Sunday, November 25, 2012

Government Pensions in Greece

Government spending on state pensioners more than doubled from €2.9 billion to over €6.6 billion in 2000—2009 (+€3.7 billion). Why?

The number of pensioners rose by a mere 13—19% percent depending on whether one uses the data from the ministry of finance or ELSTAT (see sources and notes below). This graph plots the data from ELSTAT. Clearly, the number of pensioners cannot, alone, explain the increase in spending.

To understand what drove more spending, I have decomposed the rise in three parts: inflation, more pensioners and higher pensions. “Inflation” assumes that the number of pensioners is constant and just grows the 2000 average pension at the rate of inflation. “More pensioners” takes that constant purchasing power euro and multiplies it by the number of pensioners—the delta between that and inflation can be attributed to the fact that there are more people receiving a pension. “Higher pensions” is what remains unexplained by either inflation or the number of pensioners.

Of the €3.7 billion increase, inflation accounted for 26%, the higher number of pensioners made up 23% and higher pensions contributed the remaining 51%. Thus, half of the increase in government spending for state pensioners came from giving out more generous pensions. Military pensions were 50% higher than inflation alone would justify and civil pensions were 35% higher.

One final comment on the number of pensioners. For this, I turn to the ministry of finance, which has more complete and more updated information. The chart shows the number of pensioners from 2000 to 2012.

From 2000 to 2005, the number of pensioners was growing at 0.6% a year. Then, in 2006—2007, it started to grow at 1.5% a year. Finally, in 2008—2012, it grew by 3.1% a year. The pace of retirements accelerated by 2.5 times in less than a decade! I don’t have enough information to explain this. Perhaps there was a demographic bulge. But I suspect that early retirement incentives played a role as well.

Notes and Sources

The Greek state classifies pensioners in two ways.

In the Hellenic Statistical Authority’s (ELSTAT) Public Finance statistics, they are divided into civil, military, war and other; ELSTAT, Public Finance 2000-2006, 23, here; ELSTAT, Public Finance 2002-2008, 23, here.

In the Ministry of Finance’s budgets, they are classified into civilians, military, war, rail, local government, national resistance and clergy; Ministry of Finance, State Budgets, various editions, here.

Both data series have their advantages and they generally match with two exceptions: the ministry of finance data is for October of each year (ELSTAT does not specify whether this is year-end), and the ministry also includes a count for national resistance fighters, which do not show up in ELSTAT. But the numbers are pretty close otherwise.

For all charts, except the last, I have relied on ELSTAT. There is one more exception: ELSTAT reports spending for 2009 in its Statistical Yearbook 2009—2010, but it does not report the number of pensioners in the same way. I have used the data from the Ministry of Finance to estimate the total number of pensioners in 2009. The results are the same: the split between inflation, more pensioners and higher pensions is similar for the data through 2008 (48% explained by higher pensions).

Saturday, November 24, 2012

Transportation in Focus: Hellenic Railways Organization (OSE)

Part three of a series on transportation in Greece. Hellenic Railways Organization (OSE) runs the country’s railway system (passenger and freight) and operates bus routes overseas. OSE was re-structured in 2006—2007, so the data stop at different points (data from ELSTAT, Statistical Yearbook of Greece, various editions, here). OSE is one of Greece’s longest standing and most loss-making companies, so in contrast to my other posts, this one goes back in time.

Passenger transportation has fluctuated, and in 2008, OSE carried 25% fewer passenger-kilometers than in 1975. Passenger transportation can be classified in three periods: (a) a U-shaped period, from 1975—1989, when passenger transport peaked; (b) a decline (-43%) from 1989 to 1994, which marked a 30+ year low in overall transportation (one has to go back to 1967 to find a lower figure); and (c) relative stability from 1995 to 2008, which a slight upward trajectory.

Cargo transportation shows similar variability: in 2008, OSE transported 16% fewer freight ton-kilometers than in 1975. Cargo transportation can be similarly divided in three periods: (a) from 1975 to 1994, a steady decline with occasional (1982—84 and 1986—89) spikes; (b) from 1994 to 2002, a period of relative stability; and (c) a period of relative boom. From the composition of traffic, it is clear that the decline was driven as much by domestic as by foreign transport, but the recent spike has been driven by foreign deliveries (OSE credits Bulgaria’s entry into the EU as adding to cargo transport).

The number of employees at OSE can also be divided in three periods: (a) in 1977—1982, the company’s staff declined by 11%, driven by a 36% reduction in temporary staff; (b) in 1982—1985, OSE’s personnel increased by 27%, and almost two-thirds (60%) of the increase came from permanent staff; in 1985—2006 (latest data for OSE as a single entity), staff declined by 50%, while the company almost ceased to employ temporary staff.

OSE’s revenues from passengers and from cargo have covered a progressively smaller share of its total expenses. In 1975, the company’s revenues from operations covered around two-thirds of expenditures. Over time, this share declined steadily until it reached ~11% in 1997. It has since declined by a smaller share. By 2010, the company was losing about €800 million a year, and it depended on state financing or state-guaranteed loans to keep operating. Its cumulative liabilities were roughly €8 billion (from OSE’s financial accounts, here).

To sum: OSE has transported fewer people and fewer goods over time, and, despite a recent rise in cargo transportation, the company carried fewer people and goods than it did in 1975. Its personnel registered a sharp uptick in 1982—1985 (+27%), and it has since been declining at a slow but steady pace. The decline in staff, however, has not prevented the company’s deteriorating financial position: in the late 2000s, revenues from passengers and cargo covered only a tenth of total expenditures, down from two-thirds in 1975. As a result, the company has needed more cash from the treasury, its losses amounted to €800 million in 2010, and its debt was around €8 billion.

Friday, November 23, 2012

Transportation in Focus: Attiko Metro S.A.

Part two of a series on transportation in Greece. Attiko Metro runs the Athens metro system. The table below gives the basic operational and financial numbers (data from ELSTAT, Statistical Yearbook of Greece 2009-2010, 405—406, here).

From 2005 to 2009, the company carried 5.4% more passengers against a 7.2% increase in kilometers run, leading to a slight decline in utilization. Both figures, however, fell in 2009; in 2005—2008, the number of passengers grew by 11% and kilometers run by 15.7%.

Revenues increased by 17%, driven by a 15.4% increase in sales of tickets and passes—of which, ticket validations decreased but monthly passes rose by 42%. Metro thus made its revenues more permanent and relied less on ticket-by-ticket sales. Revenues per passenger traveled rose by 9.5%.

Expenditures have two parts: system rent and other. System rent depends on profits—if the company makes profits, it makes payment towards the system (in the English translation system rent includes the words "interest payments"). Expenditures also exclude investment in new lines and stations.

To understand profitability, look at expenditures excluding system rent: from 2005 to 2009, these rose by 64% (+€44 million). Of that increase, 70% came from higher spending on personnel and wages (+€30.4 million). Another 8% came from more money for cleaning and security.

The increase in wages came both from more personnel and from higher wages. The number of people working at Attiko Metro rose by 30.6% from 2005 to 2009, with the largest increase in 2009. Office clerks (including ticket sellers) and maintenance staff rose accounted for 75% of the increase. Since overall spending on wages rose even faster, the cost per employee increased by 32% in 2005—2009, or 2.6 times the rate of inflation.

In sum: From 2005, when Attiko Metro paid almost €11 million in system rent, in 2009 it lost €20 million without any system rent—a net change of almost €30 million. The drop in profitability was not the result of lower revenues (revenues rose) but of higher costs: the company had 30% more people in 2009 than in 2005, and costs per employee rose by 32%, 2.6 times the rate of inflation.

Tuesday, November 20, 2012

Transport in Focus: Company of Thermal Buses S.A. (ΕΘΕΛ)

Part one of a series on transport in Greece. The Company of Thermal Buses (ΕΘΕΛ) has since acquired the trolley company of Athens and Piraeus to form a new venture—it no longer exists in this form. Even so, some statistics on its activities are instructive. The table below gives the basic numbers (data from ELSTAT, Statistical Yearbook of Greece 2009-2010, 409, here).

From 2006 to 2009, the company’s output (kilometers run) was flat but it transported 11.5% more people with the same volume of kilometers. In other words, its buses were fuller.

The number of employees declined by 3% from 2006 to 2009 (-202). Looking at the breakdown (not shown) there was a drop in the number of drivers (-319) and ticket inspectors (-48), coupled with an increase in the number of office clerks (+33) and maintenance technicians (+130). The biggest percentage change came from the 15% addition of maintenance technicians.

Revenues increased by 3.9%. “Subsidies or grants from the Public Sector or the European Union” make up 40% of total revenues, so it is good to look also at revenues from tickets and other activities (including “advertising, ticket fines, insurance indemnities, etc.”), which increased by 2.2%.

So this company carried 11.5% more people but its revenues rose by 2.2%. Receipts per person carried fell by 8.3%.

Expenses increased by 18% in 2006—2009. Gross salaries and social insurance contributions rose by 23.2% and 17.4%, respectively (+22% combined). Other expenses showed a modest increase, while spending on repairs and maintenance declined.

