently.Thatis,the
qualityofpublicservicescanbeimprovedandmoneycanbeeconomizedatthe
sametime.
This
money
can
be
used
to
pay
for
other
public
services,
which
are
currentlyunderprovidedbutareimportantforcompetitiveness,e.g.,investmentin
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infrastructureandhumancapital.Productivityinthepublicsectorshouldbe
measured,asisdoneinanyprivatefirm,andpublicagenciesshouldbeevaluated
basedonhowtheymeetexplicitproductivitytargets.
Howtofightcorruptioninthepublicsector?Aswithtaxevasion,corruptioniscommoninGreecebecausenotenoughincentivesareinplacetodiscourageit.In
particular,penaltiesforcorruptionshouldbecomemuchtougher,accounting
practicesshouldbemodernized,theinstitutionalframeworkthatgovernsthe
interactionsbetweengovernmentandcitizensshouldbesimplified,andthese
interactionsshouldbecomemoreanonymous.
Whyisreformofthepensionsystemessential?Untiltherecentreform,GreecespensionsystemhadsomeofthemostgenerousprovisionsintheEU,andwasill
suitedtocopewithpopulationageing.Haditbeenleftunreformed,itwouldhave
createdan
additional
deficit
of
12%
of
GDP
by
2050.
Paying
for
that
deficit
would
haverequired,forexample,cuttingcompletelyspendingoneducationandhealth
combined.Whilethecurrentreformisanimprovement,thereisscopeforamore
radicalredesignthatcanrenderGreecespensionsystembothmoreefficientand
fairer.
WhatisthemainsourceofGreecesdeficits?Tables5and6reporttherevenueand
expenditure,respectively,ofGreecerelativetotheEUaverage,in2007.4Forbrevity,we
reportonlythemainitems.
Table5:Governmentrevenue(Source:Eurostat)
Totalrevenueas
%ofGDP
Indirecttaxes
(VAT)as%of
GDP
Directtaxesas
%ofGDP
Social
contributionsas
%ofGDP
Greece 39.7 12.5 7.9 13.4
EU27average 44.9 13.5 13.4 13.5
Table6:Governmentexpenditure(Source:Eurostat)
Total
expenditure
as%ofGDP
Intermediate
consumption
as%ofGDP
Compensation
ofemployees
as%ofGDP
Interestas%
ofGDP
Social
benefitsas%
ofGDP
Greece 45 5.7 11.2 4.4 17.6
EU27
average
45.7 6.4 10.4 2.7 19.1
4
Unlessweexplicitlystateotherwise,EUreferstotheEU27.ThenumbersaresimilarifwelimitourselvestotheEurozone.
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Tables5and6indicatethatthekeydifferencebetweenGreeceanditsEUpartnersliesin
therevenueratherthanintheexpenditure.WhileexpenditureiscomparabletotheEU
average,revenueiswellbelow.Moreover,thediscrepancyinrevenueliesmainlyinthe
governmentsabilitytocollectdirecttaxes,i.e.,taxesonincome.Indeed,intheaverageEU
country,thegovernmentcollects13.4%ofGDPfromdirecttaxes,whileinGreeceitonlycollects7.9%.Thisdiscrepancydoesnotarisebecausetaxratesonincomearelowin
GreecetheyarecomparabletootherEUcountries.Thediscrepancyarisesinsteadbecause
oftaxevasion:ifthegovernmenthadbeenabletocollectdirecttaxesinlinewiththeEU
average,itwouldhavehadnodeficitin2007.Thesamestatementcannotbemadefor
2010,partlybecausetheglobalfinancialcrisishashadanegativeeffectongovernment
financesaroundtheworld.Yet,eliminatingtaxevasionwouldrestoreaprimarysurplusin
2010.
Taxevasion:whatareitscostsandhowtofightit?Fightingtaxevasionshouldbeatop
priorityforthegovernment.Indeed,ifthegovernmenthadbeenabletocollecttaxesfrom
allcitizensaccordingtotheiractualincomes,deficitswouldhavebeenmuchsmaller,and
Greecewouldnotbehavingadebtproblemtoday.Ofcourse,deficitswouldhavebeen
smallereveninthepresenceoftaxevasion,ifthegovernmenthadcutdownonits
expenditure.Yet,theexpenditureoftheGreekgovernmentisnothighbyEUstandards,and
keyareassuchaseducationandhealthareunderfunded.Insummary,thefirstandbigcost
oftaxevasionisthatitworsensthegovernmentsfinances,andpreventsthegovernment
fromprovidingahighqualityofpublicservices.
Asecond,andequallyimportant,costoftaxevasionistheunfairnessthatitintroducesinto
thetaxsystem.Akeyobjectiveofthetaxsystemistoredistributeincomefromtherichand
morefortunatetothepoorandlessfortunate.Thisisdonebycollectinghighertaxesfrom
therichandusingtheproceedstoprovidepublicservicesthatbenefitrichandpooralike.
Taxevasionunderminesthisobjectivebecauseitisdonemainlybytherich:thetaxes
evadedbyGreeceshighincomehouseholdsaregreaterthanforlowincomehouseholds
notonlyinabsolutetermsbutalsoasaproportionofincome(FlevotomouandMatsanganis
2010).Theunfairnessthattaxevasionintroducesintothetaxsystemhasanimportant
politicalconsequence:itunderminessocialconsensusandinhibitstheabilityofthe
governmenttoundertakepainfulreforms.Indeed,reformsareperceivedasharmingthe
lowincomehouseholds,whoalsofeelthattheyarecarryingadisproportionateshareofthe
taxburden.
Taxevasionhasanadditionalcostthatislittlenoticedbutasimportantastheothertwo:it
subsidizeslowtechnologyandlowgrowthactivitiesattheexpenseofhightechnologyand
highgrowthones.Indeed,theformertypicallyrequirelowinvestmentandareperformedat
asmallscale,e.g.,bytheselfemployedorverysmallfirms,wheretaxevasionishardto
detect.Conversely,thelattertypicallyrequirehighinvestmentandareperformedbylarger
firms,wheretaxevasioncanbedetectedmoreeasily.Taxevasionbytheselfemployedand
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verysmallfirmsforcesthegovernmenttomaintainahightaxrate,sotocollectthetaxes
fromlargerfirms,whichcannotevadethemaseasily.Thisdiscouragesthecreationoflarge
firms,aswellasthehighgrowthactivitiesandwellpayingjobsthatmanyofthesefirmsare
associatedwith.
TaxevasionisdeeplyengrainedintheGreekeconomyandcannotbeeradicatedeasily.At
thesametime,oneofthemainreasonswhytaxevasionisdeeplyengrainedisthatnot
enoughincentivesareinplaceforcitizenstopaytheirtaxes.Strengtheningtheseincentives
canreducesignificantlytaxevasion.Werecommendthefollowingmeasures:
Auditsofindividualsandfirmsshouldbecomeregularandbebasedonprofilingofevadersandrandomselection.Profilingwillfocusattentionontypesofindividuals
andfirmsmostlikelytoevade.Randomnesswillimplyachancetobeauditedeven
forthosenothavingtheprofileoftaxevaders.Thekeydifficultyistoorganiseaudits
thatarebeyondcorruption.Onewayofachievingthisistopursuetheentireprocessbycorrespondence,whereauditedindividualsandfirmshavetoprovidethe
requiredevidencewithoutmeetingthetaxofficials.Thetaxofficialshandlingthe
caseshouldremainanonymousandallcorrespondencesignedbysomeonewith
overallresponsibilitybutwithoutdirectinvolvement.Penaltiesshouldbe
proportionatetotheoffenceandseriousoffendersshouldbeprosecutedinthe
criminalcourts.Lessseriousoffendersshouldbefinedinproportiontothetax
evaded.
