The Foundations of Greece’s Failed Economy

Sep 4, 2015 Edmund S. Phelps

Too many politicians and economists blame austerity for the collapse of the Greek economy. But the data show neither marked austerity by historical standards nor government cutbacks severe enough to explain the huge job losses; instead, they show economic ills rooted in the values and beliefs of Greek society.

NEW YORK – Too many politicians and economists blame austerity – urged by Greece’s creditors – for the collapse of the Greek economy. But the data show neither marked austerity by historical standards nor government cutbacks severe enough to explain the huge job losses. What the data do show are economic ills rooted in the values and beliefs of Greek society.

Greece’s public sector is rife with clientelism (to gain votes) and cronyism (to gain favors) – far more so than in other parts of Europe. Maximum pensions for public employees relative to wages are nearly twice as high as in Spain; the government favors business elites with tax-free status; and some state employees draw their salaries without actually turning up for work.

There are serious ills in the private sector, too – notably, the pervasive influence of vested interests and the country’s business and political elites. Profits as a share of business income in Greece are a whopping 46%, according to the latest available data. Italy came in second at 42%, with France third, at 41%. (Germany’s share is 39%; the United States’, 35%; and the United Kingdom’s, 32%.) Insiders receive subsidies and contracts, and outsiders find it hard to break in. Astoundingly, young Greek entrepreneurs reportedly fear to incorporate their firms in Greece, lest others use false documents to take away their companies. According to the World Bank, Greece is one of the hardest places in Europe to start a business. The result is that competition for market share is weak and there are few firms with new ideas.

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0 Comments on this paragraph, 30 Comments on this article

Bruce Steinback Sep 19, 2015

But you admit that Greece isn't much 'ahead' of Italy and France in 'corporatism', and as Krugman noted recently Greece's labor productivity (bad as it is) is significantly better than e.g. Poland's, so what then is the difference that makes Greece so bad? Perhaps it is Austerity after all?

I'm not saying that Greece doesn't need to make changes. From what I gather even the Greek government isn't saying that. It's just saying the debt relief is necessary first and foremost.
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Pepy Sakellariou Sep 11, 2015

Corruption in Greece follow the same pattern as everywhere.
Let us not bury our heads in the sand and try to focus on one country cause Greece is a microcosm of Eurozone, Europe and other parts of the planet.
Don't forget what we read in German media about Siemens, Ferrostaal, Daimler, Rheinmetall ...
Nevertheless don't overlook what's going on with impoverished people in other 'rich' countries (http://www.dw.com/en/poverty-in-germany-at-its-highest-since-reunification/a-18268757).
It's not Greece economy failing!
The whole economic and political structure of Eurozone is.
It's the chronic lack of integration in Europe the reason why countries one after another are going to fail!
Focusing in one country's problems (intensified by acknowledged mistakes of previous MoUs and impasses of the new one) won't solve other countries rising problems.
Europe need to solve Greece's problem one for all because time is running out not for Greece but for the robust economies of Eurozone.
We witnessed it with the last China's sneeze
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Paul Friesen Sep 9, 2015

I have no detailed knowledge of the Greek economy, but it seems strange to me that, if everything is really this bad, Greece was able to run a primary surplus (a surplus if you neglect debt repayments) for some time, and even now is close to such a position. That seems, to me, to say that Greece has already dealt substantially with tax collection problems it may have had in the past.
The argument of Mr. Varoufakis is not that no reforms are needed, but rather that reforms cannot be implemented in an economy which is collapsing under the weight of a debt which is unpayable because the measures demanded to repay it cause the economy to shrink farther and farther. That seems like a very reasonable position to me.
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Ben Pfleger Sep 7, 2015

Where is Mr Yanni Varoufakis when you really need him? Can someone please send him a link to this article? I am not sure whether he drinks champagne at a luxury beach resort right now or drives his motorbike. Either way, he should make touch with reality before he writes another of his op-eds on this site.
- Jose araujo Sep 8, 2015
  
  Blame it on Yanni....
  
