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Elena Panaritis

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What's Next?

Posted: 02/27/2012 12:54 pm

With the economy on life support, Greece is making Herculean attempts to maintain vital functions so that no one pulls the plug.

The country's interim governing coalition managed to survive negotiations in Brussels and secure a new 130-million-euro bailout. It also got a hated IMF-EU memorandum passed through parliament, despite violent protests.

It would seem that things can only get easier, right?

Well, if only it were that easy. The hardest part is trying to get parliament to put through 3.2 billion euros' worth of additional budget cuts targeting pensions, healthcare and education. As many as 150,000 public sector layoffs are also on the cards. So is a 22 percent cut to minimum wage.

And, more importantly, Greece is going to have to address the underlying causes of the country's economic crisis.

It's time we all go back to the basics.

The solution requires radical and comprehensive structural reforms that will organise the correct incentives to rebuild the rickety foundations of Greece's productivity. There is an urgent need to speed up the structural changes. It is also necessary to develop a fresh foundation from where we can clearly outline the rules of the game and ensure the smooth and worthwhile transition from the informal to the formal economy.

One example is the creation of a simple and fair taxation system. This will radically decrease incentives to cheat. Another example is to simplify the land registry procedure.

So, why isn't all this being done?

Up until now, our priority has been to put through fiscal austerity measures and not structural reforms.

The crisis has been addressed from the top down. We have been passing laws that need time for their implementation. Despite being the 28th richest nation in the world, Greece is suffering from an unproductive, uncompetitive and grossly inefficient capital base, making deeper the solvency crisis we are really facing.

While countries across Europe (except Germany) also lose their competitive edge (vis a vis up and coming China and India), the problems are more pronounced in Greece.

For many years, a series of structural problems have contributed to a low level of productivity in the Greek economy. There are still barriers obstructing the entry and exit from a given market, especially in the traditional sectors of tourism, agriculture and energy.

And all the while, Greece is juggling with two economies: the formal and informal. The latter is a necessary evil and it is not necessarily illegal.

In fact, Greece's economy is characteristic of a large and growing informal sector -- a high level of activity that steers clear of the cumbersome bureaucracy and the unpredictability of extralegal procedures, rules and regulations, as well as overregulation.

This informal activity (also known as informality) is an "unmeasurable" component in the formal GDP.

In Greece, the informal labor sector currently represents close to 50 percent of the country's potential workforce. It is the result of high labor costs and rigid labor market (labor costs include both direct and indirect ones such as labor taxes covered by both employees and employers, social security, burdensome oversights regulations) that make it too expensive to have any incentive to be fully registered per each job. Thus we notice a hybrid version of semi-registered employees. This makes the labor market difficult to regulate and very a source of informality.

Transforming the informal sector, is not an easy task nor a quick task. Usually, there are many vested interest to keep the status quo. Many benefit from the convoluted bureaucracy. Numerous service professionals have thrived over the years by taking advantage of complicated legal prerequisites or formal requirements in various transactions.

Here's another example of what the informal economy looks like in Greece. In the area of property, transactions of any sort involve a long and elaborate maze in which buyers and sellers are required to take 27 different steps and shuffle back and forth between lawyers, notaries and more than a dozen other professionals and agencies -- from the national cadastre, the national registry, the local municipality, the tax office and more. A property sale can take as long as six months to complete from the day the buyer gives the seller a down payment.

It is no wonder the World Bank's latest Doing Business survey of 183 economies ranked Greece 150 -- one of the lowest in Europe -- when it comes to registering property.

But don't think this bureaucratic muddle is unique to Greece. The situation is not that much better in France (149) or Brussels (174). Even Germany, Europe's largest economy, ranks 77 -- nowhere near its neighbors Switzerland (14) and Denmark (11).

Surprised? Don't be. Much of Greece's legislative framework (civil, commercial and land codes) was imported from France and Germany. The French and German civil code was adopted in Greece back in the 19th and early 20th centuries.

Even though these legal tradition forms the backbone of Greece's formal economy, they were never transferred in such a way so as to take reflect the Greek reality.

Back to Greece's solvency crisis

The crisis is very much based on the intractability of bureaucracy -- all this overregulation, the under-regulation and the super-regulation that requires heroic endeavor to deal with.

It has dealt a serious blow to the country's productive capacity.

And, it is why Greece is suffering from a severe inability to boost its capital base. This is its superb human capital -- one that has been historically trapped in a complicated bureaucratic maze. It's something that has created huge inertia, "leakages" of resources and widespread inefficiency in the public sector.

The European economic model is also based on a high level of transaction costs. This has resulted in a gradual drop in economic growth rates in major Eurozone countries since 2002. Economists have been trying to pre-empt this since the 1990s by urging policymakers to reform the rigid labor markets and ease market rigidities.

How to solve the crisis

In the case of Greece, it must embrace a holistic approach to reforms that would be guided by an overall reduction of transaction costs, concentrating in simplifying processes. Simplification would be the best start and maybe go even further:

  • Deeper market deregulation and specialized professions deregulation -- such as notaries and lawyers.

  • Simplification and standardisation of procedures involved in all types of registries (land, intellectual, civil, movable, company registration)

  • Administrative and civil service reform (by rationalizing public agencies and establishing clear control mechanisms)

  • Judicial reform (accelerating litigation procedures)

  • Training the country's political leadership (MPs and civil servants) to apply best practices

Reality check

The reality looks grim and it's staring us right in the face.

It's time to correct the diagnosis of the Greek crisis and make sure it receives the proper treatment.

In my opinion -- as long as we continue to address the Greek crisis as if it were a liquidity problem we will be doomed to fail and informality will keep growing, because the structural problems and the informality are feeding off each other and drastically hurting productivity and eroding the country's GDP.

The clock is ticking. Reforms need to be visibly leading the present and the future of Greece leading the country to a clear vision, a vision to rebuild the competitive edge of the economy and the pride of its people.

Though the results of this national effort will not bear fruit from one day to the next, they will be impressive. With each step we take, with each goal that is realized, with each pledge we keep we will gradually win back the trust of the citizens towards the state and the country's credibility abroad.