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Michael G. Jacobides

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A Uniquely Greek Tragedy

Posted: 05/11/2012 6:07 pm

As the debt crisis in Europe continues to unravel, a better understanding of what really caused the crisis and how it should be resolved is starting to emerge. Analysts initially focused on the similarities between Portugal, Ireland, Italy, Greece and Spain -- lumping them together under the unflattering "PIIGS" acronym. Yet as events have unfolded, it has become increasingly clear that each country has a very different set of problems. Nowhere has this been more evident than in Greece.

This weekend, Greek voters have a unique opportunity to show that the cradle of democracy has come of age. Many now agree that the Greek problem is idiosyncratic, yet it has been treated as an "ordinary" case of macro-economic imbalance. Expenditures vastly exceeding fiscal receipts and an inefficient public administration are rightly seen as the kernel of the problem, and Greece has been pushed to restore fiscal balance.

But there is much more to the Greek crisis than this. The true underlying issues are a crumbling public administration and a political system where a few beneficiaries distort economic flows in the country, stifling development and depleting state resources.

The True Tragedy

While such structural problems have been noted for a while, their magnitude seems to have been underestimated. The true Greek tragedy is that a country that could potentially be on a solid growth trajectory is instead facing chaos because of the way the public sector (and its associated political system) interferes with the use of public resources. The press has been part and parcel of this corrupt system, impeding the understanding that would help resolve the issue. More consequentially, it has proved convenient for the stakeholders in the crisis -- in particular the European Union -- to avoid confronting the real nature of the problem. Doing so would require the sort of far-sighted action and pragmatic leadership that is -- perhaps understandably -- lacking from politicians concerned with re-election and administrative units vying for relative power.

As a result, kicking the can down the road has become the de facto solution, in the hope that things get better. The EU and the IMF have been treating a cancer with patches and aspirin. They have been busy addressing symptoms of the sickness, without daring to address the underlying cause. The EU task force, for one, has neither the skills nor the mandate to engage in the massive change management needed. So for all its short-term risks, it's time the Greek electorate addressed the problem head-on, confronting the state-induced sclerosis and sending a message to populist politicians from the left and the right alike.

The problem in Greece is three-fold. First, the public sector has proven to be a woeful manager of its own resources. The Greek public administration lacks accountability as well as a stable backbone of senior civil servants. It relies on formalistic rules to guide every step of the operation of public administration, as opposed to focusing on how it can substantively serve its purpose. These personnel issues, along with poor information and management systems (or data of any sort), mean that the public output related to expenditure is disappointing.

Serious problems exist at the top of the structure. The political system is highly influential and self-serving; its beneficiaries are able to carve out excessively compensated positions within the broad public sector, which means diverting funds from where the need exists. One such need, not surprisingly, is the growing number of Greeks living below the poverty line, as well as increasing criminality. Finally, an extremely important problem in Greece is tax avoidance -- Greece has only 30 percent of its GDP as tax receipts; the EU average is 37 percent. The inability to tax fairly has hit not only public finances, but has also created a sense of unease and social discomfort with taxation, especially under conditions of duress.

Second, the interface between the private and the public sector has seriously skewed the productive tissue in Greece. The Greek state has been a purchaser of services for construction, armaments, technology, and more mundane goods and services. Side-payments are often inherent to such procurement, as the scandal with PASOK's former strong man Akis Tsochatzopoulos, now behind bars, showed. Exposed to a corrupt system, many Greeks have shown initiative, adaptability and drive, but, sadly, this has further increased the incidence of corruption. Entrepreneurial drive and corruption have created a vicious circle which is amplified by the political system, but one which is not desired by most Greeks.

Third, the state distorts the functioning of the private sector. "Closed" or regulated professions which have given birth to local monopolies; a loose competition policy which does not really promote competition; and most importantly, a bewildering set of regulations, all deter entrepreneurial activity and private investment. Capricious taxation and unpredictable authorities add to the problem of a malfunctioning justice system, with long delays and inefficient procedures. All of this means that reduced Greek labour costs have yet to translate into reduced prices and productive investment has all but stopped.

To tackle the Greek problem, the underlying causes, as opposed to the symptoms alone, need to be treated. Unless Greek voters have the courage to grasp the uncomfortable nettle of political reform, they are likely to receive more of the same.