  Never mind that t he core of the article is wrong and that the author is trying to protect his reputation of building a theory with zero explanation power, but what sense does it make to rant about corruption, cronyism and other stuff and then be ok with Gross inequality and blame it all in the wage level?
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Wee John Lee Sep 7, 2015

How do corporatism impoverishes the less advantaged in Greece ?
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hari naidu Sep 7, 2015

I'm old enough to recall Papandreou's Sr. (Berkeley Economic Professor from Minnesota!) who took over from the Colonels and established PASOK - ruling political party. He more than any one else created the public sector to imbed PASOK as its establishment. His son carried the Balkan system further facilitated by opposition - when they came to power. Recall these are all guys trained @ US Ivory Tower Universities. Their primary preoccupation was political power and self aggrandizement.
Greece throughout its history & civilization was not a Western European nation. But part and parcel of Ottoman history & civilization.
Papandreou's takeover of post-military power meant literally using EEC/EU structural funds to build-up PASOK and, as he said blatantly, milking the EU cow!
The foundations were indeed laid under Prof. Papandreou and his PASOK political system.
- charlie papa Sep 7, 2015
  
  ...Greece throughout its history & civilization was not a Western European nation. But part and parcel of Ottoman history & civilization. ....
  
  either you are drunk or sky high with buffo
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Manolis Astropekakis Sep 7, 2015

As a young educated and employed Greek I say the author is spot on and then some.
There are so many structural problems in Greek economy that 2-3 MoA cannot change them all. Some progress has been made but still many issues preserve.
To me, 3 key problems: 1. Business making (especially for young entrepreneurs) remains extremely troublesome, 2. Taxation changes EVERY SINGLE YEAR, 3. Public sector large and underperforming.
If these are fixed, a good start will be made.
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art santos Sep 6, 2015

The same could be said almost verbatim about Portugal.
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Longan Ard Sep 6, 2015

There are so many things wrong with this article it is not worth the while spending time answering. However, the worst of all being "solidarity instead of competition". It is precisely the greed and insane return expectation that has caused the post-2008 world we live in. Solidarity is the last vestige of humanity left we all have.

I don't know who the author (Edmund Phelps) is, but reads like a freshman from some cheap Economics University in UK.
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George J. Georganas Sep 6, 2015

The article makes many valid points. However, it does not go nearly far enough in explaining why any one of them could explain the depths to which the Greek economy has sunk since 2010. Nearly all the structural failings of the Greek economy were there for decades before 2010. What allowed large-scale malinvestment in exorbitant pensions, in sinecure wider-public-sector jobs, in expensive medical care, in higher education facilities without students was the easy supply of credit made possible by Greece's accession to the Eurozone. While malinvestment on easy credit was soaring, Greece was congratulating itself on a fast rate of economic growth. Meanwhile, the twin deficits in the balance of payments and the budget were soaring.
The point is made well here :
https://unofficialdimioannou.wordpress.com/2013/09/07/greece-victim-of-excessive-austerity-or-of-credit%E2%80%91induced-turbo%E2%80%91charged-dutch-disease/
and in a more entertaining style here :
https://unofficialdimioannou.wordpress.com/2013/04/18/stories-about-defaults/
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Panagiotis Papastavrou Sep 6, 2015

Blaming the austerity for the Greek economic collapse is an easy way out for those who do not understand Greece.
The signed MOU's are in this context misleading.
The real problem is that, even though they all claim we have to take specific measures for the economic recovery,there is no strategy for development in any area I.e. For the tourism industry,for agricultural products, for exports etc whilst there are still barriers for those wanting to invest.
Even worse the direction and distribution of European structural funds is misleading.
No strategy,not the right people in the right place ,no professional management.
Once this is recognized implementation could shortly bring results.
There is great potential either in private or public sector and entrepreneurship .