Excluding subsidies, losses increased by 25% in three years, an additional €60 million, to reach €295 million (2010 losses were €360 million according to the Ministry of Finance). In 2009, revenues from tickets and other activities covered 45% of the spending on salaries and wages, and they covered 28% of all expenditures.

To sum: This company transported 11.5% more people from 2006 to 2009, but revenues increased by just 2.2%, so revenue per passenger shrank by 8%. Staff declined by 3%, but costs for salaries and social contributions rose by 22%, salaries per person increased by 27%, and losses increased by 25%.

Sunday, November 11, 2012


Readers have challenged my recent posts on austerity—and my argument that Greece has yet to practice it—in various ways. Either, people say, the data is incorrect or it is irrelevant. Let me try one more time.

This is the starting point. On one hand, we say “the state is being starved and cannot perform basic functions.” On the other, Greece still have a *primary* budget deficit, which means that we still cannot raise enough money to pay the bills even if we just ignored the debt. So we have a contradiction: we cannot both being starved and be eating too much. It does not add up.

There are two hypotheses: either revenues are too low or spending is too high. There is no other way for us to have a budget deficit.

By the way, since publishing my posts, I have found that ELSTAT publishes a pretty similar table to the one I constructed with government revenues and expenditures back to 2000 (p. 22—23). So let us use these numbers—which have a 2 November 2012 date on them.

Revenues are at a 10-year high as a share of GDP. Yes, there is tax evasion and it is important. But tax evasion did not appear overnight—we did not have more evasion in 2009 than in 2005 or 2003, at least not systemically more so. Tax evasion did not show up in the last two years, and so it cannot be used to explain why things got so much worse.

Revenues as a share of GDP
2000 43.0%
2001 40.9
2007 40.8
2008 40.7
2009 38.3
2010 40.6
2011 42.3

If not revenues, it is expenditures. The ELSAT table comes to the conclusion I did: wages (compensation of employees) and social benefits are much higher than earlier in the decade. Goods and services (which I researched to attribute to weapons procurement) and capital transfers (which is public investment) have been slashed from 2009—2011 and they account for most of the reduction in primary spending as a share of GDP from 48.8% in 2009 to 44.6% in 2011.

Spending on “social benefits” as a share of GDP
2000 14.8%
2001 15.4
2007 17.9
2008 19.6
2009 21.2
2010 21.3
2011 22.6

Confronted with that information, I can ignore it. I can say, no, this is not relevant, look at “real people on the ground.” I have no illusions about the quality of Greek statistics (after all, I have spent my fair share looking at and trying to make sense of the numbers—I understand the weaknesses). Yet this is the budget and government finances. How can you ignore it? It is like ignoring your bank account when making a plan. This is the ultimate data--it is the ultimate test.

It is also, I have pointed us, the data that the troika looks at and tries to negotiate over. They also see compensation being higher than in 2008 (or earlier) and they also see social benefits at record levels, and they wonder: how could that possibly be true? How can we reconcile all these cuts with all these measures being at record levels? Either the data is fake or the cuts are.

Is the data great? Probably not. Will the numbers be revised again? Probably. But look at the ELSTAT table—social benefits went up from 15% to almost 20% of GDP by 2008. Five percent points of GDP is a massive movement. Yes, maybe it is not 5 but 4.5 or 5.5. But the trend is too overwhelming to ignore.

At that point, you say, okay but look at the cuts that hear about. The issue here is relativity—what do you compare against? If your starting point is that 2009 was “fair,” then maybe the state has in fact been butchered (even though social spending is up as share of national income, which means that the spending cuts have not been proportional to our ability to finance them).

But if you look at these numbers versus what other European countries do, it helps you put the 2009-2011 adjustment in perspective. Look at this table, for example, on spending for old age in OECD countries:

Public spending on old age as a share of GDP, 2007
Italy 11.7%
France 11.1
Austria 10.7
Greece 10.0
Portugal 9.2
Sweden 9.0
Japan 8.8
OECD 6.4

This is up to 2007 only so it ignores the crisis. Only three OECD countries spent more on old age support than Greece did. Greece, in this measure, spent 10% versus an OECD average 6.4%. Perhaps we say that Greece has more older people. Fine. Let’s adjust for that by looking at how many old people countries have relative to their working age population (data from here). Here are the top countries (sorted by the ratio of old age dependents per 100 working age population from here):

Social spending and old-age dependency
Japan 8.8% / 31.9
Italy: 11.7 / 30.2
Germany: 8.7 / 29.7
Greece 10.0 / 27.5
Sweden 9.0 / 26.7
Belgium 7.1 / 26.2
Portugal 9.2 / 25.9
France 11.1 / 25.3
OECD 6.4 / 21.0

Greece spends more than Germany even though it has fewer old people per younger population. This is not a new issue. For the past few months, I have been read every single report on Greece that the OECD has written since 1962. For decades, it has been noting that Greece has some of the most generous (but underfunded) pensions around. This is not a new thing and the OECD data above confirms it. Our debt of 170% over GDP did not come from Greece being stingy. So yes, there are cuts, but these come only because: our past spending was unsustainable relative to what we earned, and it was also high relative to what other people spend or what Greece spent just a few years ago.

So unless the budget is irrelevant, what the state raises and spends is irrelevant, how much Greece spends relative to other countries is irrelevant, then we have to scratch our heads and come up with a convincing answer to explain the wide disparity between what we see in the daily news and what the ministry of finance has to say in its numbers. The only answer that convinces me is:
(a) we don’t fully understand how much we overspent in 2006-2009; 
(b) we focus too much on anecdotes and on income groups that do indeed suffer without appreciating how the totals look and how high total spending really is; 
(c) we don’t fully appreciate how much we spend relative to others in Europe; and
(d) we don’t see that our adjustment has not come from wages and pensions but from spending on goods and services (including weapons) and from investment.

Friday, November 02, 2012

The First Real Memorandum?

If parliament approves the 2013 Budget and its associated measures, Greece will finally have a real plan. The first memorandum was hastily drawn and ill understood, least of all by the parliament that voted for it. It was never fully endorsed and it was hardly implemented. The second memorandum was negotiated by an interim government without a proper mandate, and its main elements were to be agreed upon later (now). If this new deal passes (and the risk it will not is not trivial), it would be the first memorandum signed by parties elected for that purpose. In itself, this is a milestone.

Yet the fragility of the ruling coalition is evident in the hesitation of the two leftist parties to accept changes in employment laws. Once again, ambivalence threatens reform. PASOK’s equivocation effectively doomed the first memorandum, paralyzing reforms and leaving the country adrift. That same ambivalence is now spread between two parties, fewer deputies, and with more radical dissent from the far left. The calculus of reform has not changed, but the politics of change look harder.

The politics of change, however, also look simpler. The reason is that the left is largely a parliamentary rather than an executive partner in the current government. Of course, if the coalition disintegrates, this distinction will hardly matter – no parliamentary majority, no government. But if it survives, even weakened, this is important. Reforms during the Papandreou government failed both on a macro level (inability to come up with a grand plan on big questions) and a micro level (tendency of even modest reforms to get stuck on minister's desk).

In theory, this deal provides clarity on the big picture. An agreed big picture is important and, evidently, difficult. But the true test will be implementation: not just voting in favor of measures but carrying them out one by one. In the PASOK years, much of the stasis came from non-implementation. A New Democracy-led government committed to change could overcome these hurdles. The haggling is almost over. The time of action is coming. And while it is exciting to have a sense of consensus over the big picture, I am mostly eager to see little things being done – many, little things that have been stuck due to irresolution.

Tuesday, October 30, 2012

The National Interest: Austerity Has Yet To Come To Greece

The idea that deep cuts are pushing Greece to the brink makes for great punditry. But it is a woefully incomplete description of what is really happening. Austerity is not killing Greece. Instead, austerity has yet to come to Greece.

Read the full version of my article on the National Interest website.

Wednesday, October 10, 2012

The Parallel Universe of Alexis Tsipras

In an article for the Guardian, Alexis Tsipras articulated his message for Angela Merkel. It is no surprise that I disagree with almost everything that comes out of Mr. Tsipras’ mouth. But there are three claims, in particular, that caught my eye. Together, they show an inability to grasp reality in a way that has deep consequences for Greece.

Claim #1: “Austerity policies have led to cuts in benefits, the deregulation of the labour market and the further deterioration of the limited welfare state that had survived a neoliberal onslaught.”

Austerity policies have led to a cut in benefits and the deregulation of the labor market – no arguments there. But is Greece’s welfare state truly limited? Let’s look at a few numbers. In 2010, the Greek state spent 13.2% of GDP on pensions (data from here). Of the 23 EU countries that have data, Greece ranked second! In fact, between 2009 and 2010, amid the “austerity,” its ranking rose from 4th place to 2nd (after Italy). Health expenditures are, at least, less egregious. In 2010, the Greek state spent 7.5% of GDP on health, which is right on the EU and Eurozone average. Greece’s share is just below Italy’s (7.6%) and slightly higher than either Germany’s 7.2% or Sweden’s 7.1%. Is spending more on pensions than almost all EU states and more on health than Germany and Sweden really having a “limited” welfare state? Some perspective, please. Besides, only 10% of the €20 bn reduction in the budget deficit from 2009 to 2011 came by limiting the welfare state. So where exactly is that “neoliberal onslaught?” There is much that can be said about Greece’s “welfare state” but that it is “limited” is not one of them.