Crossreferencingbetweenexpenseclaimsandtaxdeclarationsshouldbecomeautomatic.Forexample,allexpenseclaimsthatindividualsdeclarerelatingtoa
specificdoctorshouldbeautomaticallyaddedupandcheckedtoseeiftheymatch
thedoctorstaxreturn.Evenbetter:whenadoctorpresentsareceipt,thisshouldbe
automaticallyregisteredtohistaxaccount,verymuchlikeindividualsalaries.
Moreover,toreinforcetheroleofreceiptsinimprovingtaxrevenueitisworth
consideringincreasingthetaxdeductibilityofcertainexpensesevenatthecostof
sometaxrevenuesoastochangetheculturetoonewhereitisnaturaltoprovide
receiptsforservicesanddeclarationoftaxes.
Fallacyno1:Taxevasionstimulatesgrowthbecausefirmspaylowtaxesandhence
havehigherincentivestoinvest.Firmsthatmanagetoevadetaxesaretypicallysmall
andinlowtechnologyandlowvalueaddedsectors(e.g.,restaurantsandnightclubs).To
makeupforthelostrevenuefromthesefirms,thegovernmenthastocollectmoretaxes
fromthefirmsthatcannotevadethem,whicharetypicallylargeandinhightechnology
andhighvalueaddedsectors.Thisdiscouragesthecreationofsuchfirms,andhasa
negativeeffectoneconomywidegrowth.
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Paymentsformanymedicalservicesshouldtakeplacenotbetweenadoctorandapatient,butdirectlythroughthepatientshealthinsurancefundorcompany.
Evadingtaxesonpaymentsmadethroughthelatterchannelismuchmoredifficult.
Shouldthepublicsectorbemadesmaller?ItisoftenclaimedthattheGreekpublicsectorisverylargeandconsumesavastamountofresources.ThetotalwagebillintheGreekpublic
sectorisindeedhigherthantheEUaverage:forexample,in2007Greecespent11.2%ofits
GDPtopaypublicservants,whiletheEUspent10.4%.Butthisdifferenceissmallwhenput
inbroadercontext.Forexample,Swedenspent15%ofitsGDPtopaypublicservants.
TherelevantquestionisnotwhetherthetotalwagebillintheGreekpublicsectorisslightly
aboveorslightlybelowtheEUaverage,butwhetherthepublicsectorsproductivityishigh
orlow.Thatis,aretheresourcesthatthegovernmentputsintothepublicsectorspent
efficiently? Ifresourcesarespentinefficiently,thequalityofpublicservicescanbeimprovedandmoneycanbeeconomizedatthesametime.
5
Productivityismeasuredineveryprivatefirmandshouldbemeasuredinthepublicsector
aswell.Ofcourse,thepublicsectordiffersfromaprivatefirmbecauseitsobjectiveisnotto
achieveahighprofit,buttoprovideservicesthatbenefitsociety,e.g.,education,protection
oftheenvironment,securityagainstcrime,protectionagainstexternalthreats.Moreover,
measuringthequalityofpublicservicesisharderthanmeasuringprofits.Yet,measuresof
qualitycanbecomputed,andpublicagenciesshouldbeevaluatedintermsofthequalityof
servicestheyprovidegiventheresourcestheyareallocated. Moregenerally,thenotion
thatthepublicsectoristheretoservesociety,anddosoinacostefficientmanner,should
enterthecultureoftheGreekpublicsector.Thepublicsectorshouldbeviewedasan
efficientproviderofservicesandnotasameanstoprovideemploymenttopolitical
favourites.
MeasuringproductivityintheGreekpublicsectorischallengingbecausedataonresources
spentandonqualityofservicesprovidedaregenerallynotavailable,unlikeinmanyother
EUcountries.Forexample,itishardtofinddataevenonthetotalnumberofpublic
servants.
Oneareainwhichdataareavailableiseducation.Wefocusonthatareasolelybecauseof
theavailabilityofdata,andnotbecauseweintendtosuggestthatproductivityineducation
islowerthaninotherareasofthepublicsector.6Weshouldaddthatourproductivity
measuresareimperfectandcancertainlybeimproved.Ourmaingoalincomputingthese
5Theproductivityquestionisrelevantnotonlyforthecentralgovernment,butforalsomunicipalitiesandlocal
governments,whereinefficiencies appeartobeevenlarger.
6
Indeed,productivityappearstobeespeciallylowinareassuchashealthcare,publictransportationanddefence.
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measuresistoemphasizethatmeasurementofpublicsectorproductivityispossibleand
shouldbecarriedoutmoresystematically.
TheOECDmeasuresthequalityofprimaryandsecondaryeducationthroughstandardized
testsinreading,mathematicsandscience(knownasPISAtests),offeredtochildrenaged
15.Table7reportstheperformanceofGreecerelativetotheOECDaverageinthemore
recenttests,performedin2005.Fortertiaryeducation,weconsidertwomeasuresof
quality,oneemphasizingresearchandoneteaching.ThefirstmeasureistheShanghaiJiao
Tong(SJT)annualworldranking,whereuniversitiesarerankedbasedonthequalityofthe
researchtheyproduce.Table7reportsthenumberofGreekuniversitiesinthetop500,and
compareswiththetotalnumberofEUuniversitiesinthetop500,adjustingfortherelative
GDPofGreecewithintheEU(i.e.,multiplyingbythefractionofGreekGDPrelativetototal
EUGDP).Thesecondmeasureisgraduationrates,definedasthepercentageof18yearolds
whoentertertiaryeducationinagivenyearandeventuallygraduate,relativetothetotalnumberof18yearoldsinthatyear.Table7reportsgraduationratesinGreecerelativeto
theOECDaveragein2007(OECD2009a).
Table7:Measuresofoutputsineducation(Source:OECD,SJTannualworldranking)
PISAscore,
reading
PISAscore,
mathematics
PISAscore,
science
Numberof
universities
inSJTtop
500
Graduation
rates
Greece 460 459 473 2 29.8
EU27or
OECD
average
492 498 500 4 48.1
QualitymeasuresatalllevelsofeducationaresignificantlylowerforGreece.TheGreek
averagescoreinthePISAtestsisworsethanthatofall30OECDcountries,exceptfor
MexicoandTurkey.AndwhileGreecehastwouniversitiesinthetop500,itshouldhave
fouraccordingtoitsGDPwithintheEU.Moreover,noneofthetwouniversitiesisinthetop
100,whilecountrieswithcomparableGDPand/orpopulationasGreece(Finland,Sweden,Denmark,Netherlands)haveoneormoreuniversitiesinthetop100. Finally,graduation
ratesinGreecearesignificantlylowerthantheOECDaverage.
TheunderperformanceoftheGreekeducationalsystemisamatterofseriousconcern.
Providingqualityeducationtothenextgenerationisnotonlyamoralimperative,butalso
bringsanimportanteconomicbenefit:ahighlyeducatedworkforcecontributestoan
economyscompetitiveness.WereturntocompetitivenessinSection3,butfornowwe
focusonproductivity:aretheresourcesthatthegovernmentputsintoeducationspent
efficientlytoprovidetheoutputsinTable7?
