Saturday, January 07, 2012

Why Can’t Greece Reform?

Greece needs to confront its reform paradox: despite being in the midst of an almost existential crisis, it cannot seem to muster the energy to carry out the deep reforms that are seen as necessary by a large share of the electorate. After a good start in 2010, the reform momentum came to a halt in 2011. Government resolve was replaced by backpedaling, irresolution and equivocation. The country seems stuck. Of course, there is enormous demand for change by a people frustrated by injustice and incompetence. There is also enormous supply for reform with foreign expertise and a well articulated agenda that could be summed up as: “a smaller but more competent state sector, and a bigger and more competitive private sector.” Yet supply and demand do not intersect to produce reform. Why?

To think about this issue, we need to distinguish between the desire and the capacity to reform. The “desire to reform” captures (a) the degree to which there is a social consensus towards reform and (b) the extent to which that consensus is articulated in a common agenda. A country can agree that it needs to change and it can also agree on how to change. But it may also have consensus on the need for change but disagree on what change actually means – think of Egypt after the Arab Spring. By contrast, the “capacity to reform” captures the quality of institutions and the national bureaucracy and the extent to which these can be deployed to serve a reform agenda.

Pair the two variables together and we have four possible outcomes: (a) a country that neither wants to nor has the capacity to reform – reform is unlikely in this case; (b) a country that both wants to reform and has institutions to carry out that reform – reform will likely be speedy; (c) a country with the desire but not the capacity to reform – reform will depend on the growth of capacity; and (d) a country that can but does not want to reform – reform will depend on the reaching of some political consensus in favor of reform. So where is Greece in this matrix?

Capacity to reform

There is no doubt that the country’s capacity to reform is low. Upgrading the government’s ability to govern is an urgent task that requires uprooting practices codified by law and perpetuated by custom. Weak public administration means that the state bureaucracy cannot conceive, legislate, coordinate or implement change. Reform is thus piecemeal, misguided or unimplemented. A 2011 OECD report on Greece’s public administration noted: “The apparent inability of successive Greek governments to implement measures that were enacted can be traced back to important weaknesses, which were allowed to persist in the functioning of the public administration. In particular, Greece’s central administration was plagued with inefficient structures, inadequate access to information and lack of co-ordination. Such problems had become a hallmark of the Greek government system long before the financial crisis, with considerable costs for the Greek economy and society.”

Whether Greece reforms depends on the pace of institutional change in public administration. But there is a problem here. In order to reduce its budget deficit, the government has pledged to cut the country’s public workforce by 150,000 between 2010 and 2015 (a 22% reduction). Of course, such a reduction is necessary, both to alleviate budgetary pressures as well as to lower redundancies. But this reduction is not tied to performance, and anecdotal evidence suggests that ministries are losing capable staff; as one staff member told me, “the people who left were the only ones working.” So there is a tension between shrinking the bureaucracy, which is absolutely necessary, and retaining competent staff, which is not happening. An increasing capacity to reform is hardly a given.

Desire to reform

The desire to reform is much harder to gauge. As mentioned above, we need to distinguish between a relative agreement on the need for reform and a relative agreement on what reform should look like. We also need to think about the constituencies that favor or oppose reform. Let us begin with the direction of reform.

An April 2011 Public Issue poll supports the idea, referenced above, of a consensus that Greece needs “a smaller but more competent state sector, and a bigger and more competitive private sector.” Around 60% of respondents had a favorable view of the private sector, while a mere 20% thought highly of the public sector. A larger share, 69%, thought Greece needed to rely more on the private sector for growth. Even more people, 74%, saw privatizations as necessary. Only in a handful of cases is there a public majority that is against privatization.

There is more evidence to support this thesis. The biggest drop in the public’s support for the ruling PASOK party came when the government started to waver in its resolve to push through reforms. This sense was particularly acute during the debate over “the closed professions” in early 2011 when it became clear that the “opening” of the professions was not really opening anything. That reform ambivalence violated the unspoken pact that the government had made and that George Papaconstantinou, the finance minister, had articulated: society will accept pain that is evenly distributed but will rebel if PASOK tried to protect its own constituencies. Once PASOK tried to water down reforms, it started to lose the support of the silent majority which yearned for change in the country. That too indicates a society that wanted to move towards less state and more private sector.

