economic crisis in greece - a time of reform and opportunity

8/3/2019 Economic Crisis in Greece - A Time of Reform and Opportunity

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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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13

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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14

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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15

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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16

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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17

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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18

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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21

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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22

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.

ReferencesCabral,R.(2010),ThePIGSExternalDebtProblem,VoxEU.org,8May.

Flevotomou,M.andM.Matsanganis(2010),DistributionalImplicationsofTaxEvasionin

Greece,LSEHellenicObservatoryWorkingPaper.

Katsios,S.(2006),TheShadowEconomyandCorruptioninGreece,SouthEasternEurope

JournalofEconomics,1:6180.

OECD(2006),AgeingandEmploymentPolicies,Paris.

OECD(2009a),HighlightsfromEducationataGlance,Paris.

OECD(2009b),OECDEconomicSurvey:Greece,Paris.


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OECD(2009c),PensionsataGlance,Paris.

OECD(2009d),TaxingWages,Paris.

Rapanos,V.(2009), ,

FoundationforEconomic&IndustrialResearch()WorkingPaper.

Scarpetta,S.andT.Tressel(2002),ProductivityandConvergenceinaPanelofOECD

Industries:DoRegulationsandInstitutionsMatter?OECDEconomicsDepartmentWorking

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economic crisis in greece - a time of reform and opportunity

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