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Table8comparesGreecetotheEUaverageintermsofexpenditureindifferentlevelsof
education,andratioofstudentstoteachersinprimaryandsecondaryeducation.The
expendituredataarefrom2005andthestudent/teacherratiodatafrom2006(OECD
2009a).
Table8:Measuresofinputsineducation(Source:OECD)
Expenditurein
primaryand
secondary
educationas%
ofGDP
Expenditurein
tertiary
educationas%
ofGDP
Ratioof
studentsto
teachersin
primary
education
Ratioof
studentsto
teachersin
secondary
education
Greece 2.7 1.5 10.6 8.2
EU19average 3.6 1.3 14.5 11.9
Tables7and8suggestthatexpenditureintertiaryeducationisinefficient:Greeces
expenditureiscomparabletotheEUaverage,buttheoutputs(topuniversitiesand
graduationrates)aresignificantlylower.Thepictureforprimaryandsecondaryeducationis
lessclearcut.GreeceunderspendssignificantlyrelativetotheEUaverage,sothelower
outputs(PISAscores)couldbereflectingthelowerexpenditure.Atthesametime,thereis
aninefficiencybecauseGreeceisachievingtheloweroutputsbyemployingmoreteachers
perstudentrelativetotheEUaverage.WeshouldnotethatGreeceslowerexpenditurein
primaryandsecondaryeducationdespitethehighernumberofteachersisnotbecause
teachersareseverelyunderpaid;itismainlybecauseGreecespendslittleoneducation
infrastructure(e.g.,buildingsandteachingequipment)andonpreschooleducation.
Insummary,thedatasuggestthatthereisampleroomforincreasingproductivityin
education:itshouldbepossibletoimprovethequalityoftertiaryeducationwhilealso
economizingonexpenditure,andtoimprovethequalityofprimaryandsecondary
educationwhilealsoemployingfewerteachers.Weshouldemphasizethatthelow
productivityisnotareflectiononlyontheteachers;itconcernstheentireeducational
systemofwhichtheteachersareonlyonepart.
Howtoraiseproductivityinthepublicsector?Allemployees,whetherinthepublicorinthe
privatesector,aremoreproductivewhentheyaregivenincentivesbasedontheir
performance,i.e.,goodperformersarerewardedwithhighersalariesandbetterpromotion
opportunitiesthanbadperformers.Suchincentives,however,arelargelyabsentinthe
Greekpublicsector.Infact,apreconditionforsuchincentivesisthatindividual
performanceismeasured(fairlyandaccurately),butsuchevaluationsarenotcommon.
Returningtotheareaofprimaryandsecondaryeducation,promotionislargelybasedona
teacherslengthofservice,andnotontheteachersperformanceintheclassroom,oron
whethertheteacherhasattendedonthejobtraining(OECD2009b).Measuringandrewardingindividualperformancewouldleadtosignificantproductivitygains.
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Performancebasedincentivesshouldbegivennotonlyatthelevelofindividuals,butalso
atthatoforganizationalunits.Forexample,theperformanceofeachschoolanduniversity
shouldbemeasured,andmoreresourcesshouldbeallocatedtotopperformers.Together
withthisgreateraccountability,organizationalunitsshouldbegivengreaterautonomy.For
example,schoolsanduniversitiesshouldbegivenmorefreedomonwhichteachersandprofessorstohire,andhowtoallocatetheirbudgets.
Theproductivitygainsachievedthroughperformancebasedincentivesshouldbe
complementedbyrationalizingtheresourcesallocatedtospecificactivities.Forexample,
employmentlevelsseemtobeexcessiveinsomeactivities,suchasprimaryandsecondary
education,andshouldbereduced.Suchareductioncouldpartlybeachievedthrough
redeploymenttootheractivitiesofthepublicsector.Byrationalizingresources,itwouldbe
possibletofreeupresourcesfromactivitieswherespendingisinefficient,andredeploy
themtoactivitieswherespendingiscurrentlyminimal,butwhichareimportantforcompetitiveness.Examplesincludeeducationinfrastructureandpreschooleducation,basic
research,labourmarketprogrammesandassistancetotheunemployed,transportation
infrastructure,etc.
Howtofightcorruptioninthepublicsector?Theissueofpublicsectorproductivityisrelatedtothatofcorruption.Indeed,onereasonwhyproductivityislowisthatsomeofthe
moneyallocatedforpublicserviceprovisionendsupinthepocketsofcorruptpublic
servants.CorruptionisamajorprobleminGreece:in2009,TransparencyInternational
rankedGreeceasthemostcorruptofthe27countriesoftheEuropeanUnion,togetherwithBulgariaandRomania.
Corruptionhasseverecosts.Itpreventsthegovernmentfromprovidingahighqualityof
publicservicesbecausesomeofthemoneyallocatedforpublicserviceprovisionisdiverted
away.Itforcesthegovernmenttoimposehighertaxestomakeupforthelostmoneyand
thesetaxesdiscourageproductiveactivities.Corruptionalsotaxescitizensandfirmsmore
directlysincetheymustbribecorruptpublicservantstobeservedefficientlybythem.Last
butnotleast,corruptioncausescitizenstostoptrustingtheirgovernmentandrespecting
thelaw.Thecostsofcorruptionare,inmanyways,similartothoseoftaxevasion:inbothcases,moneythatshouldbecollectedbythegovernmentandspentforpublicservicesends
upinsteadinthepocketsofprivatecitizens.
CorruptionisdeeplyengrainedintheGreekeconomyandcannotbeeradicatedeasily.But
aswithtaxevasion,oneofthemainreasonswhycorruptionisdeeplyengrainedisthatnot
enoughincentivesareinplacetodiscourageit.Werecommendthefollowingmeasuresto
fightcorruption:
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Penaltiesforcorruptionshouldbemademuchtougher.Forone,thereshouldbenostatuteoflimitations.Moreover,corruptpublicservantsshouldbepunishedbythe
withholdingoftheirpensionaswellasbyimprisonment.
Accountingpracticesshouldbebroughtinlinewithmoderninternationalstandards.ExpensesofpublicagenciesshouldberecordedinrealtimeinacentralizedcomputersystemhousedattheMinistryofFinance.Overrunsfromagenciesannual
budgetsshouldbefollowedupwithpromptaudits.Underthecurrentsystem,
overrunscantakeyearstodiscover.
Performancebasedincentivesshouldbeintroduced.Indeed,onesourceofcorruptionisthatpublicservantsholdupnormalworkuntiltheyarebribed.Well
designedperformancebasedincentiveswillinducepublicservantstoworkharder,
andthiswillreducetheneedforbribes.
Theinstitutionalframeworkthatgovernstherelationshipbetweenindividualsandfirmsononehand,andthestateontheothershouldbesimplifiedandmademore
transparent.Complicatedbureaucratichurdlesprovidefertilegroundforcorruption
asindividualsandfirmshaveanincentivetobribetogetaroundthehurdles.
Theinteractionbetweenindividualsandfirmsononehand,andthestateontheothershouldbecomeanonymoustoamoresignificantextent,aswealready
emphasizedinthecaseoftaxaudits.Simplifyingproceduresandmovingtoonline
andpostaltransactionsisanimportantstepinthatdirection.
