Prosperity Unbound

But no matter how many austerity measures Greece implements and how many eurozone summits and meetings are scheduled, the markets remain skeptical.
Investors are nervous. They realize the crisis has been misdiagnosed as a problem of illiquidity.

 
It is not just a problem of illiquidity. Greece is also facing a solvency crisis caused by an inadequate capital base. Yet, current fiscal measures have largely only targeted the symptoms of these structural problems.

 
The government, for example, has worked hard to overhaul the tax system. However, the government’s failure to raise tax revenues signals a more serious problem than a broken tax code.

 
Informality is to blame for Greece’s structural economic problems. It’s the result of excessive red tape and overlapping regulations, an uninviting investment climate, as well as the absence of any well-defined and secure property rights.
The findings of the World Bank’s latest Doing Business survey of 183 economies are quite alarming. Greece’s not-so-friendly business environment is 109th overall. The World Bank ranked Greece 149th for starting a business, 153rd when it comes to registering property and 154th in protecting investors.
But while Greece’s rankings may be low, the country is not unique in terms of the challenges it faces. Many other developed countries, like fellow EU member Spain, also rank near the bottom. Spain is at 147th for starting a business, and France ranks 142nd for registering property.
As regards ease of doing business, Italy ranks 80th and China 79th. Russia places 123rd — only slightly better than Brazil (127th) and India (134rd). While Europe’s trading powerhouse, Germany, ranks 22nd overall, it drops to 88th for paying taxes. This is actually slightly worse than Greece (74th).

 
What’s more, despite the current crisis and the country’s low rankings in important business indicators, Greece is an advanced economy. The country does not face the same problems developing economies face. These include widespread poverty, malnourishment and illiteracy, as well as low levels of human capital, which reduce the ability to develop high levels of capital adequacy.  
 
 
In terms of individual wealth, last year Greece ranked 47th in the world, with a GDP per capita of $29,600. Germany ranked in 33rd place with a per capita GDP of $35,700.

 
And while Greece’s debt/GDP ratios are entirely unsustainable, they are not too far off from those of other advanced economies. According to the Organization for Economic Cooperation and Development (OECD), Greece’s debt/GDP ratio for 2011 (January to May) stands at 157%. Japan’s ratio is at 212%; Italy, Iceland and Ireland are all above 120%; and Portugal, the United States, Belgium and France are around 100%. Germany and the United Kingdom are not too far behind, with both at 88%.

 
The problems facing Greece are illustrative of those afflicting other mature economies, including those in Western Europe and North America. The fundamental difference between Greece and most advanced economies is in degree — and not in kind.

 
Nonetheless, the impediments to economic growth in Greece are quite real. The country’s over-regulated economy is one example of how doing business can be hindered. It’s a situation that stems from the creation of new regulations before the existing ones can be tidied up and harmonized. The costs are financial and economic, direct and indirect, and they serve to hamper investment and economic growth.

 
What’s clear now is that it is necessary to undertake urgent and immediate measures to manage the problem of illiquidity in the near term. But it would be wrong to presume that this will also provide a viable exit from the crisis. This is because the real problem is not one of liquidity, but one of capital adequacy.

 
The solution hinges on successfully reforming the Greek state. We need to simplify judicial services and enforcement of rules and laws, apply quality control on goods and services, eliminate organizations with overlapping mandates and rationalize the public sector.
We must also streamline the process of creating, running and dissolving a business, while encouraging foreign investment.

 
The purpose of reforms should be to boost our capital base, generate growth and make Greece an attractive place for investment. These reforms should focus on Greece’s comparative advantage.  
 
Greece’s main asset is its human capital. The country is also blessed with significant natural resources and boundless potential, especially in the tourism, shipping and renewable energy sectors. Their exploitation, however, also requires a kind of investment and entrepreneurship that can only flourish in a healthy business environment.

 
Consequently, the country’s central strategy should be to capitalize on our bright, capable and creative individuals — all those who do so well when they are outside of the country.
Any effective long-term plan must involve far-reaching and comprehensive reforms that are necessary to guarantee the long-term growth prospects and economic health of the country. In turn, a robust economy will improve the sustainability of the public debt, sending a positive message to creditors.