Claim #2: “The European citizens should know, however, that loans to Greece are paid into an ‘escrow’ account and are used exclusively to repay past loans and to re-capitalise near bankrupt private banks. The money cannot be used to pay salaries and pensions, or to buy basic medicine for hospitals and milk for schools.”

To be fair, much money that came into Greece flowed straight out again (see here). But to say that the money cannot be used to pay for expenses is an odd claim. Money is fungible and for two years, Greece had a primary deficit meaning that its revenues could not cover its expenditures even without paying interest (the budget is almost balanced now, again excluding interest). The idea that all this money has gone exclusively to “repay past loans and to re-capitalise near bankrupt private banks” is untrue. It is misleading too because debt repayments went also to Greek institutions and individuals, including institutions that form part of the welfare state. Mr. Tsipras is right to point out that much money went to repay debt holders; but he is not right to claim that those payments have nothing to do with state spending; nor can he really say that having a banking system bears no relationship to social welfare and social peace.

Claim #3: "We believe that their [elites] aim is not to solve the debt crisis but to create a new regulatory framework throughout Europe that is based on cheap labour, deregulation of the labour market, low public spending and tax exemptions for capital … Europe needs a new plan to deepen European integration. Such a plan must challenge neoliberalism and lead European economies back to recovery. It should prioritise the needs of workers, pensioners and the unemployed, not the interests of multinational companies and bankrupt bankers."

Neoliberalism is a big, bad word, although despite having graduate degrees in political science and economics, I have no idea what it means (or how it differs from liberalism). But from what Mr. Tsipras writes, two points merit a response. The first is the cheapness of labor. It is true that Greece’s austerity package is focused on making labor cheaper. But the reason is not a neoliberal conspiracy. Rather, it is that the average Greek produced almost half as much per hour of work than the average employee in the Eurozone (see here). Only Portugal, among the EU-15, produced less for each working hour than Greece. Greek labor ought to get cheaper not so that companies can make more profits, but so that work and reward can be better balanced. This is a profound philosophical point because Mr. Tsipras is obsessed about wages but does not seem to care about productivity. He should.

The second point is the idea that the austerity package favors the interests of multinational companies. Big companies are easy scapegoats of course. But consider these two data points. First, Greece is dead last in the Eurozone in terms of how much foreign direct investment it has attracted, and it has been dead last since 2002 (see here). Greece has 40% less FDI than second-from-last Italy and it has one-fourth the FDI of the Eurozone on average. Second, by far the biggest driver of the recession in Greece is the complete collapse in investment, which has halved since 2007. This is mostly domestic investment and it has collapsed across the board. The reason, most recently, is deep uncertainty. But beyond uncertainty is the difficulty of doing business in Greece, including because of the worker protections that Mr. Tsipras wants to enhance. If you told the CEO of a multinational company that the austerity package in Greece is favoring the interest of multinational companies, they would laugh above all because it is a silly claim. Making Greece a haven for capital would be great, but Mr. Tsipras understands neither what it takes to get that nor what it would do to Greek living standards thereafter.


These points underscore two bigger problems with Greece’s attitude towards the crisis which Mr. Tsipras first typified and now propounds. The first is an inability to do some serious introspection and thus get a sense of perspective. Without it, questions such as “what is fair” or “what is just” are impossible to answer. It is all well and good to bemoan the welfare state, but why isn’t Mr. Tsipras outraged that the Greek state spends so much and delivers so little? Why is his only answer to just spend more, along with the necessary (and empty) nod that he would do it better and fairly (without telling us how)? Why is he not outraged that investment has halved and that there is less foreign investment into Greece than anywhere else in the Eurozone? Crisis demand introspection, not just scapegoats.

The second problem is deeper and it speaks to the inability to think beyond zero-sum politics. There is a reason that people of Mr. Tsipras’ persuasion have gone out of fashion in advanced countries. At some point, even politicians understood that trying to split the pie without growing it was self-defeating. Better to create more wealth and fight for a different allocation rather than focus solely on the allocation. When he rails against multinational companies or bankers or capital, he is saying “one wins, the other loses.” This is a great philosophy. It’s simple, compelling and massively appealing. It’s also wrong and outdated. I titled this post “The Parallel Universe of Alexis Tsipras.” Perhaps it is best to say that he lives in a time capsule. Of a time long, long ago.

Saturday, October 06, 2012

Ten Surprising Facts About Greek Economic History

A year ago, I wrote a post about the ten most surprising things that I had learned about Greece in the course of writing my blog. As I dug deeper into the country’s recent economic history while conducting research for my book on the Greek crisis, I came across a few more. Here are the things that most surprised me during that research (relying heavily on the OECD’s Economic Surveys of Greece dating to 1962).

Fact #1: Employment in the public sector grew ~40% in the 1980s. The Greek state admitted at some point that it was not quite sure how many people it employed. Getting a full picture on this subject has been tough, but the 2001 OECD report was instructive: “Between 1981 and 1990 public sector employment increased at an average annual rate of about 4 per cent – around four times as fast as in the private sector.” The graph in the report shows that employment went from just over 500 thousand in 1981 to just under 700 thousand in 1989. Through 1999, employment declined some periods (1989-1992 and 1996-1999) and it rose in others (1993-1996). The data then stops. In 2009, the earliest year for which I have seen numbers, employment was ~715 thousand. That is higher than the 1989 peak or the 1999 point of ~640 thousand. Judging from state spending patterns, this final growth likely came in 2006-2009.

Fact #2: Remittances beat tourism and shipping as a source of foreign exchange. The OECD notes that 1.25 million Greeks emigrated from 1950 to 1974. The money they sent back trumped tourism or shipping receipts as a source of foreign exchange through the late 1970s. For every dollar earned by remittances in 1960, shipping provided 74 cents and tourism 33 cents. In 1970, the gap was narrower for tourism (40 cents) but larger for shipping (68 cents). From 1970 to 1978 tourism and shipping grew faster than remittances, and so, by 1978, tourism brought in $1.12 and shipping $1.02 for every dollar of remittances.

Fact #3: Minimal foreign direct investment. From 1954 to 1976, foreign direct investment was ~$620 million in total – which was equal to the amount of remittances received by the country on an *annual* basis at that time. Modest FDI did not really start until 1976, and even since then, it averaged less than 1% of GDP a year (with a peak of 2% in 2% in 2006).

Fact #4: Liabilities linked to public enterprises accounted for 50% of GDP by the late 1990s. From the 1998 OECD report: “The cost [of public enterprises] to the economy consists not only of an annual drain on the budget of about 3 ½ per cent of GDP … if accumulated over the past decade and half, and added to other government liabilities due to public enterprises, they represent a burden equivalent to about 50 per cent of GDP.” Enough said.

Fact #5: The importance of industry peaked in 1973. Greece is a service-based economy – in fact, services provide a greater fraction of GDP than in almost every other EU country. But this wasn’t always the case. Of course, services have always been important. But in the 1960s and 1970s, the relative decline of agriculture came together with a growth in industry. Then, industry peaked in 1973, and after some fluctuation, its share of GDP reached a second peak in 1979, at 31%. It then started to decline with few interruptions down to 18% in 2011. Since agriculture also fell, this meant that services, which made up ~56% in the 1960s and early 1970s progressively edged up to 78% in 2011.

Fact #6: Tax evasion became a read headache towards the late 1970s. I was interested to see the point at which tax evasion shows up as a major problem in Greece. This graph is both imperfect and instructive: it shows the word count for “evasion” in each OECD survey of Greece since 1962. Until 1978, the word shows up sporadically. Then the 1979 survey mentions evasion as many times as all the previous 12 surveys combined. After a few quiet years (6 mentions per survey), its presence spikes to a new plateau of ~13 per survey from 1986 to 1996. At that point evasion shows up either a lot (~27 times) or a little (~7 times) before reaching a whole new level in 2009-2011 with an average of 42 mentions per survey.

Fact #7: The bifurcation of the Greek economy. It is no secret that there are two very distinct, almost parallel economies in Greece. But the extreme divergence between the productive and the non-productive Greece still surprised me. From the 1993 OECD report: “Greek manufacturing industry is composed of two distinct sub-groups – dynamic private firms, with very high profit rates, and ailing (mainly state-controlled) firms, cumulating losses year after year.” By 1982, the losses of the loss-making firms exceeded the profits of the profitable firms and the overall profit rate turned negative through 1986. Yet throughout the 1980s, anywhere from 55% to 74% of the country’s 3,000+ firms were profitable and their return on equity was very high (20%).

Fact #8: Greece is a deep rentier economy. In an April 2011 post, I noted that Greece could be understood as a rentier state where work and reward were becoming disconnected. Mostly, I had in mind state spending for public employment and benefits. But delving more into the history of the Greek economy, I saw that the extent of rentierism was much deeper: large EU transfers in the 1980s and 1990s; sizeable remittances especially until the mid 1980s; and the massive boom in construction that created a pure “rentier” class, where rents form a household’s largest source of income (~10% of tax returns in recent years). So much revenue unlinked to work and effort.