Panagiotis Papastavrou
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bill harris harris Sep 6, 2015

Perhaps the conceptual error is to think of Greece as 'European' to begin with. Hypothetically speaking, the variance in their economic profile from that of other European nations might be best explained by demonstrating its similarity to non -western European entities, such as, say, Turkey or the Balkans.

Otherwise, I would say that the mental incorporation of Greece into being European was an act of desire (noite?) that was motivated by three events: an over-appropriation of the classical world, a sincere participation in their struggle against fascism, and a deep admiration of their modern high-culture---the music of Theo and Mits, the poetry of two Nobel laureates, Ellie singing 'Dynata' to close The Olympics....regrettably not the demotic Greece, but rather a thin crust.
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Per Kurowski Sep 6, 2015

Phelps writes: “a structuralist perspective illuminates what went wrong – and why… For several years, Greece drew on …loans from German and French banks to finance a wide array of highly labor-intensive projects…. When that capital inflow stopped… Greece went from boom to outright slump… [It] also explains why recovery has been slow. With competition weak, entrepreneurs did not rush to hire the unemployed.”

How could it be otherwise when regulators allowed bank to leverage over 60 to 1 when lending to the government of Greece until the end of 2009 because that was “very safe”; and they currently require banks to hold the most of very scarce bank equity when lending to entrepreneurs SINCE that is considered “very risky”?

http://subprimeregulations.blogspot.com/2015/02/ecb-imf-unbelievable-greeces-memorandum.html
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E. Harokopos Sep 6, 2015

The main cause of the Greek crisis is the process of exchanging votes for public service jobs. See: http://www.digitalcosmology.com/Blog/2015/02/04/on-the-metaphysics-of-greek-debt/
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William Wallace Sep 6, 2015

The critique offered of poor Greek practices is well-placed. Certainly there were and continue to be structural issues, including many tied to cultural mores that prove inefficient in practice, regardless of noble intent.

However, reforming these faults are not all a question of austerity, and if doing so under the harsh conditions imposed only results in the collapse described by the author, then the policy is still erroneous, irrespective of Greek idiosyncrasies.

As per Varoufakis' recent post on Project Syndicate, negotiations were focused on rule compliance, eschewing practical analyses of cash flows. Clearly, the intent of the Troika was to nip any rebellion in Europe against this form of blind austerity, and destroy the first populist movement to gain power in protest, lest others follow that lead. That they managed to do away with any notion of a united Europe in the process is an additional aspect to this tragedy.
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F R Sep 5, 2015

It looks like prof. Phelps is adjusting his original story that was published here few weeks ago.
http://www.project-syndicate.org/commentary/what-greece-needs-to-prosper-by-edmund-s--phelps-2015-08

Some reality checks on that story (and this one) here:
http://bilbo.economicoutlook.net/blog/?p=31665
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charlie papa Sep 5, 2015

...and the sun in Greece rises from the west

that is if someone writes by "hear_say"
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Paul Dix Sep 5, 2015

Austerity and government cutbacks aren't to blame for the collapse of the Greek economy, but they sure aren't helping it to recover.
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M M Sep 5, 2015

I fully agree with your conclusion but not necessarily with some aspects of the article. In the war against financial strangulation (capital controls, etc.) the Greeks came up the winners. If it was not for their secondary and third economies (what some people might perceive as black economies) and for corporatism, the Greek people would have starved to death and a revolution would have spread across the Continent. So the unconventional economical wisdom of the Greek economy (ies) saved its own people and the European Politicians from their irresponsible behavior. The other EU/EZ countries must learn something from it and must start getting their own houses in order. Corporatism is like tango, it requires two parties, the Greeks did not tango by themselves, the German, French, Italian, Portuguese and other politicians were very good dancers as well, if not excellent conductors.
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Avraam Dectis Sep 4, 2015

.
Corruption is never acceptable.

Corporatism, as defined, may be a good thing.