Oneareawherecorruptionandwastearerifeishealthcare.Thenotoriousbrownenvelopes
areafactoflifeandtaxthemostvulnerable.Moreover,thequalityofhealthcareprovided
inthepublicsectorisgenerallylow,withmanyofthosewhocanafforditswitchingto
privatecare.Hereweneedradicalrethinking.Weneedasystemthatwillextendthesame
qualityofhealthcaretoallincomegroups,willrecognisetheneedtosubsidisetheless
wealthy,andatthesametimewillbemanagedefficiently.Thesystemthatweadvocate
consistsof(i)sellingthepublichospitalstotheprivatesector,(ii)settingupa
comprehensiveandmandatoryhealthinsurancesystem,whereallindividualsarerequired
tohaveinsurance,andinsurancecompaniesarenotbeallowedtoexcludeanyone,and(iii)
usingpublicmoney,subsidizetheinsurancepremiaforlowincomeindividuals.Thissystem
canbringlargegainsovertheexistingone,aswewillexplaininmoredetailinafollowup
article.
Fallacy
no
2:
Corruption
and
tax
evasion
cannot
be
eradicated
because
they
are
an
integralpartofGreekculture.CorruptionandtaxevasionhavebecomepartofGreek
culturebecausenotenoughincentivesareinplacetodiscouragethem. Inparticular,
accountabilityinthepublicsectorislowandpenaltiestooffendersarelenient.No
cultureincludingGreecesisimmunetocorruption,whichcanonlybeeliminatedby
healthyandaccountableinstitutions.
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Whyisreformofthepensionsystemessential?AdrasticreformofGreecespensionsystem
hasrecentlybeenvotedthroughParliament.Suchareformwasessential:accordingto
estimatesfromtheEuropeanCommissionin2009,ifGreecespensionsystemhadbeenleft
unreformed,itwouldhavecreatedanadditionaldeficitof12.5%ofGDPby2050(OECD
2009b).Thisishigherthanwhattheentiredeficit(includingpensions)hasbeenonaverageovereachofthepastthreedecades.Itisalsohigherthanspendingoneducationandhealth
combined.
Greecespensionsystemwasindireneedofreformbecauseofitsmanygenerousfeatures.
Table9reportstwokeyfeatures:theofficialageofretirementandtheaveragepension
(wheretheaverageisacrossallemployees)(OECD2006,2009c).
Table9:Retirementageandlevelofpensions(Prereform.Source:OECD)
Officialretirementage Averagepensionas%ofaveragelifetimeearnings
(replacementrate)
Greece 58 95.7
OECD 63.2 60.8
EmployeesinGreececouldretireat58yearswithfullpension,providedthattheyhad
completed37yearsofwork.Theretirementageof58wassignificantlylowerthantheOECD
averageof63.2years.Moreover,theaveragepensionwassignificantlyhigherthanthe
OECDaverage:itwas95.7%ofanemployeesaveragelifetimeearnings(evaluatedatthe
timeofretirementbyadjustingforeconomywideearningsgrowth),againstanOECD
averageof60.8%.78
Thatthepensionsystemwasunsustainablecanbeseenbythefollowingbackofthe
envelopecalculation.Thesocialcontributionthatthegovernmentreceivesfromthe
averageemployeeis44%oftheemployeesgrossearnings,with28%paidbytheemployer
and16%bytheemployee(OECD2009d).About60%ofthisgoestopensions,andthe
remaindergoestoothersocialbenefitssuchashealthinsurance.9Supposethatindividuals
7Pensionsareoftenexpressedasapercentageofearningsduringthelastyearofonesworkratherthanasa
percentageofaveragelifetimeearnings.ThisyieldssmallernumbersthaninTable9becauseearnings
increasewithage.ThenumberforGreeceis7080%(OECD2009b).
8Inadditiontoitsgenerousprovisions,Greecespensionsystemhasmanyadverseincentiveeffectsbuiltin.
Forexample,itmakesearlyretirementattractivebecausethisyieldsapensionthatisnotmuchlowerthanthe
incomeearnedwhileworking.Moreover,theprovisionthatpensionsdependononeswageduringthelast
fiveyearsofworkratherthanovertheentirelifetimeencouragestaxevasion:neitheryoungworkersnor
theiremployershaveanyincentivetodeclarethefullwage.
9
Thiscanbeseenfromthefactthatpensioncontributionrevenuesare7.5%ofGDP(OECD2009c),whilesocialcontributionsare13.4%ofGDP(Table5).
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liveexactlyuptotheirlifeexpectancy,whichis80yearsforGreece,andsupposethatthere
isnopopulationgrowth.Ifindividualsworkfor37yearsandretireat58,thisleaves
37/22=1.68employeestopayforeachpensioner.Therefore,apensionercanreceive
1.68*44%*60%=44.5%ofhisgrossearningsatretirement.Thisislessthanhalfofthe95.7%
figureinTable9.Thus,ifareformdesignedtorenderthesystemsustainableweretoleavetheretirementageunchanged,itwouldhavetoreducepensionsbymorethan50%.The
recentreformreducespensionsbyabout30%,butalsoraisestheretirementage.
Notethatasmallerreductioninpensionscouldbeachievedbyraisingsocialcontributions
beyond44%.Socialcontributions,however,arealreadythesecondhighestintheOECD.
Raisingthemfurtherwillmakefirmsevenlesswillingtohire,andraiseGreecesalreadyhigh
unemploymentrate.Thus,socialcontributionsshouldnotberaised.
Thesustainabilityproblemofthepensionsystemhadbecomemoreacuteinrecentyears
becauseofthecombinationoftwodemographicforces:lifeexpectancyhasbeenincreasing,
whilepopulationgrowthhasbeendecreasing,almosttozero.Lowpopulationgrowth
impairssustainabilitybecausefeweremployeesareavailabletopayforeachpensioner.
Areformreducingpensionsshouldaccountforpovertyinoldage,whichishigherinGreece
thantheEUaverage.Thisshouldbedonebycuttingmainlythelargerpensions.More
generally,reformshouldaddresstheunfairnessofthepensionsystem,wherebysome
individualsreceivepensionsthatarelargerelativetotheirlifetimecontributions,atthe
expenseofotherindividualswhoreceivemuchsmallerpensions.Wenextsketchamore
radicalredesignofGreecespensionsystemthatcanrenderitbothmoreefficientandfairer.
Greecescurrentpensionsystem(pre andpostreform)ispayasyougo,wherethose
currentlyemployedpaythepensionsofthosecurrentlyretired.Analternativeisafunded
system,wherethosecurrentlyemployedsavefortheirownpensionsinsteadofpayingthe
pensionsofthosecurrentlyretired.Afundedsystemhasmanyadvantagesoverpayasyou
go.First,itistransparentandeasytoadminister.Indeed,individualsareallocatedpersonal
retirementaccounts,whosebalancetheycanobserveatanymoment.Moreover,
contributionandinvestmentdecisionsaremadebytheindividualsthemselvesratherthanbyatimeconsumingandexpensivebureaucraticprocess.Asecondandrelatedadvantage
ofafundedsystemisthatindividualsareinbettercontroloftheirretirement:theycan
decidehowlongtoworkandhowmuchtosavetoachievetheirdesiredpension.Inthis
sense,thesystemisfair:individualspensionsdependonhowthriftytheywerewhen
young.Athirdadvantageofafundedsystemisthatitisimmunetotheriskthatpopulation
growthslowsdown,whilepayasyougoimposesalargeburdenonpublicfinances.Finally,
underafundedsystem,individualssavemore(sincethisishowtheycanaccumulatetheir
pensions),andthesesavingshelpfinanceproductiveinvestment.