Fact #9: The Olympics cost too little to explain Greece’s debt. The 2004 Athens Olympic Games cost around €8.954 billion, not including spending on projects that were going to happen anyway but that were accelerated for the Olympics. This is paltry compared to Greece’s debt of €298 billion at year-end 2009. Maybe the Olympics were a luxury that Greece could not afford – but they are not a cause of the current crisis.

Fact #10: For 25 years, Greece’s growth was the second highest in the OECD. In the past, I had written that Greece’s economy was vibrant not too long ago; yet this comment from the 1992 OECD report still surprised me; referring to the impact of the 1980s, the OECD noted: “after having recorded the highest GNP growth rate, next to Japan, in the OECD for about 25 years, Greece fell to the bottom place at the beginning of the 1980s and has remained there since. At the same time, the public sector debt reached one of the highest levels in the OECD area (113 per cent of GDP), representing a heavy burden for the economy in the future.”

Friday, September 28, 2012

The Endless Tax Squeeze in Greece

My last post discussed how Greece’s “austerity” was not really austerity because first, much of the cut in spending came from lower investment and lower spending on weapons; second, that the cut in spending between 2009 and 2011 has been smaller than the increase in spending from 2006 to 2008; and third, that the state still spends more as a share of GDP than it did in 2000-2005. But since spending is not falling quickly enough, the state has to increase revenues to plug the hole in its budget deficit. This post reviews the main changes that have occurred on the revenue side of budget in recent years.
The first thing that is obvious from the graph is that revenues are not the main problem. I am not denying, of course, that tax evasion is pervasive in Greece; nor do I doubt that the state could collect a lot more in taxes if it functioned better. Rather, I mean that the changes in revenue cannot explain what has occurred recently to the Greek economy.

Government revenues as a share of GDP fell from a high of 43.5% in 2000 to 38.1% in 2004. In part, this drop was the result of the entry into the eurozone. Revenues in 2000 were at a historical high – at no other point in Greek history has the state collected as much money as it did in 2000. Once the country joined the eurozone, its focus and discipline on tax collection weakened. Soon thereafter tax reforms pushed revenues were back to their 1997 level, following an inverted U-path. In other words, it was the 2000 figure that was abnormal, not the drop to 2004. Effectively, the increase in revenues before 2000 was akin to a pre-wedding diet – it worked but it unraveled the day after. That is what happened to revenues in Greece.

From 2004 to 2007, revenues increased somewhat, peaking at 40.8% of GDP in 2007, before falling in 2008 due to the modest contraction in the economy. They then fell by a greater amount in 2009 due to a 3.3% recession and, at 38.2% of GDP, they were almost at the same level as their 2004 low point. But by 2009, the growth in spending had already put the budget completely out of balance – it was spending that was out of control, not revenues, which were at historical averages.

At that point, the state started to practice “austerity,” mostly by cutting spending (as economic practice recommends). But the state also tried to raise more revenue to close the huge fiscal hole with which it ended 2009. It did so mostly by increasing indirect taxes, thus offsetting the decline in revenues that are linked to work, income and profits. This tax hike pushed up prices and squeezed households. Something that cost €100 in 2008 would have cost €109 in 2011 – but in constant taxes, it would have cost €104, meaning that more than half of the increase in prices came from higher taxes.

Besides value added taxes, the government also benefited from an influx of EU funding which rose from a low of €1.8 billion in 2009 to €3.6 billion in 2011. This inflow was, by far, the greatest addition to the Greek budget on the revenue side during this crisis. In fact, 11% of the fiscal adjustment (drop in deficit) between 2009 and 2011 came from higher EU finding for the public investment budget.

What does all this tell us? Greek revenues were a problem from 2000 to 2004 when the gains in tax revenues of the 1990s abated. Soon enough the state was collecting as much in revenue as it was in the late 1990s. Yet through 2006, the weakness in revenue was coupled with a relatively flat primary expenditure profile. It was at that point that spending started to increase and revenues followed suit only modestly in 2007. During the crisis, the government has been able to bring revenues back to their 2001 levels, in part due to higher EU funding and in part due to extraordinary taxation. But if one takes a decade-wide snapshot it is clear that Greece’s problem is that spending spiraled out of control, not that tax evasion became more pervasive or that revenues fell. It is thus on the expenditure side of the equation that the correction ought to focus.

Greek Arithmetic

In my last post, I wrote that Greece has not really practiced austerity. This surprised people. Well, here are some more numbers. If you wonder “what the hell does the troika want from us,” the following table should answer your question.

The top line shows primary government expenditure (data from Eurostat), which covers what the state spends on salaries, benefits, goods and services and investment (but excludes interest). In 2011, primary spending was €92.7 billion, which is €20 billion below the 2009 level. So in a two-year period, the Greek government has cut an enormous amount of spending. If you only look at that number, it seems that Greece has in fact practiced a lot of austerity.

But notice what happened between 2006 and 2009: spending rose by €28.1 billion! In other words, the cuts of 2010 and 2011 barely serve to offset the massive increases of 2007, 2008 and 2009. In fact, as a share of GDP, the amount of spending in 2011 was higher than in 2007 (43.1% versus 42.8%) and much higher than in 2006 (40.5%). Even after cutting €20 billion between 2009 and 2011, the Greek state spent 3.4 percentage points of GDP more than it did in the period from 2000 to 2005. Why?

The first line shows government wages. Here, we see a similar story to the top line number. Between 2009 and 2011, the government cut almost €5 billion in spending. But on an absolute basis, the spending of €26 billion is higher than the spending of €25.5 billion in 2007 and as a share of GDP, government employees took in more than in 2008, before the cuts started. Compared with normal levels in 2000-2005, spending on wages was 1.1 percentage points higher. So yes, the government has made a tremendous effort between 2009 and 2011, but this is not enough to even offset the increase of 2006 to 2009, much less revert spending back to its 2000-2005 levels.

Next comes spending on social benefits, which is mostly health and social protection. Here the reduction is even smaller. Between 2009 and 2011, the government cut €1.9 billion in spending. But from 2006 to 2009, spending rose by €13.3 billion; of that raise, 56% came from higher spending on pensions, 23% from higher spending on health and the rest from other benefits (chiefly sickness, disability, family, unemployment). Relative to GDP, the “welfare state” spends even more than it did in 2009 and it spends 6.3 percentage points more than 2000-2005!

Wages and social benefits made up 79% of primary government spending in 2011 so that’s why they deserve special attention. But their share of total spending was around 67% to 70% from 2000 to 2009, which means that they have declined at a much smaller pace than other spending. In other words, the drop in other spending is disproportionately high to compensate for the modest decline in spending for wages and social services. From the rest of the table, I want to highlight two items.

The first is the drop in the purchase of goods and services. Unfortunately, Eurostat does not have yet detailed information for 2011, but the Budget Bulletins of the Ministry of Finance show that spending on weapons went from €2.4 billion in 2007 to €360 million in 2011, which means that more than a third of the change between 2007 and 2011 in “goods and services” came from reduced spending on defense systems.

The second item to highlight is capital spending. This is mostly the public investment budget and this has been cut severely during the crisis. Here again we need to look at the data from the Ministry of Finance to get a clearer picture of the trends. From 2009 to 2011, the Public Investment Budget declined by €3 billion, which accounts for almost two-thirds of the drop in capital spending. The drop came mainly from reduced spending in transportation, industry and regional development.

These numbers reveal the following. First, the Greek government is cutting spending, but the reductions have yet to make up for the increase from 2006 to 2009, much less to bring the state back to where it was in 2000-2005. Second, the government is cutting spending in defense, infrastructure and development because it cannot reduce wages and benefits quickly enough. And third, tax increases (which I am not covering in this post) are in place to finance the very slow retraction of a state that expanded spending so massively from 2006 to 2009.

The last thing to point out is this. The Greek recession started in Q4 2008 but things really got worse in 2009, when GDP fell by 3.3%. Yet (primary) government spending rose 11.2% in 2008 and 6.3% in 2009. The reason this is important is that there are people out there who seem to think that the recession is due to cuts in government spending and who prescribe more government spending to get out of the recession. But government spending was rising quite rapidly while the economy was shrinking! In fact, when government spending declined by 10.5% in 2010, the economy contracted by just the same amount as it did in 2009 when government spending was rising.

A devout Keynesian (probably not Keynes himself) would say that the increases in government spending were not enough to offset the drop in private activity. But within a three-year period, from 2006 to 2009, state spending as a share of GDP rose by a fifth – Greece had 20% more state in 2009 than in 2006. How can that not be enough? Where was that state? Were the services that the state offered to the Greek citizen 20% better in 2009 relative to 2006? What exactly did that massive increase in spending accomplish besides enrich the people who work in the government and who receive social benefits? What did the taxpayer who was honest then and is honest now get in return? And how is spending more on wages and social benefits as a share of GDP versus 2000-2005 starving “public administration” or crippling the “welfare state?”

These are serious questions. People who are enraged at the corrupt elite should also ask their fellow co-protestors how much money they make relative to 2006 and what they have done to deserve this rise in compensation or benefits. There is plenty of blame to go around but the ideas that the state is either starved or that the solution rests with more “counter-cyclical” government spending are absurd. As Bill Clinton put it recently: Arithmetic, people.