 
In addition, such measures will improve public opinion of the government’s response to the crisis. Unsurprisingly, the majority of Greek citizens are fully aware of how difficult it is to boost investment and do business in Greece. They are also very much aware of the wider structural problems plaguing the country.

 
This internal public discontent mirrors the poor image of Greece abroad. Greece suffers from a reputation deficit due to a series of statistical revisions of government debt and deficit figures, as well as the failure to honor past promises of reform. All this has undermined Greece’s credibility, especially that of the political parties and politicians.

 
And, perhaps because Greece is a popular summer destination, there is also a prevalent, enduring and damaging image of Greeks as lazy and ungracious recipients of excessive government benefits.
This could not be further from the truth. According to the OECD, Greeks in 2009 worked on average 2,119 hours — much longer than the OECD average of 1,739 hours. Specifically, Greeks worked on average 20% longer than Americans, 36% longer than workers in France and 52% more than the average German worker. Moreover, according to the Center for European Policy Studies, government expenditures on public wages as a percentage of GDP were lower in Greece than in Portugal and France.   
 
Yet Greece has undertaken a stability program to dramatically reduce its public expenditures. It is proceeding with an internal wage reduction. Salaries and pensions have been reduced, and taxes have increased. The unemployment rate has soared to 14.5%, while 7% of full-time workers are getting paid below minimum wage.
With these figures in mind, is it any surprise thousands of Greeks have demonstrated in protest against the new austerity measures? Pushing through such reforms would be unthinkable in any other European country. Let’s not forget what happened in France, where the mere mention of lengthening the 35-hour workweek has caused widespread public unrest, forcing policymakers to backpedal.

 
Amidst these extremely difficult economic conditions and growing public discontent, Greece will continue to push through tough reform measures. Sadly, the international public underestimates the difficulty of such a Herculean endeavor.
Due to past policies and a lack of credibility, Greece’s reputation abroad has been tarnished. If this were not the case, the results of these critical and unprecedented measures would probably be a lot more positive.

 
Evidently, Greece must wage a war on three fronts. The first is to take immediate action to ensure adequate liquidity over the next few years. The second requires us to implement ambitious structural and institutional reforms that will establish capital adequacy and solvency in the longer term. The third is to highlight the enormity of the changes, the painfulness of the adjustment process in the short term and the potential for positive reform that can benefit the country in the long term.
This message must reach the Greek and the international public, as well as important partners such as the eurozone and IMF.

There is a clear need for courageous, ambitious and timely actions on the part of the government.
The impetus for necessary changes must come from within the country itself — both from the Greek government and from the Greek people.

The crisis is a wake-up call. It can provide an opportunity for a complete reversal of the country’s current economic course, fostering sustainable economic growth that is based on productive investments and on taking advantage of the country’s human and natural resources. 

Elena was qutoed in the Guardian by Paul Mason in the provocatively titled piece “Greece Today. Tomorrow Europe’s Gucci-clad Elite” http://www.guardian.co.uk/commentisfree/2011/jun/30/today-greece-gucci-elite-eurozone?CMP=twt_gu

QUOTE: Elena Panaritis, one of the western-educated lawmakers guiding the Greek prime minister, insists the eurozone authorities have played this badly: “Through indecision they turned an issue of long-term structural reform into an issue of short-term insolvency,” she says. As a result the austerity this week cannot in any way be cathartic – nor can it be sold as such, whatever short-term euphoria it has produced in Brussels. We need to deliver a productive economy, with an entrepreneurial culture, that exports. Europe needs to create a quick reaction system.”

Mason argues that “the governance dysfunction we see in Greece is replicated at a higher level in Europe”. He also remarks that Greece’s middle class will find itself extremely vulnerable as the country opens its economy to more competition and free-market liberalism. Losing the middle class politically also jeapordizes support for the larger European Union.

 But air of inevitabilitly surrounds the need for reforms.