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Afundedsystemmustincludeanelementofsocialinsurancetoprotectthosewhohadbad
luckinthelabourmarket,e.g.,wereunemployedforlongperiodsoftime.Unfortunately
badluckishardtodistinguishfromachoicenottowork.However,thegovernmentshould
guaranteeaminimumbasicpensionpayablestartingat6568toanyonewhohasworked
foraminimumnumberofyears,e.g.,1015.Bycarefullycalculatingtheamountofthispensionandtheageatwhichitwillbepayable,incentivestoworkcanbepreserved.
Afundedsystemmustincludesomedegreeofprotectionnotonlyagainstadverse
outcomesinthelabourmarket,butalsointhecapitalmarket.Thisisbecausethemoney
heldinretirementaccountsisinvestedinfinancialassets,whosepricescandrop.Individuals
canprotectthemselvesagainstsuchdropsbyholdingwelldiversifiedportfolios,andby
investinginbonds,whicharesaferthanstocks.Atthesametime,thegovernmentcould
reinforcethisbehaviourbyrestrictingindividualschoicestoasetofwelldiversified
portfolios,andrequiringthattheallocationtobondsexceedsaminimumlevel,whichincreaseswithage.Thegovernmentcouldalsoimposeacaponallowablereturnssoasto
fundaminimumreturn.Forexample,thecapcouldbe6%,andanyexcessreturnscouldbe
savedinanindependenttrustfundtopayforthepensionsofthoseagecohortswho
achievemuchlowerreturns.
MostOECDcountriesaremovingtowardsfundedsystemswithcharacteristicssimilarto
thosedescribedabove.Suchreformsinvolvedelicatetransitionissuesbecausetheyimpose
largeburdensonthosecurrentlyemployed,whomustsavefortheirownpensionsin
additiontopayingforthosecurrentlyretired.Despitetheseissues,webelievethatmoving
towardsafundedsystemwithelementsofsocialinsuranceistherightdirectionforfuture
pensionreforminGreece.
3.Competitiveness Whyiscompetitivenessimportant?Competitivenessiswhatallowsacountryto
enjoyprosperityonasustainablebasis.Duringthe2000s,theaverageincomeof
Greekcitizensrosesignificantly.Thisrisewasunsustainable,however,becauseit
wasfinancedbyexternalborrowing.NowthatGreececannolongerborrow,it
facesthe
risk
that
the
process
will
run
in
reverse,
i.e.,
incomes
will
shrink.
The
only
Fallacyno3:Thestatemustbethemainproviderofpensions. Basingpensionson
individualsavingsallowsindividualstheflexibilityofwhentoretireandhowmuchto
savetofundthisretirement.Italsoremovesapotentialburdenonthepublicfinances,
aswellasaninstrumentthatpoliticianscanusetomanipulatetheelectoratesaffections.Byasuitabledesign,riskscanbeminimisedandtheunluckypoorcanalsobe
supported.
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waytoavoidthis,andtoensurethatincomescanriseonasustainablebasis,isto
raisethecompetitivenessoftheGreekeconomywhichcurrentlyisthesecond
lowestamongthe27countriesoftheEuropeanUnion.
HowcantheGreekeconomybemademorecompetitive?Thegovernmentshouldprovideastableinstitutionalframeworkthatpromotescompetition,investment
andentrepreneurship.Thisinvolvesnotasmuchcreatingnewregulationsas
abolishingmanyexistingones.Acomprehensiveregulatoryreformalonecanraise
thecompetitivenessoftheGreekeconomyandultimatelytheincomesofGreek
citizensbymorethan15%,thusreversingmostofthenegativeeffectsthatthe
crisisishavingonincomes.Thegovernmentcanfurtherraisecompetitivenessby
increasingitsinvestmentintheeducationandhumancapitalofGreekcitizens.
Whatkeyreformsareneededintheproductmarket?Regulationsthatprevententry
into
many
industries
and
professions
should
be
abolished.
Abolishing
such
regulationswillpromoteinvestmentmuchmoreeffectivelythanthrough
investmentsubsidies.Monopolypracticesshouldbeprosecutedmorevigorously
andtheCompetitionCommissionshouldbestrengthened.
Whatkeyreformsareneededinthelabourmarket?Regulationsthatmakeitdifficultforfirmstofireworkersshouldbeloosened.Thiswillultimatelybenefit
workersbecauseGreecewillattractmoreinvestmentandwellpayingjobs.
Mobilityofworkersacrossfirmsandindustriesisasignofahealthyeconomy,but
mobilityin
Greece
is
the
lowest
in
the
OECD.
Whyiscompetitivenessimportant?ForGreekcitizenstohaveaccesstowellpayingjobsand
highincomes,andthistohappenonasustainablebasis,itisnecessarythattheeconomyis
competitive.Iftheeconomyisnotcompetitiveandyetincomesarehigh,thismustbe
becausemoneyisflowinginfromabroadintheformoftransfers(e.g.,fromtheEU)or
externalborrowing.Inbothcases,thehighincomesareunsustainable:EUtransfersdonot
lastforever,andexternalborrowingcomesattheexpenseoflowincomesinthefuture.
Greecesperformanceduringthelastdecadeillustratestheimportanceofcompetitiveness.
Table10reportstheaveragegrowthofrealGDPduring20008,thechangein
unemploymentduringthatperiod,andGreecescompetitivenessin2002and2008.Real
GDPisGDPadjustedforinflation,i.e.,asifpricesin2008werethesameasin2000.
CompetitivenessismeasuredbythenumberofEU27countrieswhoseWorldEconomic
ForumindexofcompetitivenessisabovethatofGreece.
Table10:Growthandcompetitivenessduringthe2000s(Source:Eurostat,OECD,WEF)
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Averagegrowth
ofrealGDP,
20008
Changein
unemployment,
20008
Competitiveness
rankamong
EU27countries
in2002
Competitiveness
rankamong
EU27countries
in2008
Greece 3.9% 4.0 17 26
EU27average 2.0% 2.2 14 14
During20008,GreecegrewitsGDPtwiceasfastastheEU27average,andreducedits
unemploymentratebytwiceasmuch.Thehighgrowthtranslatedintohighincomes:
incomesgrewfasterinGreecethaninmostotherEUcountries.Yet,thisgrowthwas
unsustainableasbecamepainfullyevidentduringthecurrentcrisisbecauseitwasnot
drivenbyimprovementsincompetitiveness.Indeed,Greecescompetitiveness,whichwas
alreadyamongthelowestintheEUatthebeginningofthelastdecade,decreasedeven
furtherduringthatdecade.Forexample,in2002,therewereeightEU27countrieslesscompetitivethanGreece,andin2008therewasonlyone(Bulgaria).
Growthandjobcreationduring20008weremainlydrivenbythemoneythatthe
governmentwasborrowingfromabroadandpumpingintotheeconomy.Forexample,the
governmentspentsomeofthemoneyonpublicinfrastructure,causingactivitytoincrease
andjobstobecreatedintheconstructionsector.Growthandjobcreationpropagated
throughouttheeconomy,asthosewhoseincomesincreasedspentmoreonothergoods
andservices.Forexample,thoseworkingintheconstructionsectorcouldspendmoreon
holidays,causingactivitytoincreaseandjobstobecreatedinthetourismsector,andsoon.