Wednesday, September 26, 2012

What Austerity?

Austerity is killing Greece. Or so we’re told. The politicians and the press have a clear narrative: to please foreign creditors, the Greek government is cutting spending to such low levels that the provision of basic services is being compromised. The Greek people, who suffer under these cuts, are rebelling. That’s the story that one reads on a daily basis and it sounds good. Too bad it’s not true. 

Yes, Greece is cutting spending. But to call what Greece is doing “austerity” is like saying that going from eating five Big Macs a day to four is “a diet.” Reality is more complicated. 

Look at government finances. Basically revenues fell in 2009 but have since held flat. This is due to three forces. First, revenues that depend on work, income and profits have fallen due to more unemployment, lower wages and lower corporate profits. Second, the government has increased value added taxes on consumption, in part because these are easier to collect than direct taxes (where evasion is high). Third, EU financing for investment has increased, providing additional revenue to the treasury. 

These measures have kept revenues flat but since the economy is contracting, the ratio of revenues to GDP is at a ten-year high of almost 41%. So yes, there is tax evasion and revenues could be higher, but the state is taking in as much money as at any point over the last decade. Meanwhile, the increase in indirect taxes has plunged the economy into a deep recession as people have less disposable income. Deposits have fallen by 35% due to capital flight and dissaving. Wealth is evaporating. 

The reason can be seen on the expenditure side of the equation. From 2008 to 2011, the state cut €13.2 billion (-12.5%) in primary spending (excluding interest). But look closer and the “adjustment” evaporates: less public investment accounts for almost half of that drop, while much of the remainder is explained by less spending on defense, meaning the state is building less infrastructure and buying fewer weapons. Meanwhile, social benefits have risen and spending on wages has declined by merely 7%, largely due to retirements by civil servants rather than any rationalization in public administration. 

But consider something else. In 2011, primary spending was at 43.1% of GDP, down from 48.7% in 2009. Yet spending from 2000 to 2006 averaged 40% of GDP. So even today, the state spends three percentage points more than it did earlier in the decade. In fact, once you strip out capital expenditures (to control for the recent drop in investment), the state is spending 5.3% of GDP more in 2011 than it was in 2000-2006. In 2011 terms, that is a €11.5 billion difference, roughly the amount of money that foreign creditors demand that the state cut over the next few years. 

This breeds three big questions: why does the reduction of infrastructure and defense spending so compromise the provision of public services; why is it so outrageous to shrink the state back to its 2000-2006 levels; and why can the state not provide with 43% of GDP the goods and services it could provide with 40% of GDP? 

These are profound questions that go to the core of what is happening in Greece. Taxes are rising so that the government can buy time to shrink the state back to where it was a decade ago (as a share of the economy). The idea that the state is being starved and therefore cannot provide for its citizens is rubbish. Money is not the issue. The state is alive and well – in fact, it is eating better than it was a decade ago. So much for a diet.

Ποια Λιτότητα;

Η λιτότητα σκοτώνει την Ελλάδα. Ή τουλάχιστον έτσι μας λένε. Οι πολιτικοί και ο Τύπος παρουσιάζουν μια σαφή εικόνα: για να ικανοποιήσει τους ξένους πιστωτές, η ελληνική κυβέρνηση μειώνει τις κρατικές δαπάνες σε επίπεδα που θέτουν σε κίνδυνο τη παροχή βασικών υπηρεσιών. Οι πολίτες, που υποφέρουν κάτω από αυτές τις συνθήκες, επαναστατούν. Αυτά διαβάζει κανείς σε καθημερινή βάση. Λογικά ακούγονται. Αλλά δεν είναι αλήθεια. Όντος η Ελλάδα κάνει περικοπές. Αλλά αν αυτό πού κάνει η Ελλάδα είναι «λιτότητα», τότε κάποιος που τρώει τέσσερα χάμπουργκερ την ημέρα αντί για πέντε κάνει δίαιτα. Η πραγματικότητα είναι πιο περίπλοκη. 

Κοιτάξτε τα δημοσιονομικά της χώρας. Τα κρατικά έσοδα μειώθηκαν το 2009, αλλά από τότε έχουν μείνει στάσιμα. Αυτό οφείλεται σε τρεις δυναμικές. Πρώτον, τα έσοδα από την εργασία, το εισόδημα και τα κέρδη έχουν μειωθεί λόγω της ανεργίας, της μείωσης των μισθών και τα χαμηλά εταιρικά κέρδη. Δεύτερον, η κυβέρνηση αύξησε τους φόρους προστιθέμενης αξίας, εν μέρει επειδή είναι πιο εύκολο να τους εισπράξει από τους άμεσους φόρους (όπου υπάρχει φοροδιαφυγή). Τρίτον, η χρηματοδότηση της ΕΕ για τις επενδύσεις αυξήθηκε, παρέχοντας πρόσθετα έσοδα στο δημόσιο ταμείο. 

Τα έσοδα έχουν μείνει σε σταθερά επίπεδα, αλλά επειδή η οικονομία συρρικνώνεται, τα έσοδα ως ποσοστό του ΑΕΠ βρίσκονται στο 41%, το υψηλότερο επίπεδο της τελευταίας δεκαετίας. Οπότε ναι, υπάρχει φοροδιαφυγή και τα έσοδα θα μπορούσαν να είναι υψηλότερα, αλλά το κράτος εισπράττει το μεγαλύτερο μερίδιο χρημάτων της τελευταίας δεκαετίας. Εν τω μεταξύ, η αύξηση των έμμεσων φόρων έχει βυθίσει την οικονομία σε ύφεση, καθώς το διαθέσιμο εισόδημα έχει μειωθεί . Οι καταθέσεις έχουν πέσει κατά 35% λόγω της φυγής κεφαλαίων και της αρνητικής αποταμίευσης. Ο πλούτος εξατμίζεται. 

Το πρόβλημα βρίσκεται στις δαπάνες. Από το 2008 έως το 2011, το κράτος έκοψε € 13,2 δις (-12,5%) από τις πρωτογενείς δαπάνες (εξαιρουμένων των τόκων). Αλλά τι έκοψε; Καταρχάς μείωσε τις δημόσιες επενδύσεις, που αποτελούν το ήμισυ της συνολικής πτώσης. Από το άλλο μισό το μεγαλύτερο κομμάτι είναι η χαμηλότερες αμυντικές δαπάνες. Εν τω μεταξύ, οι κοινωνικές παροχές έχουν αυξηθεί ενώ οι μισθολογικές δαπάνες του κράτους έχουν μειωθεί μόνο κατά 7%, κυρίως λόγω συνταξιοδοτήσεων των δημοσίων υπαλλήλων παρά ενός εξορθολογισμού της δημόσιας διοίκησης. 

Ας δούμε και κάτι άλλο. Το 2011, οι πρωτογενείς δαπάνες ήταν 43,1% του ΑΕΠ (έναντι 48,7% το 2009). Ωστόσο, οι δαπάνες την εποχή 2000 - 2006 ήταν κατά μέσο όρο στο 40%. Ακόμη και σήμερα, το κράτος δαπανά τρεις ποσοστιαίες μονάδες περισσότερο από ό,τι στις αρχές της δεκαετίας. Αν αφαιρέσουμε τις κεφαλαιακές δαπάνες (επειδή η πρόσφατη πτώση των δαπανών οφείλεται στις επενδύσεις), το κράτος δαπανά 5,3% του ΑΕΠ περισσότερο από ό,τι την περίοδο 2000-2006. Αυτό το 5.3% είναι ίσο με €11,5 δις, που είναι σχεδόν τα «μέτρα» που συζητάμε τόσους μήνες. 

Όλα αυτά δημιουργούν τρία μεγάλα ερωτήματα: γιατί η μείωση των δαπανών για τις υποδομές και την άμυνα θέτει σε τέτοιο κίνδυνο την παροχή των δημοσίων υπηρεσιών; Γιατί είναι τόσο εξωφρενικό να κόψουμε τις δαπάνες στο επίπεδο που ήταν την περίοδο 2000-2006; Και γιατί δεν μπορεί να παρέχει το κράτος με 43% του ΑΕΠ τα αγαθά και τις υπηρεσίες που παρείχε με το 40% του ΑΕΠ; 

Αυτά είναι μεγάλα ερωτήματα που βρίσκονται στον επίκεντρο του τι συμβαίνει στην Ελλάδα. Οι φόροι αυξάνονται ώστε η κυβέρνηση να κερδίσει χρόνο για να γυρίσει το κράτος εκεί που ήταν πριν από μια δεκαετία. Η ιδέα ότι το κράτος δεν έχει πόρους για να παρέχει υπηρεσίες δε στέκει. Το θέμα δεν είναι τα χρήματα. Το κράτος ζει και τρώει καλά – μάλιστα τρώει καλύτερα από ό,τι έτρωγε πριν μια δεκαετία. Λιτότητα σου λένε. 