Elena was also quoted in ” Breathing space for Greece as reforms pass ” (published in the Brisbanetimes with Gardian News & Media) as saying that ”There’s an American expression – ‘No pain, no gain’ … Unfortunately we have to revise our economic way of doing business.”

This article first appeared in the Globalist on May 13, 2011.

Over the past year, we here in Greece have been going through all of the five stages of grief: denial, anger, bargaining, depression and acceptance.
We woke up to the crisis in denial, came to terms with it, and became angry. Then we started bargaining for our future until we got so depressed we finally had to accept our “new” reality — a reality of recession, high debt and continuous austerity.

Greece is a very old country. Not just an old country, but an old civilization. It wasn’t until the 1830s that the modern Greek state was established, after rebelling and gaining independence from the Ottoman Empire.

This achievement, however, was followed by a series of wars: The 1912-13 Balkan Wars (during which we actually increased our territory), World War I, another war involving Asia Minor in 1921, World War II in 1940, followed by six years of civil war that started in 1946 — and, finally, a conflict in 1974 between Cyprus and Turkey.

The Greek Civil War was fought between a government backed by British and American support and Greek Communists. It was the bloodiest and most devastating war in the history of Greece considering the number of lives lost. The death toll reached nearly 10% of the Greek population.

While we — and the world — have been focused mostly on the political dimension of Greece’s path in the entire post-1945 era, tragically the economic sphere never received similar attention. While still a poor country, Greek leaders sought to protect, and sooth, the war-stricken population by finding alternative ways to help improve their livelihoods. The stage was set for a statist approach to economic policy.

A welfare state emerged, including an automatic, indexed salary schedule instead of annual pay increases based on market indicators (such as productivity). A worker’s base salary would be further adjusted to include subsidies and transfers of all kinds, based on factors such as marital status and number of children. This also included the infamous 13th and 14th monthly salaries.
The resulting lack of economic opportunity and real growth, however, pushed an unprecedented number of Greeks to emigrate to the United States and Australia after the World War II. With one of the highest rates of emigration in the world, remittances soon became the largest component of Greece’s GDP. Greece even established a parliamentary committee for its diaspora to better address their interests.

Also worth noting is the fact that, despite these measures, the average total monthly salary in Greece was still far below the average European Union monthly salary.

Greece’s modern history is marred by conflicting factors: a rapid evolution of the state, economic growth and governance based on legal institutions that were mainly imported. Despite all these problems, I am convinced that Greece can bounce back. And while the path to prosperity may be slow, it is not unrealistic.

Greece has done it before. Let’s not forget the economic miracle achieved by Greece in the early 1970s (when the country boasted an average annual growth rate of 6%). It was a period of unprecedented growth. Inflation was low. Greece’s GDP was growing annually about 8% — the fastest growth rate in Western Europe. Industrial production also expanded at about 10% annually, and manufacturing exports topped agricultural experts for the first time in Greece’s history.
This time around, we will need to spark growth through institutional reforms. The question before us is this: How can we use the current crisis to steer Greece in the right direction?

In the Parliament, we have pushed through some difficult, but very necessary, reforms. They are aimed at freeing up the very rigid labor market of the past. We have also taken actions aimed at rebuilding trust between citizens and the state. These reforms are opening up the so-called “closed professions,” increasing the retirement age, and consolidating wages and pension funds by 2015. We will also restore some key institutions, focusing on property rights and security of title.

We have to rekindle Greeks’ entrepreneurial spirit at home, rather than out of the country. Why is it that Greeks excel far better abroad in countries like Australia and the United States? It’s because these countries provide a friendlier investment environment. We are continuing on the path of reform to deregulate and simplify bureaucracy. I am confident we will see a remarkably strong emergence of local entrepreneurs.

A solution to all the problems can only be found if the formal economy becomes simple, predictable and, therefore, easy to track. Any rules must, at long last, be applied even-handedly, with appropriate pricing of risk and minimal informational asymmetry, which usually benefits those who have accumulated considerable economic power — and thus stifles innovation, risk-taking and entrepreneurship.