ExternalborrowingisnolongerpossibleforGreece;Greecemustinsteadpaybackitsdebt.
Thisraisesthealarmingprospectthattheprocessdescribedinthepreviousparagraphwill
runinreverse,i.e.,jobsandincomeswillshrinkovermanyyearstocome.Negativegrowth
hasalreadybegun:forexample,realGDPshrunkin2009.
TheonlywaytoavoidaprotractedcrisisinGreeceandtoensurethatincomescanriseona
sustainablebasisistomaketheeconomymorecompetitive.ThebrightsideaboutGreeces
abysmallylowcompetitivenessisthatthereismuchroomforimprovement,andsohigh
potentialforgrowthandprosperity.Wenextexplainhowthispotentialcanberealized.
HowcantheGreekeconomybemademorecompetitive?Aneconomyiscompetitiveifits
firmsandworkerscanachieveahighlevelofproductivity.Whenproductivityishigh,jobs
paywellandincomesarehigh.Moreover,theeconomycanattractinvestmentbyforeign
firms,whichcreatesmorejobsandfurtherraisesincomes.
Themaindeterminantofcompetitivenessisthesetofrulesthatgoverntheoperationof
markets.Theserulesshouldpromotecompetition,investmentandentrepreneurship.Rules
thatarewelldesignedandenforcedvigorouslycanmakeacountrycompetitiveand
prosperous.
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Greeceslowcompetitivenessisnotduetoalackofrules.Indeed,theGreekeconomyis
oneofthemostheavilyregulated(i.e.,tightlycontrolledbythestate)intheOECD:the
product(i.e.,goodsandservices)marketisthemostheavilyregulatedofall30OECD
countries,andthelabourmarketisthefifthmostregulated(OECDproductmarket
regulationindicators2008,OECDemploymentprotectionindicators2008).Manyoftheregulationscreateseriousobstaclesforcompetition,investmentandentrepreneurship,and
shouldbeabolished.Atthesametime,thefewregulationsthatpromotethegood
operationofmarketsarenotenforcedvigorouslyenough.Thatshouldchangeaswell.
BecausetheGreekeconomyisheavilyandinefficientlyregulated,therearelargebenefitsto
reapfromregulatoryreform.AccordingtotheOECD(ScarpettaandTressel2002)a
comprehensiveregulatoryreformalonecanraisethecompetitivenessoftheGreek
economyandultimatelytheincomesofGreekcitizensbymorethan15%.Thiscan
reversemostofthenegativeeffectsthatthecrisisishavingonincomes.
Ifregulatoryreformcanyieldlargebenefits,whyhasntitmaterializedyettoasignificant
extent?Onereasonisthepoliticalpressurebyminoritygroupswhowouldstandtolose
fromspecificreforms.Forexample,regulationsthatprevententryintoanindustryor
profession,andsoimpaircompetition,benefitthefirmsinthatindustryorthemembersof
thatprofessionbecausetheyenablethemtochargehighprices.Therefore,theindustryor
professionrepresentativeslobbypoliticianstomaintainsuchregulations.
Anadditionalreasonwhyregulatoryreformhasnotbeenhighuponthepoliticalagendais
thatthegeneralpublichasnotfullygraspeditsbenefits.Indeed,thereisawidelyheldbeliefthatmarketsshouldbeheavilyregulatedbecausetheyproduceundesirableoutcomeswhen
lefttooperatemorefreely.Thisbeliefispartlyjustifiedgiventhepublicsexperience:
marketliberalizationinGreecehasoftenresultedinhigherprices.Atthesametime,the
beliefiserroneousbecausemarketsweremadefreeonlynominallybutnotinsubstance:
regulationspreventingentrybynewfirmswereleftinplaceand``freedompertainedonly
totheabilityoftheexistingfirmstoraisetheirprices.Notsurprisingly,pricesincreased,and
thisreinforcedthepublicssuspicionoffreemarkets.Hadinsteadentrybeenliberalizedat
thesametimeasprices,priceswouldhavedecreased,andmarketliberalizationwouldhave
benefitedthepublic.
Fallacyno4:Pricesofmanygoodsareaffordableonlybecausethegovernmentis
imposingpriceceilings;ifmarketsareliberalized,priceswillgoup.Marketsaretruly
liberalizedwhenregulatoryobstaclestoentryareremoved.Suchobstaclesareimposed
bythegovernment,oftenbecauseofpoliticalpressurebyincumbentfirmsandother
vestedinterests.Removingtheminducesentry,andthisresultsinlowpriceswithoutthe
needtoimposepriceceilings. Regulationsthatcontroldirectlythelevelofpricesshould
beusedsparingly,whenthemarketistoosmalltosustainmanyfirms.
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Inadditiontosoundrulesgoverningtheoperationofmarkets,competitivenessrequiresa
highlyeducatedworkforce:thismakesexistingfirmsmoreproductiveandhelpsattractnew
firms,especiallythoseengagedinhightechnologyandhighgrowthactivities. Aswe
showedinSection2,Greecemustperformbetterintheareaofeducation:bothby
allocatingmoreresourcestoitandbyensuringthatresourcesareusedmoreproductively.Itshouldalsoinvestmoreinresearchanddevelopment(R&D),anareawhichcurrently
receivesveryfewresources.Forexample,Greeceinvestedonly0.6%ofitsGDPinR&Din
2007.Theaverageacrossthe30OECDcountrieswas2%,withGreecescoringthethird
lowest.
Improvementsineducationwillnotbearmuchfruitunlesstheyarecombinedwith
regulatoryreformthatmakesiteasierforfirmstooperateinGreece.Indeed,intheabsence
ofregulatoryreform,hightechnologyandhighgrowthfirmswillnotcometoGreece,but
insteadeducatedGreekswillmigrateabroad.Becauseregulatoryreformwillinducesuchfirmstocome,itwillnotonlystemGreecesbraindrain,butwillalsoinduceeducated
Greekswhomigratedabroadbecauseofbetterjobopportunitiestoreturnhome.
Whatkeyreformsareneededintheproductmarket?Onekeyreformistoreduce
drasticallytheregulatoryobstaclesthatprevententryintomanyindustriesandprofessions.
Reducingthesesocalledbarrierstoentrymakesaneconomymorecompetitivefortwo
reasons.First,thenewfirmsenteringanindustrymightbemoreproductivethanthe
existingonesbecausetheyhavebettertechnologiesorideas.Thisraisesindustrywide
productivity.Second,evenifthenewfirmsareequallyproductiveastheexistingones,
competitionbecomesmoreintensebecausetherearemorefirms.Thislowersprices,and
benefitsfirmsinotherindustriesthatuseasinputtheoutputofthatindustry.Thecostsof
thesefirmsdecreaseandtheirproductivityincreases.
Tomakethingsmoreconcrete,weuseanexamplethathasbeeninthenewsrecently:road
transportation.Firmsthatwanttoenterthisindustryarecurrentlyrequiredtopayahigh
licencefee,whichcanbeupto200000Eurospertruck.Reducingthisbarriertoentrywill
enablemorefirmstoenterintotheindustryandwilllowerprices.Lowerpriceswill,inturn,
raisetheproductivityoffirmsinotherindustriesthatdependonroadtransportation,e.g.,
agriculture,construction,etc.Forexample,iffarmerscantransporttheirproductsmore
cheaplyandtomoredestinations,theywillhaveanincentivetoproducemoreandtoinvest
inmoreefficientproductionmethods.Theproductivitygainsarelarge:accordingtoIOBE
(2007),eliminatingthelicencefee,andsoliberalizingroadtransportation,willlower
transportationpricesby20%andraiseGreecesGDPby0.5%.