What about the existence of a consensus on the need for reform? In a way, the evidence above shows that there is such consensus. Poll after poll shows mounting discontent as do continuous strikes and protests. Very few people thought the country was headed in the right direction in 2011 and confidence indicators have reached historical lows. Such sentiments are captured in various polls, and one poll, conducted at the one-year anniversary of the bailout, showed deep disillusionment with the country’s political and economic model. More than half of the respondents (56%) said the country needed radical change, while a further 33% said it needed a revolution. Since 1999, the base year, there has been growing radicalization: fewer people believe that minor changes suffice and more people think a revolution is needed. Naturally, the call for revolution is mostly a communist call. Even so, the disillusionment and call for radical change cuts across parties and ideologies.

Yet despite this growing frustration, there is still disagreement on what exactly went wrong and what needs to change. The best evidence for this disagreement comes from the answer that the Greek people give to this question: how responsible are different parties and institutions for Greece’s debt? Respondents were asked to rate from “very” to “little” a number of different culprits. Their answers highlight that Greece still lacks a consensus narrative about the roots of the crisis. The number one culprit was “Greek governments” which is understandable although vague (which governments exactly and how?). The Greek public also faults speculators, Greek banks, big EU countries and foreign banks. About half of the respondents placed some blame on the Greek people themselves while a minority (44%) saw the euro as contributing greatly to Greece’s debt.

Such views tell us that while there is a clear desire for change, there might not be consensus on exactly needs to change – or on what needs to change first. If one indeed thinks that Greece’s debt was caused by speculators, banks and the big EU countries, there is obviously no reason to think that the way out of this crisis lies with major institutional reforms. Similarly, laying blame on “Greek governments” concentrates the culpability on a (large) number of bad politicians; however, this diagnosis may mean that the solution rests not with major reforms but with a change in the country’s politics or leadership. And so, while there is clear frustration with the state of the country’s affairs, there is less consensus on what exactly went wrong and what needs immediate fixing, even though there is consensus on the broad, long-term direction that the country needs to follow.

The politics and political economy of reform

These numbers would suggest that Greece has a desire to reform that is consistent on the big picture but vague on the particulars, but it lacks the institutional capacity to carry out reform. And yet the numbers above merely give us some general idea of where the public at large stands. Policy depends on politicians who take their cues from narrow constituencies and special interests. Just because a majority wants something, it does not mean it will happen. Reform needs champions both in government and in society, and it also needs force and momentum to beat its opposition. Does the reform movement in Greece have momentum?

In my mind, PASOK was and remains split on the merits of reform. While the former prime minister sincerely believed in the need for radical reform, he was never able to create a consensus in this cabinet in favor of that position. As a result, there were continuous battles, often in public, among ministers over the country’s reform agenda. In part this was mere politicking and it reflected the quest for power or the desire to curry favor with a constituency. But it was also due to ideology: getting a socialist party to overhaul a country’s economy along market lines is a tough sell. It became especially tough as PASOK got caught in a vicious cycle where declining popularity led more party members to hedge their positions, which in turn stalled reforms that intensified public discontent and hence contributed to declining popularity.

For the main opposition party, the paramount objective is to force elections as early as possible and to gain power by winning those elections. The party’s focus is thus on obstructing change and highlighting the government’s failings rather than a desire to promote a specific reform program. There is little desire to provide political cover for deep reforms.

What about the public? One approach is to look at employment numbers to gauge who might favor reform versus who might oppose it (see here). The ones who benefited from the old system are chiefly public sector employees and private sector professionals who can evade taxes and who enjoy various protections. There are roughly 700,000 public sector employees and 2 million professionals, although not all of these people benefited from the old system. On the other hand are private sector employees who subsidize either the state or the professionals and they number roughly 1.3 million. Besides these groups are forces whose self-interest is less obvious: the unemployed (now up to 850,000), the economically inactive population (2.1 million) and pensioners (2.1 million). We can think of pensioners and the unemployed as up for electoral grab, especially insofar as these people see their deteriorating condition (inability to get a job or lower pensions) as a result of the slow progress towards reform. These numbers are hardly scientific but they confirm a possible plurality in favor of reform.