Wednesday, September 19, 2012

Great Expectations in Greece

No one expects much of Greece anymore. Markets expect it neither to repay its debts nor to stay in the Eurozone. Foreign officials doubt that the government has either the will or the capacity to change, and they now merely beg for a faint gasp of reform – any reform. The investor has closed his checkbook, while the rapidly depleting bank balance has turned into a countdown to desperation for the middle class. The unemployed do not expect to find a job, and the employed do not expect to be able to survive through whatever job they have. The infirm have given up on health, the vulnerable on the “safety net,” the parent on education, and the citizen on the police. Fighting tax evasion, selling state assets, reforming the public sector, opening up the private sector – in all, expectations are shrinking faster than the economy. We are almost at zero now. 

Such low expectations make it hard to turn the country around. People often do what you expect of them: if you treat people as if they are unlikely to achieve much, they are unlikely to achieve much. This is a lesson that J. Sterling Livingston captured well in his essay, “Pygmalion in Management,” where he wrote: “The way managers treat their subordinates is subtly influenced by what they expect of them. If managers’ expectations are high, productivity is likely to be excellent. If their expectations are low, productivity is likely to be poor. It is as though there were a law that caused subordinates’ performance to rise or fall to meet managers’ expectations.” The de-motivation of Greek society emerges from a sense that not much can be expected and so not much should be given. 

Yet there is also something refreshing about low expectations. As any underdog will tell you, exceeding expectations is easier when the expectations are low. In Greece’s case, the three main constituencies of the government are its own citizens, its official creditors, and the markets. All three expect little of Greece. They are thus ideal candidates to be surprised. Given the low starting point, it will not take much to replace the current race to the bottom, where one piece of bad news follows another, with a virtuous cycle that can change how people think of Greece. 

Imagine what good news (genuine good news, not propaganda) could do for Greece. Imagine if people believed that reforms were moving forward. Foreign governments would pledge more money and give Greece more time. Investors would sign up for more short-term Greek debt, perhaps even medium and long-term debt. If the Greek people believed in their government and were willing to allocate a share of their savings to finance state spending, the country’s financing needs would be more easily covered. Investment – foreign and domestic, direct or through sold state assets – would rejuvenate the economy and yield revenue to the treasury. And the mental health of the Greek people would rebound from a belief that this endless descent into misery is coming to an end. Good news can do a lot. 

But how to do this? In pondering this question, I have been drawn to a Walter Isaacson article called “The Real Leadership Lessons of Steve Jobs.” Based on Isaacson’s own biography of Steve Jobs, it draws on what one could learn from the founder of Apple and one of the greatest business personalities of our times. The article itself has 14 lessons, but I think five will suffice. 

Focus. “Deciding what not to do is as important as deciding what to do,” Jobs said, a lesson that most leaders will echo. It is easy for the Greek government to find one hundred things that need urgent fixing. And they are all important, politically, economically, ethically, socially. Yet no person, no organization can fix a hundred things at once. And rather than trying, the government would be better served to focus on a few big things. My list would be tax evasion, judicial reform, entrepreneurship, physical security and accountability in the public sector. These are big, broad tasks, of course. But how closer would Greece be in achieving them if it had devoted 90% of its resources to serving these five goals rather than allocating 5% each to 20 goals? Focus means discipline and it means learning to avoid distractions. It is hard work but it means asking every day, “what did I do today to achieve these goals?” 

Simplify. Together with “focus” comes “simplify.” Simplicity, Jobs understood, came from “conquering, rather than merely ignoring, complexity.” Anyone who has interacted with the Greek system knows its immense complexity. No task, however mundane, is truly simple (although I have few complaints about passport issuance). Simplicity requires a return to first principles, to look at each thing and ask “what purpose does this serve” and “do we really need it?” Imagine a serious commitment to simplicity, where the government bureaucracy is pushed to ask “how can I make this task simpler” and where simplification is rewarded by promotion and by pay. What would the Greek system look like then? 

Put Products Before Profits. Jobs said, “My passion has been to build an enduring company where people were motivated to make great products. Everything else was secondary. Sure, it was great to make a profit, because that was what allowed you to make great products. But the products, not the profits, were the motivation.” Greece is not in the profit making business. But Jobs understood that if you focus merely on profits you are no longer focusing on great products. This is the feeling one gets from the Greek government, as if the goal is to create elegant “five-year” plans in the communist style. Pour over the numbers too long and you are missing the point of what governing is about. The goal is not to produce a piece of paper, but to change the country – if the country starts to change, the debt math, the GDP math, the competitiveness math, they will all look immensely better. A country, like a company, needs its priorities straight. 

Don’t be slaves to focus groups. Jobs liked to quote Henry Ford who said “If I’d asked customers what they wanted, they would have told me, ‘A faster horse!’” One of my own favorite dictums comes from Bill Cosby: “I don't know the key to success, but the key to failure is trying to please everybody” In politics, it is hard to ignore constituencies. But with 1.2 million unemployed, with pensioners and wage-earners whose standard of living is shrinking, with the extreme left and the extreme right gaining ground, with such desperation and frustration, it is hard to see how reforms are “bad politics.” Listening to what people want is important but only to a point. There is no way to get out of this crisis while making everyone happy – and in fact, the past few years have shown this to be true. Focus on the big picture not on every constituency. 

When behind, leapfrog. When Apple missed the boat on music, “instead of merely catching up by upgrading the iMac’s CD drive, [Jobs] decided to create an integrated system that would transform the music industry. The result was the combination of iTunes, the iTunes Store, and the iPod, which allowed users to buy, share, manage, store, and play music better than they could with any other devices.” But what does it mean for Greece to leapfrog? It means that Greece is devoting enormous energy to playing catch up. It is trying to adapt, to adopt “best practices,” to close the gap. In some ways that is necessary. But crises are times for bold ideas. Countries have often leapfrogged with innovations such as flat taxes, special economic zones, or industrial clusters. What does leapfrog mean in tourism or shipping? How can the state help turn Piraeus into the premier shipping hub in the world, where owners, charterers, insurance companies, lawyers, and universities gather to shape the future of the shipping industry? Why is that beyond the capacity of the Greek state? In what other ways can Greece leapfrog? I don’t know all the answers, but no one achieved greatness by merely copying others. 

What permeated the Jobs philosophy more fundamentally was a commitment to excellence, a belief that doing great things attracts first-rate people, challenges the human mind and fulfills the human spirit. When asked whether he was rough on people, he said “Look at the results … These are all smart people I work with, and any of them could get a top job at another place if they were truly feeling brutalized. But they don’t. … And we got some amazing things done.” What Jobs brought was a sense of common purpose, a shared journey to a great destination. 

What Greece needs, above all, is someone to believe in its potential for greatness again. It needs a politician who believes that this country can be, as it was a few decades ago, one of the most dynamic and fastest growing in the developed world; who believes that Greece can offer an unmatched tourist product that blends natural beauty, history and modernity; who believes that Greece can be a center for global shipping where young professionals come to build their careers and get ahead; who believes that Greece can be a magnet not merely for refugees and economic migrants but for skilled professionals and for Greeks who no longer feel they need to cross borders and oceans to find opportunities; who believes we can do great things together by getting the little things right – little things like rewarding good work and balancing our rights with our responsibilities to one another. 

This is a paradigm shift and it is what Greece needs not merely to lift itself up, but also to believe that there is something worth lifting itself up for. The expectations are so low, it does not take much to get people thinking differently both in and out of the country. But that change has to come from the top. It can be no other way.

Tuesday, August 07, 2012

How Much is Public-Sector Tenure Costing Greece?

The Greek government continues its search for €11.6 billion in spending cuts; yet, it has made clear so far that laying off public sector employees is off the table. This is a pity: spreading the pain evenly between the private and the public sector is the best decision that the government could make. Besides boosting its credibility with Greeks who feel they are being suffocated to pay for generous state wages, this decision would yield enormous economic gains. Consider the following table.

Admittedly, the data on the Greek public sector remains opaque. But the European Commission, in its review of Greece’s second program, published a table showing public sector employees at year-end 2009 and 2010 and for November 2011 (see here, p. 24). To take the data through December 2011, I have relied on numbers published by the Ministry of Administrative Reform (here). The data shows that public sector employment shrank by some 56,000 from 2009 to 2011, a 7.8% drop (Line 1).

At the same time, from Q4 2009 to Q4 2011, total employment in Greece dropped by 544,000, a 12.2% decline (Line 2, sourced from here). If we subtract public sector employment from total employment, we can conclude that the private sector has been hit disproportionately with a -13% drop in employment. On top of fewer jobs are also lower labor costs, which have fallen considerably by 18.5% (Lines 4 and 5, sourced from here).

At the same time, the Greek government has managed to reduce its wage bill by almost 15.9% from €31 billion to €26 billion (Line 6, sourced from Eurostat). Given that part of the drop came from employing fewer people, the cost per worker only fell by 8.8% (Line 7). But had public sector costs fallen by the same amount as the rest of the economy (18.5%), the wage bill per person would have been almost €4,000 lower.

If we put these two pieces together, we can estimate that if the number of public sector employees had declined by the same amount as private sector employees, the wage bill would have fallen by 19.9%, given the (actual) drop in wages for the public sector. But if wages had fallen further, in line with the economy as a whole, the government’s wage burden would have shrunk by 28.4%.