ThegainsinGDPachievedbyliberalizingroadtransportationwilltranslatetoahigherreal
incomefortheaveragecitizen.Indeed,citizenswillpaylowerpricesiftheyneedtomove
homesandtransporttheirbelongings.Theywillalsopaylowerpricesforgoodsthatdepend
onroadtransportation,suchasagriculturalproducts.Finally,jobswillbecreatedandincomeswillriseinindustriesthatdependonroadtransportation.Ofcourse,noteverybody
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willbenefit:holdersoftransportationlicenceswilllose.Theselosses,however,willbemuch
smallerthanthegainsforeveryoneelse,andcouldbecompensatedtosomeextentbya
timelimitedtaxcredit.Losseswilladditionallybecompensatedbythefactthatholdersof
transportationlicenceswillbenefit,asconsumers,fromthelowerpricesachievedby
reducingentrybarriersintootherindustries.
Regulatorybarrierstoentrycantakemanyforms.Someareduetoregulationsthatlimit
entryexplicitly,asinthecaseofroadtransportation.Suchregulationshavebeenabolished
insomeindustriesduringthelastdecade,partlybecauseofpressurebytheEuropean
Union.Thosethatremainshouldalsobeabolished.
Otherbarrierstoentryareduetobureaucratichurdlesthatthegovernmentimposesonall
firmsandcitizens.Forexample,anewfirmthatwantstobuildafactorymustobtainan
arrayofpermitsfrommultipleauthorities,whichrequireittomeetmanycomplicatedlegal
requirements.Thisprovidesfertilegroundforcorruption.Indeed,afirmhasanincentiveto
bribecorruptpublicservantssotogetaroundthebureaucratichurdlesandenteran
industry.Andexistingfirmsintheindustryhaveanincentivetobribesothatentrycanbe
prevented.
Reducingthebureaucraticbarrierstoentryrequiressimplifyingandclarifyingthe
institutionalframeworkwhichgovernstheestablishmentandoperationoffirms.For
example,theabsenceofclearzoninglawscreatescomplexityandambiguityforobtaininga
permitbytheurbanplanningoffice,andisasourceofcorruption;thisshouldchange.A
simpleandtransparentinstitutionalframeworkwillnotonlyencourageentryandinvestment,butalsoreducecorruptioninthepublicsectorasweemphasizedinSection2.
Moreover,thebeneficialeffectoninvestmentwillbemuchlargerthanthatofdirect
investmentsubsidies,whicharealsosubjecttofavouritismandcorruption.
Thebureaucraticbarrierstoentryareespeciallyimportantforforeignfirms,whicharenot
familiarwithGreeklawsandculture.Andindeed,foreigndirectinvestmentinGreeceis
extremelylow:between2003and2008itwasonly1%ofGDP.Theaverageacrossthe30
OECDcountrieswas4.1%,withGreecescoringthefourthlowest.
Fallacyno5:Thebestrecipeforgrowthisforthegovernment toidentifypromising
industrysectorsandsubsidizeinvestmentinthem.Moreoftenthannot,investment
subsidiesendupinthepocketsofpoliticalfriendsandarewasted.Thosebestqualifiedto
determinepromisingindustrysectorsarenotpublicservantsbutprivateentrepreneurs
whoinvesttheirownmoney.Thebestthatthegovernmentcandoistoprovideasimple
andstableinstitutionalframeworkinwhichfirmscanoperatewhichinthecaseof
Greecemeansdismantlingmanyoftheexistingregulationsandensuringthatthefew
whichareusefulareenforcedvigorously.
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Eveniftherewerenoregulatorybarrierstoentry,someindustriescouldsupportonlya
smallnumberoffirmsbecausethesizeofthemarketissmallrelativetothesizeatwhich
firmscanoperateprofitably.Forexample,therearefewerairlinesthanroadtransportation
firmsbecausetheformercanoperateprofitablyonlyatalargesize.Anindustrythatcan
supportonlyasmallnumberoffirmsispronetomonopolypractices,e.g.,firmsformacartelandchargehighpricestoconsumers.Regulationinsuchindustriesshouldaimto
monitorandprosecutemonopolypractices.InGreece,thisactivityisperformedbythe
HellenicCompetitionCommission(HCC).WhiletheHCChasmadesomestepsforwardinthe
lastdecade,itlagsinefficiencyrelativetoitscounterpartsinotherOECDcountries.Firms
thatengageinmonopolypracticesareoftennotprosecuted,whilefirmsthatdonotengage
insuchpracticesareoccasionallyprosecutedbecauseofpoliticalorotherconsiderations.
TheHCCshouldstrivetoimplementthelawinatransparentandconsistentmannerthat
adherestothebestpracticesintheEU.Thiswillyieldsignificantbenefits:priceswill
decreaseinmanyindustries,andeconomywideemploymentandproductivitywillincrease.
TheHCCshouldbestrengthenedintermsofhumanresources,independencefromthe
governmentandaccountability.
Whatkeyreformsareneededinthelabourmarket?Onekeyreformistoloosenthe
regulationsthatmakeitdifficultforfirmstofireworkers.Themainsuchregulationsconcern
severancepaymentsthatfirmsmustmaketoworkerswhotheyfire,andlimitsonthe
numberofworkersthatfirmscanfireinanygivenmonth.Areformthatlowersseverance
paymentsandraiseslimitsoncollectivedismissalshasrecentlybeenvotedthrough
Parliament.Itgoesintherightdirection,althoughtheregulationsshouldbeloosenedevenfurther.
Reducingfirmsfiringcostsisinthebestinterestnotonlyoffirmsbutalsoofworkers:this
mayappearsurprising,butistrueasweexplainbelow.Butfirst,itisusefultoclarifyfor
whichworkersfiringregulationsshouldbeloosened.Greecehasalargeinformaleconomy,
whichaccountsfor2530%ofGDP(Katsios2006)andwhereemploymentprotectionis
minimalinparticular,firingisunregulated.Theseworkersshouldbebroughtintothe
formaleconomyandprovidedwithemploymentprotection.Additionally,firingregulations
forbluecollarworkersaremuchlooserthanforwhitecollar.Firingregulationsshouldbe
thesameforallworkers,andthisshouldbeaccomplishedbylooseningthoseforwhite
collar.
Howcanreducingfirmsfiringcostsbenefitworkers?First,firmswillbebetterableto
surviveadownturnandmoreeagertohireagainwhenbusinesspicksup.Indeed,afirm
thatisunabletoreducesharplyitsworkforceinadownturnfaceslargecostsandpossibly
evenbankruptcy.Lowfiringcostscanpreventbankruptcy,andsoallowatleastsome
workerstokeeptheirjobs.Moreover,lowfiringcostswillmakethefirmmoreeagertohire
againwhenbusinesspicksupbecauseitknowsthatitcanreduceitsworkforcemoreeasily
inthenextdownturn.
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Perhapsthemainbenefitoflowfiringcostsandofflexiblelabourmarketsingeneral is
thattheyattractmoreinvestment,includingbyforeignfirms.Asalreadyemphasized,
foreigndirectinvestmentinGreeceisverylowbecauseforeignfirmsarereluctanttoenter
intoGreecesheavilyregulatedmarket.Makingthelabourmarketmoreflexible,together
withtheadditionalreformsdiscussedearlier,willbringmoreinvestmentandwellpayingjobs.