Perhaps the challenge is to design an economic system that saves the best attributes and resolves the wort.
.
- Avraam Dectis Sep 4, 2015
  
  Worst, not wort.
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Jose Gines Mora Sep 4, 2015

What you say is in principle quite true. For decades the economic system in Greece was a disaster in many senses. I know the country quite well (and also I love it) and I always suspected that they where cheating with most of the published economic data.My point is: If I knew that (and I am not an expert in finances), why the experts of the EU, German and Frech banks did not know? Why the lended millions to a country with this weak economic basis? Are they so ignorant? I do not think so. They were speculating for obtaining big benefits thanks to the support of corrupted politicians. In summary, debtors and creditors are responsible of the disaster...but not the common people of Greece that are now the only victims. In any case, as you rightly say, austerity is not the origin of the collapse...but certainly is not helping to solve the problem.
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Curtis Carpenter Sep 4, 2015

I thought everyone had agreed at this stage that any solution to the Greek problem was going to require both structural change and debt relief in some form. That debate has already been won (or lost, depending on one's point of view).

But structural change is going to take time, and the Greek economy is going to have to function -- even at a level difficult for her people -- during that period of adjustment. So far, there is reason to believe that the effort to implement structural change has begun -- but we're still waiting to see if Greek debtors will give the process a chance to bear fruit.
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Walter Gingery Sep 4, 2015

I don't think this is accurate; at least, I know of no economists who have declared that structural considerations have NOTHING to do with the crisis.

The quarrel, rather, has always been about the best course to follow in order to shift the Greek economy from corporatist to competitive.
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Jose araujo Sep 4, 2015

Professor Phelps with all the respect, but if the massive tax increases are not an historical increase in austerity, then what is. We are talking 100% increase in many taxes and overall more then 20% increase in others.

Also, Greece was growing in 90's and 80's, how can that be explained in light of your particular theory?

Korea is a country and regime marked with cronyism, corruption and still growing. The golden era of American capitalism is marked by large scale corruption, hell wall street even bought a presidency of the US..

Trying to re write history to make if fit to your particular way of seeing the world, instead of admitting that the model you base your analysis is fundamentally wrong.

Greece being in a non optimal currency zone and the severe demand shock due to a crazy austerity policy, is the reason Greece is what it is now. It proved that the fable creatures and confidence fairies have nothing to do with economic development.
- Jose araujo Sep 7, 2015
  
  @Ian
  
  Greece, Portugal; Ireland and Spain experienced in the 80's and 90's a period of growth, that's a FACT. Nikos TSafos cann have is opinion, but for this discussion is immaterial.
  
  Now if a country politic and social regime is the source of a problem, we would expect for this problem to exist while the regime exists, but Data shows otherwise, because this countries experienced growth while with this regimes.
  
  Now, this isn't all, because ignoring that Greece is in a non optimal currency zone since 2000 shows that Phelps is just twisting the data for his convenience.
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- Ian Maitland Sep 6, 2015
  
  Jose:
  
  You counter Phelps' thesis by claiming that Greece prospered in the '80s and '90s.
  
  You haven't done your homework. Take this account by Nikos Tsafos in 2010:
  
  Did the 1980s Ruin Greece?
  Dissecting the numbers on the Greek economy, it is hard to avoid the conclusion that the 1980s ruined the Greek economy, with successor governments sharing the blame mostly for failing to reform rather than further regression. But this post is no anti-PASOK rant; I thus have to accept that a counter-factual 1980s could have been bad as well.
  
  That the Greek economy regressed in the 1980s is obvious. In fact, it is hard to find any economic measures that did not deteriorate sharply in the 1980s....
  
  The detailed analysis can be found at:
  http://www.greekdefaultwatch.com/2010/09/did-1980s-ruin-greece.html
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- Jose araujo Sep 4, 2015
  
  When models fail explaining reality like microfoundations did, only minor people start blaming reality instead of acknowledging the obvious.
  
  Saying Greece didn't suffer austerity isn't just blindness or madness its plain criminal.
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