In other words, if the public sector had suffered in a similar way as the private sector, the government would have spent €3.9 billion less in 2011 (€22.2 billion versus €26.1 billion actually disbursed). Given that Greece had a primary deficit of €4.6 billion, the government would have almost run a primary surplus in 2011! Another way to think about this is that the increase in indirect taxes (VAT, gasoline, etc.) has produced a net gain of about €2.3 billion from 2009 to 2011 (calculated as the delta between real revenues in 2011 vs. revenues if the ratio of indirect taxes to GDP had remained at its 2009 level – effectively estimating that the new measures prevented indirect taxes from falling in line with GDP as happened with direct taxes). Greece could revert back to pre-crisis tax levels and still come out ahead.

These are huge stakes, and all that they require is that pain is evenly split. No need to wipe out the public sector, just to treat public sector employees like everyone else. Greece would be running primary surpluses if the government could confront public sector employees. And Greeks would see a big spike in their disposable income from lower taxes. So much that can be accomplished with such a simple policy of political courage.

Wednesday, July 18, 2012

Assessing the New Greek Government: A Month Later

It has been a month since the June 17 election and the subsequent formation of a New Democracy-led coalition government. Where do things stand in Greece?

First, the sense of relief that came on the night of June 17 – as the country recognized that left-wing SYRIZA would end up in second rather than first place – has proven somewhat durable. The country is far from normalcy, of course, and there is a lot to be done. But the near panic that permeated the Greek public at the fear of what a SYRIZA government might do to the country has subsided. In and of itself, this is a good thing.

Second, there has been a marked change in tone. For much of the campaign season, the emphasis had shifted from what Greece can do for itself to what Europe can do for it; as I put it before, “Greece’s new motto is: ask not what you can do for your country; ask what Europe can do for you.” This has now changed. Instead, we now hear about how much Greece has not done, how few of the provisions of the memorandum it has implemented. This is, again, a very good development.

Third, we appreciate a lot better just how much the elections put on hold. There is an intense discussion about the measures that the new government has to take; but these numbers, (€11.9 billion in cuts through 2016) were part of the new bailout agreement and were known since, at least, March 2012. Yet we are just now getting to talk about them. Sad as it is, this fact underscores how much of a wasted opportunity the election season truly was. In three months and two elections we managed to avoid talking about the most important fiscal challenge that the country faced. Pity.

Fourth, the new government is picking the right battles. Instead of focusing on what to renegotiate, it understands that it first needs to restore some credibility. Credibility means a commitment to reforms and it means convincing its partners in Europe and the IMF that it is serious about change. Privatizations and the reform of the public sector are indeed urgent priorities and the government is right to put them front and center in its new agenda.

Fifth, we will know very soon what this government is made of. Gearing up for a fight with the power company’s union will tell us a great deal about the government’s stomach and appetite for change. So far, the government has indeed shown a willingness to fight; but it has also said publically that it will not fire people from the public sector, a non-serious starting point for reforming the state. Therefore, the signals so far are mixed. But they will be unmixed shortly. And that is good news since we will then know whether this government is for real or not

Sunday, July 15, 2012

One European Crisis, Different National Fates

We often use the term “European Crisis,” but not every country in Europe is experiencing the crisis in the same way. In fact, there are several countries that are doing quite well. On a sub-national level, Eurostat reported that unemployment in 2011 ranged from 2.5% in Salzburg and Tirol in Austria to 30.4% in Andalucía in Spain. These three regions are occupying the same economic space only in a very abstract way.

Inspired by that report, I looked at a few more metrics (see table). Of the 502 million people who live in the European Union:
  • 55% live in countries where real GDP was higher in 2011 than in 2007.
  • 95% live in countries where real GDP grew in 2011.
  • 64% live in countries where real GDP is expected to grow in 2012.
  • 71% live in countries whose cost of borrowing has declined relative to pre-crisis August 2008.
  • 46% live in countries where unemployment went down in 2011.

What do these numbers tell us?

First, they are a useful reminder that this is not a “European” crisis at least not in any meaningful sense since a lot of people live in countries that are doing well economically. Given the debate about whether this crisis is due to country-specific problems (corruption, red tape, state intervention, etc.) versus systemic flaws (common currency, European leadership, capitalism, etc.), such variance in outcomes means it is hard to put all the blame on systemic flaws alone.

Second, mobility of capital and of people is insufficient to level outcomes (of course mobility can only okay a role). Eurostat reported that, “In 2011, there were 48.9 million foreign-born people living in the EU27 Member States, with 16.5 million born in another Member State than the one in which they live (3.3% of the EU population) and 32.4 million born in a country outside the EU27 (6.4% of the EU population). In total, foreign-born people accounted for 9.7% of the total population of the EU27.” By contrast, in the United States, the foreign born population was 12.9% in 2010, and the share of people who lived in a state other than the one they were born was 27%. In other words, the “natives” made up 90.3% of each European country while they made up only 58.8% of each US state.

And third, the political economy of the EU remains precarious. For one, such a variance in experiences mocks the idea that this is in fact a “common union.” But more generally, it risks creating a greater backlash in the periphery. People often tell me that Germany does not want to solve this crisis because its economy benefits from it. I do not share that view, but I also recognize that as long as the European economy continues to operate in many tiers, such grumblings will only get louder. And over time, they can only cause harm to the union.

Thursday, July 12, 2012

Should Greece Restructure and Privatize its Power Company?

The New Democracy-led coalition is gearing up for its first big fight against the labor union of the Public Power Corporation (PPC, or ΔΕΗ in Greek). This is good news because we will know soon whether the government has what it takes to implement reforms. Lose this battle, and it will lose the war. Yet amid the bullying and the threats, there is also a quasi-argument brewing: an argument that Greece’s low tariffs for electricity are proof enough that the system is not broken. Is that true?

PPC is right in a very narrow sense. In 2011, Greece’s residential tariffs were the fourth lowest in the European Union and 23% below the EU-27 average (excluding taxes). But that is not the whole story. The state regulates prices, so it’s not hard to mandate that prices remain low. Therefore, the price level itself is not a very useful guide. How should we, instead, think about prices?

First, retail tariffs have not increased according to fuel costs, as they should in a market system. As the International Energy Agency (IEA) notes in its 2011 Country Report on Greece: “The tariff system has caused several distortions in the electricity market. The average wholesale price of electricity tripled from 2004 to 2008, but the regulated end‐user tariffs were increased by only 40% for industrial users and by 25% for households.”

Second, industrial consumers are subsidizing residential consumers. In the EU, tariffs for industry are on average 29% below those for residential consumers, which makes sense it is cheaper to supply bigger consumers in bulk than to supply smaller customers one by one. Yet in Greece, industrial tariffs are almost the same (-2%) as tariffs for the residential sector. Only four EU countries have a bigger discrepancy between residential and industrial prices and none are part of the EU-15. Therefore one reason that the Greek consumer pays so little is that the bill is picked by Greek industry.

Third, the regulated tariff does not cover the cost of electricity production. In a November 2007 strategy presentation, PPC claimed that the gap between the company’s revenues and the real market price for electricity was 25%. So this is another reason to not cheer about low prices: if they cannot cover the cost of production, they are unsustainable.

Fourth, PPC is expensive to run. Take payroll: the company’s staff has fallen from 31,645 in 2000 to 20,821 in 2011, a 34% drop. Yet, its payroll has risen by 23% in the same period – in fact, its payroll had risen by 66% by 2009 before it came down. These numbers mean that real compensation for PPC employees rose by 75% between 2000 and 2009 and by 29% in 2000-2011. By contrast, compensation in the Greek economy as a whole was up 15% and 4% respectively in the same period. PPC employees are doing very well, so why not take that extra cost in salary and give it back to the Greek consumer?

Fifth, the company overall is underperforming. Amazingly, the best benchmarking data to prove this point come from PPC itself. In 2007, return on equity was 1.1% versus 17.1% for the four largest European utilities. Return on capital employed was 2.1% versus 10.1% for six big European utilities. In a number of other metrics – return on sales and capital turnover – the company was lagging its peers. This is no wonder if power prices barely cover costs and staff costs have gone up when the number of employees has declined.

Sixth, it is not clear that the company’s trajectory is sustainable. At times, PPC is cash positive. But in part this is because it is depleting its coal mines – look at the finances of the coal mines by themselves, and they barely make money, which means that PPC is benefiting from investments in coal made a long time ago. But coal production peaked in 2002 and has declined by 21% since then. What is more, as the IEA noted, “In March 2008 … the EU Commission found that PPC’s right to privileged access to lignite violates EU competition rules.” Access to cheap coal is not a sustained competitive advantage.

Seventh and linked to the sixth, is the significant carbon intensity of the Greek economy which is due, in large part, to the heavy dependence on coal for power generation. Greece’s carbon intensity per unit of energy is 25% higher than the EU average. Besides the obvious implication for climate change, this also exposes Greece in general, and coal-fired generation in particular, to significant cash costs to buy emissions permits to keep polluting. As the IEA notes, “lignite‐fired power plants in Greece emitted an average of 1 tonne of CO2 per MWh generated in 2009, whereas the gas‐fired plants emitted 350 kg of CO2 per MWh.” This is again a looming cost for the Greek consumer.

