A superb paper by Tryphon Kollintzasa, Dimitris Papageorgioub, and Vanghelis Vassilatosc.
The paper is a fairly detailed description of facts on Greece economy and how its macros are an outlier in the European system. The authors say much of the Greek system was designed to benefit the insiders at the cost of outsiders.
This explanation derives from the view of Greek society, since the return to democracy in 1974, as consisting of two groups with conflicting ends – “insiders” and “outsiders.” Insiders are enjoying rightful and unrighteous benefits and the system is protecting them from their own potentially unlawful behavior, competition and meritocracy. Outsiders are the rest of society. Typical insiders are considered to be civil servants and especially employees of public sector enterprises, private sector companies engaged in public procurement, the media, “closed” or “regulated” professions and tax evading professionals and companies. Typical outsiders are considered to be employees and pensioners of the non-protected private sector, new entrants to the labor force, unemployed and discouraged workers, immigrants, those needing the social protection net, exporters that compete in competitive world markets and companies that cannot tax evade. Although, outsiders outnumber insiders by a great margin, they are widely dispersed and contrary to insiders hardly, if at all, organized in promoting their common interest.1
Each and every group of insiders seeks rents from the political system and especially government incumbents. On the other side, politicians are, in general, eager and willing to provide these rents in exchange for the political support and/or the avoidance of political harassment by those groups.2 But, these rents are directly or indirectly increasing budget deficits and/or decreasing output and output growth and thus, affect negatively all outsiders and society as a whole.
These benefits have led to the wide deficits in Greece:
The economic consequence of the insiders-outsiders society, is the accumulation of public and foreign debts as well as relatively low overall growth – features that characterize the Greek economy, for some time. The debts in turn, emanate from excessive public and current account deficits, respectively. The public deficits are initially brought about by high government spending and/or low tax burden, mainly for the benefit of insiders. These deficits lead to higher consumption and imports and lower savings and investment.
In addition, the public deficit-related rents to insiders as well as other (non-deficit related) rents to insiders lead to lower total factor productivity and jeopardize the competitiveness of the economy, resulting in lower exports and output. Output growth also diminishes due to the combined effects of low total factor productivity growth and lower capital formation. The lower output feeds back to the public deficit via automatic stabilizers-type effects. The accumulation of public deficits in combination with the relatively low growth increases the public debt-to-GDP ratio to the point where interest payments as a share of GDP tower over output growth, leading to debt sustainability problems. Furthermore, the accumulation of current account deficits, increases the foreign debt-to-GDP ratio, which in view of the fact that Greece is a member of the Euro area and cannot devalue its currency, leads to credibility problems. And, therefore we have the present crisis.
The proposals to resurrect Greece are therefore wrong:
In terms of economic policy, there seems to be an obvious recommendation: Structural reforms to dismantle the insiders-outsiders society. Unfortunately, nothing of this kind was implemented under Memorandum I (May, 2010), which was associated with the first EUIMF rescue package, for the Greek economy. To a great extent, however, policies aiming at dismantling the insiders-outsiders society do characterize Memorandum II, which is associated with the second EU-IMF rescue package (February, 2012).9 There are some obvious lessons for countries that share features of the insiders–outsiders society with Greece, especially for those that are also members of the Euro area.
One cannot help but relate this to India. The insider/outsider society applies to India and most countries as well. In India the licence raj has moved to resource raj where natural resources have been given to a favored few. In Us and other economies we have the 1% vs the 99% which also in a way means the same insider/outsider regime..