A second approach is to dissect the protest movement in Greece (see here). The protestors are a motley group and they encompass people who oppose to change because they stand to lose from it, people who are exasperated by the political system and those who are frustrated that change is not coming soon enough. Participation in protests has ranged from a low of 12% to a high of 29% of the public (here). More than half of the protestors came from the private sector and they were evenly split between employees and employers. Public sector employees participated more than other groups but they made up about a sixth of the total. The balance came from pensioners, the unemployed and they economically inactive population. So the protest movement, while vocal, represents only about a quarter of the population. The protestors are as often driven by self-interest as they are by frustration – if we assume that private sector professionals and public sector employees are definitely opposed to reform, they make up less than half the protestors. And with a more than third of the protestors saying they intend to abstain in elections, there is room for political maneuver.

These data points suggest that the politics of reform are not very auspicious with neither of the two parties fully endorsing a strong reform agenda. On the public side, there is wide-spread opposition from those who will lose from reform, but these people are not a majority; there is also an increasingly share that can be swayed by a convincing program.

What happens to reform?

This analysis leads me to two conclusions. First, the need to upgrade the country’s public administration is intimately connected with reform. Not only does this task require a change in long-held practices and beliefs, but it also needs to happen at a time when the state sector is shrinking and losing capable staff. We can expect this process to be very slow.

Second, the desire to reform exists at the public but not at the political level. Public attitudes seem to favor reform but the country still lacks a broad narrative that can connect three pieces: why Greece ended up here; what options does it have; and how are those options connected to different futures for the country? People may agree on the reforms needed but they disagree on how Greece got into this mess and they also cannot see how these choices will get the country out of this crisis. Ultimately, this is a leadership problem. If a government were able to galvanize the support for reform that already exists, it could create a pro-reform electoral consistency that could trump over self-interested opposition. Instead, the government is stuck in the worst of both worlds: too much reform to keep favor with the people who stand to lose from it and too little to win over those who crave for it. As long as we are stuck in that position, reform will be slow.

13 comments:

  1. George PapadopoulosJanuary 7, 2012 at 12:16 PM

    Excellent, thank you. It is tragic to watch the implosion happen in slow motion/greek time. I think the key factor is just inept capacity to reform...and way too many leftists/communists/anarchists/unionists/closedprofessionmafiozi impeding everything along the way banking on chaos/revolution/statusquo...Then I look around and I see absolutely noone in the atrocious political scene to carry the torch and lead the country of the mess...

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  2. people do not want to pay for debts that the government created in their name but has stolen most of the money. And why should they ? Borrowing money in somebody's else name should be illegal

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  3. Excellent as usual. Your analysis always hits the nail on the head, and is carefully considered, well articulated and thus highly persuasive. This blog should be considered essential reading for anyone interested in the Greek crisis.

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  4. Well, Mr. Papadopoulos, I see even more stubborn opposition to all systemic changes on the right wing side. After all, the professionals and business owners profit from the unfair system (even if it's only relatively, ignoring that in the long run they would profit from a more efficient, competitive economy, too), and as Tsafos shows, they're even more numerous than the public sector employees. Imho the only realistic way towards real improvements is if the private sector unions and the left wing parties would join forces and come up with a more responsible approach towards their role in the nation. With shrinking employment, they should see that their constituency is doomed, together with all of Greece, if there aren't serious changes. A vast left wing coalition, focussing on fighting corruption, tax evasion and the byzantine roadblocks harming the economy could put Greece on a path towards a maodern social market economy. Where is the larger-than life popular leader to unite the diverted left wing scene behind such a realism based program? In the news today, there is a report that in Israel, a TV anchorman will run for office, with polls showing he has a good chance to succeed. There have to be similar guys (and dolls) in Greece, too. They shouldn't wait any longer and step up now. Remember what JFK famously said: "Ask not what your country can do for you, ask what you can do for your country." I know that's a very ungreek idea, but there has to be at least one honest person with leadership qualities who sees a value in serving the nation and not only his/her selfish interests!