For that to happen, however, people first need to understand the underlying risk and the devastating effect of bad rules and processes and inappropriate institutions, and that they not only lead to persistent distortions, but also systematically diminish economic growth.

Greece’s recovery is not a sprint. It’s a marathon and an exercise in building trust between citizen and state.
This is the answer to the country’s problems: Unshackle the chains of the past. Unleash the enterprising spirit. We have just never tried it before — and it’s high time to do so.

Greece’s recovery is not a sprint. It’s a marathon and an exercise in building trust between citizen and state. That makes it all the more worth pursuing and completing.

The 2009 crisis is probably the biggest opportunity in Greece’s modern history to carve out a new path to prosperity.

For that to happen, we need to put through deep institutional reforms. That might, and will, displease the few, but if we don’t do so, we will fail the many — our citizens.

I  just presented the Greek edition of my book “Prosperity Unbound” in Athens yesterday (this is the book’s second non-English translation).  This long awaited release, as most of you know, is of great personal significance. I am really proud to share a small part of my work with the Greek public and to engage them in a larger conversation about the possibility of transformation, as I have lived and experienced it some years ago. It was also terrific to see so many familiar faces in the crowd! Thank you for all of your support!

Each new translation calls for a reinterpretation of the themes outlined in the book. Yesterday’s panelists did a great job of contextualizing the book in the post-financial crisis world, where the need for radical reforms sustained by broad-based impetus is ever more necessary. The reform in Peru reminds us that while political vision is key, collective buy-in and strong alignment of incentives between public, private, and civic parties is fundamental.

I hope I’ve shown that informality does transcend geographical borders and cultural differences.  Greek readers today could draw lessons of hope, determination, and perseverance.  Prosperity Unbound is ultimately about unleashing human potential by ensuring equal rights to physical and intellectual property. As we enter the world of  the “New Economy” innovation, ingenuity, and ideational capital will be the key drivers of growth and development. But before “going long” on entrepreneurship and imagination, let’s make sure that we put in place the right market ‘infrastructure’ to support such transformation.

-EP

Elena Panaritis, institutional economist, social entrepreneur and Greek MP from the ruling Panhellenic Socialist Movement (Pasok) was quoted in the June 29, 2010 article: \”Greece: A marathon to sprint\” (FT article, June 29, 2010),  published in the Financial Times.

In response to the severity of the recently voted reform packages and the necessity to re-institute greater competitiveness in the Greek economy while dismantling vested interests and lowering transaction costs, Ms.Panaritis states:

“In the last six months the Greeks grew up by one century. Before that they didn’t understand the word market.”

In particular liberalization of the currently rigid labor market and opening up of the so-called “closed professions” is expected to add around 13.2 percentage points to Greek’s GDP.

But further reforms are needed. One in particular promises to bring an even greater economic impact, and that is the reform addressing the problem of informality and  property rights. Greece currently has one of the weakest property rights systems in the West.  Denmark, for example, has not been touched at all by the 2008 or 2009 economic crisis and has 0% informality.  Canada, Australia, and New Zealand are also among the countries that have consistently had very well established and enforced property rights systems.

Ms. Panaritis’ work in transforming illiquid property markets suggests high social, economic and even gender-equity returns.

This is probably the best opportunity to set Greece onto a new path to prosperity by conducting deep institutional reforms and not to fail its own citizens.

To read the entire article, visit FT.com: \”Greece: A marathon to sprint\” (FT article, June 29, 2010)

Response to Going the Way of the Greeks, Ottowa Citizen

by Rachel Beach and Elena Panaritis

David Warren’s perspective is one potential perspective on economic crises: Greek is just like every other freely elected government, “gradually assembling financial entitlements which its taxpayers can no longer keep up with”.  It is not the only perspective, and it might not be the most well thought-out perspective.  It’s fairly easy to glance across headlines and declare, “Oh here we go again, another country submerged by overextension of its public resources…”  But Warren’s use of this type of analysis itself is an example of a deeper underlying problem.  It is a tendency to attribute outcomes to the same problem, no matter where a crisis materializes.