Eighth, PPC does not provide great service. The Council of European Energy Regulators (CEER) conducts a Benchmarking Report on the Quality of Electricity Supply. Its top measure of quality is “unplanned interruptions excluding exceptional events.” Greece had 134 minutes in 2009 (latest data available), putting it 6th from the bottom in a list of 19 countries. Only Portugal, among the EU-15, had a worse number. Relative to the best service (Germany), Greece had ten times more minutes interrupted. That’s not very good.

Ninth, PPC’s dominant position distorts the market for wholesale power and prevents any meaningful competition from emerging. So without a reform of PPC, the power market cannot be reformed in any meaningful and the new investment that the country needs to meet its power needs will always lag what would have been possible if PPC did not have a dominant role.


One of my earliest memories when I went to college in the United States was furiously unplugging my laptop when I heard thunderstorms outside. My roommate looked at me and was puzzled: “what are you doing?” I said I am protecting my computer because we will lose power.” He gave me a perplexed look. It turns out that this is not quite what happens in America.

Deregulating the power sector is a serious debate and one that requires a focus on getting regulation right and on ensuring that we do not replace a public monopoly with a private one. But PPC is intimately connected with lights going out during inclement weather and with the A/C doing down in the midst of the summer heat wave. Sometimes, this happens because the power company cannot do its job. But sometimes it happens because its bullies in the labor union want to send a message to the rest of us. They get paid too much money to be sending those messages and to be bullying anyone. It’s time to end this farce.

Tuesday, July 10, 2012

Should Privatizations Be a Priority for Greece?

Privatizations are once again are at the center of the public debate in Greece. Should privatizations be a priority for Greece? 
Let me start with three observations. First, there is no doubt that the state has legitimate interests which markets will not fulfill on their own. For example, flying regularly to a remote island may not be a profitable proposition and one that the market will not provide at sufficient quantities. Yet a state has an interest in ensuring that all its citizens are connected. This is just one example. Markets will no doubt fail to provide certain goods and services that a state should want provided.

Second, private companies tend to be better managed, but not all state owned enterprises (SOEs) are inefficient – some (but not many) are indeed world class. Nor are private companies perfect – many lose money and engage in harmful or outright criminal behavior. Left unsupervised, private companies can undermine the public interest. We should neither dismiss public companies nor idolize private ones: believing in private or public enterprise should be an empirical, not an ideological position.

Third, the agent-principal problem applies to both public and private companies. Companies are meant to serve their shareholders, but they often serve their managers and employees instead. This happens due to information asymmetries, perverse incentives, and a pure inability to control a company’s day to day operations. Therefore, not every decision will be in the interests of the company’s shareholders, whether these are private investors or the state.

What then distinguishes private from public ownership? The most important difference is the possibility of failure. If a company cannot compete, it will go bankrupt. In private enterprise, this is a constructive force and allows resources to move from unproductive to productive uses. But SOEs rarely go bust. For one, states often own companies because they do not think that profit is their chief function – instead, they are presumed to serve some public interest. Rather than shut down unprofitable SOEs, states recapitalize them and socialize their losses. Even if states want to shut them down, they may not be able to due to social pressures. If a car factory cannot make money, people may protest its closure but there is nothing they can do about it. But they can petition a government – and vote-hungry governments often listen to those petitions. 
Why is this problematic? Three reasons. First, the absence of failure distorts incentives. Without failure an SOE has little incentive to invest, to offer superior services or to keep costs down. Survival depends on political connections. Therefore, the company no longer serves its customers (their view does not matter) or the state in a broader sense. Instead, SOEs need to cater to political interests to keep the money flowing. At a minimum this structure creates bad products and services.

The second problem is that such behavior distorts the markets in which the public company operates. SOEs tend to dislike competition since it underlines their own inferiority. Who wants to work for the company that has crappy 30-year old planes when your competitors have shiny new planes? Competition separates the good from the bad. Thus, state companies tend to lobby the governments for restrictions and regulations in their industry and they can even directly undercut competition by offering very low prices (as losing money is not a problem).

Of course, these efforts are couched in the name of consumers’ or the public interest – they are presented as a concern for prices or reliability in “strategic” sectors. Almost always, these arguments are a sham: instead, state companies want to protect their own privileges and will do anything to do so, including undermine other companies that can deliver the same service more cheaply and reliably. Consumers not only get bad services but they are also likely to be prevented from a chance to get the same service from private providers.

The third problem is that the inability to shut down companies has costs. When the state puts money into SOEs, it does so by either taxing people or borrowing money on their behalf. There is no free lunch: people pay for these companies either directly (by buying their products) or indirectly (by financing the state). A train ticket may cost €15 but if the state-owned railroad company runs a deficit financed by the state, the real price is above €15 – and in fact, people who do not use this service subsidize the people who do.

In that process, however, the state loses sight of costs and benefits. Greek state owned enterprises lost €2 billion in 2011 (before financing from the state). Is what Greece got in return worth €2 billion? Is it worth €2.6 billion (what they lost in 2010)? These questions become very hard to answer. It is easy for me to ask, do I want to pay €150 to fly from Athens to Thessaloniki? But when there are hidden costs, it’s much harder to compare costs and benefits directly. Cost-benefit analysis becomes too opaque.

These critiques prompt a question: can the state safeguard its interests without owning a company? Take the example of the unprofitable flight route mentioned above – clearly there is a state interest and clearly the market will under-provide this service. But the state has many ways to deal with this. It can, on one extreme, own a company so that it can directly provide this service. Or it can merely pay a private provider an amount that will make that provider want to supply this service. In a perfect world, the burden of the two options would be the same. But this is not a perfect world and so the difference ends up being much higher under direct ownership. Or the state can impose regulations on the private sector – make the right to fly contingent on servicing these unprofitable routes. There is a wide spectrum of options and owning a company is an extreme and costly way of getting something done.

So far, this is generic analysis, although given a natural suspicion towards markets, it is never a bad idea to restate the basic principles. Let us now turn to Greece. Most SOEs in Greece lose money – that, in itself, is a case for privatizing them. But financial results should not be the sole factor. Assume that Athens had an amazing metro but the company lost €1 a year; should the company be privatized? Maybe not. Maybe €1 a year is a tolerable subsidy for a perfect metro, even though the private sector could probably better service. At the same time, we ought to ask ourselves, is this result sustainable? Can the company open new stations and invest in new trains if it does not make money? If not, then maybe it should be privatized.

Conversely, let’s assume that a company generated profits – is that an argument against privatization? For one, if it has a monopoly, profits are easy. The company may also be “milking” old assets – it can earn a profit but it does not have enough money to invest. Imagine this: let’s say I own a newspaper and one day all the journalists quit and I replace them with third-rate journalists. For a while, this can remain a profitable company: it will be a while before advertisers pull out and subscribers stop buying the paper. Short-term profits may even go up because costs went down (by hiring cheaper staff). But current profitability masks an inevitable decline.

In Greece, the case for privatizations rests on four pillars. The first and most obvious is financial. Greece cannot afford to subsidize companies. These companies will no longer have funds to carry out their essential duties. In June 2012, for example, the power company secured a set of loans for €525 million with interest rates ranging from 7+ to 11.9%. In this environment, the company’s ability to keep going is severely impaired.

Second, SOEs tend to be inefficient and provide services at a higher cost than private companies could. Even if the state could afford to subsidize SOEs, it shouldn’t. The most glaring evidence comes from data published by the Ministry of Finance showing that salaries at SOEs were twice as high as the average salary in the private sector in 2008. This is hard to justify on productivity or other bases. The taxpayer is paying a lot of money extra for services that tend to be substandard.

Third, privatizations are an essential component of broader market opening and deregulation. The power market is a perfect example again: as long as the power company retains its current form, competitive markets will be nearly impossible to form. It is hard to achieve more competition and lower prices without also changing the ownership of what is usually the biggest or the only company in an industry. What is true for power is true for other sectors.

Fourth, Greece needs to signal its commitment to change. Privatizations tend to be politically tough, especially in countries such as Greece, where skepticism of markets and where the power of labor unions are both high. No wonder many analysts see the looming clash between the government and the power company as the first real test: will the government really stick to reforms? If privatizations are delayed, people will become increasingly doubtful that Greece can actually change.

Experience teaches us three things about how to privatize. First, the process of selling assets should be fair and transparent. Second, privatization needs to be accompanied with a broader market opening – there is no sense in turning a public into a private monopoly. And third, privatizations require regulation: functions that were previously either not needed or performed by SOEs will be now performed by the state. To do this the state needs to upgrade its capacity to regulate these new industries and to ensure that market competition is indeed serving the public interest.

The most serious and perhaps only objection to the case for privatizations is timing. Greece is unlikely to get a great value for its assets; why sell now rather than wait? This is a legitimate concern, even though realistically Greece cannot afford to wait. But there is different way to ask this question: can Greece achieve its economic and political goals without privatizations? Can it reinforce a sense of justice that it is willing to stand up to labor unions; can it put its public debt on a sustainable path; can it open up industries to attract investment; can it communicate domestically and internally a serious willingness to liberalize the economy; can it do these things without privatizations? I think not. And that is the reason privatizations are so essential.