Finally,lowfiringcosts(andlighterregulationsingeneral)willbringmoreactivityfromthe
informaltotheformaleconomy:onereasonwhyactivitybecomesinformalisthehigh
regulatoryburden.Thebeneficialconsequenceswillbethatworkersintheinformal
economywillreceiveemploymentprotection,andthegovernmentwillcollectmoremoney
intaxesandsocialcontributions.
Areformthatlowersfiringcostswillgeneratesomelosersintheshortrun:theworkerswho
willlosetheirjobsasaconsequence. Butoncethereformprocessiswellunderwayandthe
Greekeconomypicksup,everybodywillbenefitasmoreandbetterpaidjobswillbecome
available.Thosecurrentlyunemployed,adisproportionatefractionofwhomareyoung,will
particularlybenefitsincetheywillbeabletofindjobsmoreeasily.Opposinglabourmarket
reformservesonlytoprotecttheshortruninterestsofonlyafractionofemployedworkers
(whitecollar),withoutregardtotheremainingworkersandtheunemployedandwithout
regardtothelongrunbenefitsthatthereformwillbringtoallworkers.
Somehavearguedthatreducingfiringcostsisirrelevantbecausetheseaffectonlylarge
firms,whicharenotprevalentinGreece.Forexample,firmswithfewerthantenemployees
arenotsubjecttoanylimitsoncollectivedismissals,andtheyconstitute98%ofallGreekfirms.Thisargument,however,servesonlytoreinforceourpoint:oneofthereasonswhy
Greecedoesnothavelargeanddynamicfirmsisbecauseofitsstrictlabourmarket
regulations,whichdiscourageforeigndirectinvestment.Looseningtheseregulationswill
affectnotasmuchthefirmsthatGreececurrentlyhas,asthosethatitdoesnothaveand
shouldaspiretohave.
Fallacyno6:Regulationsthatrestrictseverelyfirmsabilitytofireworkersaregood
forworkers.Tightfiringregulationsdiscouragejobcreationbecauseofthepotential
costsofadjustingtheworkforceinadownturn.Youth,whoareinexperiencedand
untried,areparticularvictimsofsuchpoliciesasevidencedbythehugeyouth
unemploymentratesinGreeceandothercountrieswithtightlabourmarketregulations,
suchasFranceandSpain.
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Asecondkeyreformistodecentralizelabournegotiationstothelevelofindividualfirms.
Wagesandworkingconditionsarecurrentlyagreedonatthenationalorindustrylevel,and
firmsarerequiredtoconformtotheagreementswhetherornottheyarerepresentedin
thenegotiations.Manyissues,however,shouldbeleftfornegotiationbetweenindividual
firmsandtheirworkers.Thisisbecausedifferentfirmsfacedifferentmarketenvironments,andrequiringthattheyallofferthesamewagesorworkingconditionsdamagestheir
productivity.Forexample,afirmforwhichovertimeworkisvaluablecouldnegotiatea
lowercompensationforovertimewithitsworkersinexchangeforahigheroverallwage.
Suchflexibilityisnotavailableinthecurrentsystem.Werecommendthatnegotiationsat
thenationalorindustrylevelconcernonlyminimumlevelsofwagesandworking
conditions,leavingsignificantroomfortopupstobenegotiatedatthefirmlevel.
Aflexiblelabourmarketshouldbeaccompaniedbyawelldevelopedunemployment
insurancesystem.Greecehasreliedonfirmstoinsureworkersagainstunemployment,
throughseverancepaymentsandotherrestrictionsonfiring.Thisisinefficientforthe
reasonsdiscussedearlier.Unemploymentinsuranceshouldinsteadbeprovidedbythe
government,andinawaytoavoidmoralhazard,i.e.,makeunemploymenttooattractivean
option.Werecommendamoderncontributoryunemploymentinsurancesystem.Insucha
systemabasiccomponentcomesfromthegeneraltaxpayerandanadditionalcomponentis
tiedtoindividualcontributions.Individualscanaccumulatecontributionsinan
unemploymentfund,whichtheycanrundownduringspellsofunemployment.Thissolves
theinsuranceproblemandatthesametimekeepsmoralhazardtoaminimumbylinking
theamountofunemploymentbenefitstothelevelofcontributions;thissoundslike
compulsorysavings,whichitis.Thepointispreciselymoralhazard,becauseifindividuals
knowthatthegovernmentwillpickupthebillwhentheyareunemployedtheywillnotsave
enough.
ConclusionTheeconomicpoliciesofthelastthreedecadeshavebroughtGreececlosetobankruptcy.
Reformsthatothercountriesundertookmanyyearsagowerepostponedoverandoveragain,leavingGreecewithanunproductivepublicsector,anunfairandinefficienttax
Fallacyno7:Tightlabourmarketregulationsdonotmatteriftheeconomyhasa
vibrantinformalsector,wheretheseregulationscanbecircumvented.Firmsinthe
informaleconomyaretypicallysmallandinlowvalueaddedsectors.Largefirms,which
aretypicallyinhighvalueaddedsectors,cannotoperateintheinformaleconomy.Tight
labourmarketregulations(andtightregulationsingeneral)discouragethecreationof
largefirms,thussubsidizinglowvalueaddedsectorsandlowskilllabourattheexpense
ofhighvalueaddedsectorsandhighskilllabour.
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collectionsystem,anunsustainablepensionsystem,andaheavilyregulatedeconomy
whosecompetitivenessislowanddeclining.
ThelackofreformshasbeenespeciallycostlyforGreecesyoung.Theeducationthatthe
stateisprovidingthemwithlagsrelativetointernationalstandards.Oncetheyfinishtheir
studies,theyfindithardtoenterthelabourmarketbecausestrictregulationsdiscourage
firmsfrominvestingandcreatingjobs.Whentheyoungwilleventuallyfindjobs,theirtaxes
willbehightorepaythedebtthatpreviousgovernmentshaveaccumulated,andsowill
theirsocialcontributionstopayforGreecesgenerouspensions.UnlessGreecereformsits
economyrapidly,itrunstheriskthatthatmanyofitsyoung(andespeciallythemost
creativeandentrepreneurialones)willmigrateabroad.
ThebrightsideaboutGreecescurrentsituationisthatmuchimprovementispossible.
Indeed,thereexistsaclearpathofreformsthatcanhelpGreecerecovermuchofthelost
ground.ThereformsagreedbetweenGreeceanditslendersgointherightdirection,and
shouldbesupported:forexample,thereformsrecentlyvotedthroughParliament
concerningthepensionsystemandthelabourmarketarenecessaryandoverdue.This
articleexplainswhysuchreformsarenecessary,andoutlinesabroaderlongrunreform
programmefortheGreekeconomy
Thereformsoutlinedinthisarticlewillbenefittheeconomyandraisetheincomeofthe
averagecitizen.Atthesametime,aminoritywilllosefromeachreform.Forexample,
loweringregulatorybarrierstoentryintoanindustrywillbenefitconsumersandwill
increaseemployment,butwillhurtexistingfirmsintheindustry.Thosewholosefromonereform,however,willbenefitfrommanyothers,andonceenoughreformsareimplemented
almosteverybodywillhavegained.Reapingthesegainsrequiresthatreformsare
implementedsuccessfullyandwithoutdelay.
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