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    1. Gray, there is no "rigth wing side" in Greece. The right wing in Greece is the extreme right wing, and their flag is not the market, is xenofobia and nationalism. You talk about "social market", but no one defendes the "market". they defend the "social". That's why there is no market in Greece. Greece produces olive oil and yoghurts. The left rules Greece. A union leader can block Greece very easily, as we have seen along the years. A public union can cut all the energy in Greece, and the ports. That's real power. The private sector is weak. You talk about left wind and unions join forces. Papariga, Tsipras and the union leaders? Sure, that would be a party. Greece doesn't need larger than life leaders. That's folklore, that's Zorba. Enough of that.

      Peter

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  5. Nikos, are you going to be translating this piece into Greek?

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  6. Dionysi - That's my plan, yes! Just got caught up with something so it's taking a little longer.

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  7. Excellent analysis, Niko! I would hasten to add that very few countries have successfully undertaken a structural reform effort like that which Greece is expected to do. Several countries do come to mind, including Georgia, FYRO Macedonia, Singapore, and Saudi Arabia. But the circumstances for these countries' successes are much different than those that pertain in Greece.

    For example, Saudi Arabia and Singapore are autocratic countries, to put it mildly. Their rulers have wide latitude to impose economic regulation and with minimal hindrance by vested interests. Saudi Arabia, it is said, has the desire to become number five in the Doing Business survey within two years. It's very easy to do if you don't have a legislature standing in your way and if you have plenty of money to spread around creating new systems and buying off whatever special interests (or closed professions) stand in your way.

    Georgia and FYRO Macedonia, on the other, are relatively small, backwater economies that understand a need to make themselves more attractive to investment, and they do this as a matter of national survival. No one from the EU, IMF, or World Bank set forth a high bar of conditionalities to make them do this. To be sure, however, these institutions (and USAID) certainly did provide technical assistance that encouraged these countries to reform their business climates.

    What sets Greece so far apart from these other examples is the sweeping amount and suddeness of the reform effort. It resembles the "shock therapy" that Russia was expected to take. In that case one must remember how things backfired. Strobe Talbot, a senior State Department official, had even remarked that perhaps there was too much shock and too little therapy in the medicine.

    Is Greece like Russia was in the 1990s? Not exactly, and Greeks have an abundance of entrepreneurial drive if it's allowed to be channelled to the right things.

    Greece needs to reform. I wish that country's new leadership the stamina and the patience to see things through in the face of vested interests and institutional ineptness and footdragging.

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  8. I have the feeling that staying on this quantitative level of observation (namely, reform desire vs reform capacity) without focusing on the overall systemic structure of Greece, obscures rather than illuminates the issue.
    Because it is not difficult to think of an individual who wholeheartedly desires reform, on a rational level, but who, through the details of their structural involvement in the system, is effectively an opponent of reform.

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  9. That's why clearheaded leadership in the truest sense of the word is so vital. Getting bogged down in details easily derails the efforts.

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  10. The key to getting Greece out of this mess is strong, effective Greek leadership. If Greeks ascertain that they have a leadership determined to implement policies that are fair to all Greeks, and has the clout and determination to do so, they will back such a leadership.

    But you can't expect the Greek population to back a dry technocrat chairing a Cabinet of apparent crooks, for the simple reason that they have no faith in such an administration and will therefore sabotage its work every step of the way.

    This is a simple rule in management training -- get the employees on your side otherwise they will screw you and the company.

    Obviously the Greek Cabinet hasn't got an MBA between them.

    It is leadership, Niko, that will lead Greece out of the hole its corrupt and greedy leaders dug for such a proud nation.

    Everything else will follow if Greece has good leadership -- indeed, I would go as far as to say that Greeks will make huge sacrifices to get their country back on track as long as the right leadership is steering the ship (and punishing the malingerers).

    At the moment, this leadership is sorely lacking.

    Look what good leadership did to Greece in 1941 -- even a right-wing dictator such as Metaxas was able to unite the whole country behind him, and persuade the population to make incredible individual sacrifices without complaint and do the impossible, because they believed in the cause and they believed that Metaxas was the right man for that particular job.

    You can talk economics day and night. But without good leadership, Greece will go nowhere except downhill.

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  11. Excellent analysis. But a bit sour. 50 years from now, greek politicians, common people, journalists, bloggers etc, will keep saying "we need to reform" "we need to reform" "we need to reform" "we need to reform" ...

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  12. Niko, congratulations, very well written, regardless of whether one agrees with your points or not.

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