It is interesting that Mr. Warren uses history to analyze the economic crisis.  However, his conclusion that Greece’s illnesses are due to a well-deserved history is too simplistic an analysis.  The blaming game is a blind guide.  It is this blaming game – short-sighted and rigorously thin – which has brought us to this point.  It ignores the importance of incentives and their impacts at each break in the historical line of progress of the Greek socio-economic structure.

In Greece, as in the many successful members entering the European Union, governments took a template of government ‘best practice’ legal structure (i.e. the EU acquis), stenciled it over their legal map, cut it out and voila!  These countries imported a sterile set of laws without refitting them to their own socio-cultural-political environment.  Doing so has led to legal confusion and inefficiency in enforcement of laws.

Yet country after country in Europe swallowed the European acquis wholesale without determining how the legal structure fit into their existing laws and regulations, and many joined the common currency area with politicians pushing the advantages and ignoring potentially negative consequences for their economies.  In Greece,when the euro was adopted commodity prices for some goods increased almost 1000%.  Life changed for the average Greek.

The rules may look the same on paper, but the problem is that each country has its own unique set of institutions and bureaucratic structures, each operating by their own internal organizational behavioral and incentive structures that have evolved over decades, even centuries.  To expect each of these bureaucratic agencies will interpret and enforce the new set of regulations – in their way of ‘doing things’ – in the same manner across countries, and within countries is naïve.

Warren claims that the financial ‘crisis will be the same everywhere.’  The crisis is certainly not the same everywhere, and has affected EU member states and economies around the world in different ways.  India and China earned boasting rights for their ability to weather the 2009 international financial crisis with only a slight slow-down in economic growth (i.e. China from roughly 10% growth to 8%, and India from 8% to 6.1%, check).  Most European countries, on the other hand, faced a significant economic slowdown.  Bulgaria, surprisingly, was in a more sound macroeconomic position than many other EU members.  While both Bulgaria and Greece, are reputed within the EU for high levels of corruption, the former had a healthy fiscal cushion to fall back on while the latter suffered as a consequence of negligence.  A comparison of the two in 2008 based on Warren’s analysis would have drawn inappropriate conclusions for how the two countries have born the global financial crisis.

Bulgaria’s macroeconomic indicators in 2008 revealed that the country was in a much stronger financial position – even compared to the older, larger members of Western Europe – due to its fiscal discipline and budget surpluses over the past few years.  Even then, macroeconomic indicators can give a false impression of a healthy economy, but do not connote the characteristics of underlying institutions.  Some of Greece’s macroeconomic indicators suggest a healthy patient, some – such as the budget deficits and sovereign debt levels – hint at its illness, but do not describe nor explain the illness.  If one looks at the Doing Business indicators for Greece (i.e. contract enforcement), she might be surprised to learn Greece ranks at number 109, below Mongolia, Zambia, Egypt and Ghana.  It ranks number 154 in the world (1 being the best) for protecting investors.  All of these indicators give a better – but not clear – impression of Greece’s woes: weak institutional arrangements.

Greece’s institutions exhibit social distrust and feature complicated and conflicting sets of rules.  The past several decades of Greek politics record a history of partial-reforms where every party at the table comes with their own agenda, and no thoroughgoing restructuring has been implemented to date.  As a result, we find weak enforcement (in part due to the lack of clarity of the laws) and a tax system so constraining that it requires a contractor to return to a tax office (and negotiate a bribe with the tax officer) after every step of construction.  Most taxpayers would rather run the risk of being audited every few years (and negotiate a single bribe at this time) than deal with tax agents as part of their weekly routine.  Papandreou’s government, facing a financial crisis, is once again in a position where they must provide solutions fast – and resorts to issuing bonds and squeezing a citizenry even tighter with higher excise taxes.  What is needed, however, is a Reality Check Analysis (as outlined by Elena Panaritis in her book, Prosperity Unbound) that takes careful examination of the breaks in incentive structures and identifies the weak links institutional structure.