Political economy of Greece crisis and why India did not go the Greece way?

This is an amazing must read paper on the Greece crisis. On reading this you come to three points:

  • How Greece became a member of EMU despite being such a crony capitalist country?
  • Those who think after bailing out Greece things will be resolved, are just making a fool of themselves. This country needs a complete overhaul starting from government and will take a while for it to be a worthwhile economy.
  • In many ways Greece is like many of those companies like Enron etc that has been fooling all the stakeholders for a long time. And then comes a time when game is over embarrassing one and all. Greece became a developed economy (god knows how) despite many defaults in the past. On joining the EMU, it discovered it could borrow at rates equal to Germany without doing anything and continued to splurge. And now the game is over embarrassing all – banks, memmber EMU countries etc.
A similar perspective was brought by Michael Lewis who showed corruption is rampant even in religious places like monasteries. There was one such monastery which led to this crisis as well
Another afterthought on reading this paper is – Much of Greece happenings are similar in India as well (will become clearer on reading the paper and the post). This brings me to two qs as well:
  • How India has not managed to go the Greece way?
  • Or are we headed the Greece way?
First let us discuss some key findings of the paper. It says  that even early history of Greece system was centred around rent seeking and corruption.  And how little has changed even in 21st century:

Political clientelism and rent seeking have been the central organizing principles of Greek society since the foundation of the Greek state in the 19th century. The influence of the Eastern Orthodox Church on Greek nationalism and the legacy of the patrimonialist Ottoman empire produced a weak civil society. The result has been a disproportionately large Greek state and public bureaucracy since the 1800s that set the stage for rent-seeking struggles that have followed.

Since the 1930s, political patronage has been disbursed through increases in public sector employment, regulations that limit competition, and the imposition of levies on transactions that benefit third parties. The resulting system has encouraged corruption, discouraged wealth creation and affected popular ideological narratives. The view that the state is good and that markets are bad is widespread, held across the political spectrum, and is understandable in a rent-seeking society where all activities, including market transactions, are seen as redistribution. But the realization of “putting people above markets” has deepened clientelism and produced the current national crisis.

Hmm. Unlike US whose system was based on meritocracy, Greece systems itself were based on kleptocracy. You have counties that become kleptocratic but here the foundation was based on principles of corruption and rent seeking.

The paper goes on to tell you how the system has disintegrated over the years. It has some amazing history which encouraged all this and actually strengthened it. Nothing has changed despite many wars etc:

Much water has of course flowed under the bridge since those days. Greece experienced wars, revolutions, occupations, bankruptcies, dictatorships, earthquakes, etc. Yet if there was one thing that remained constant throughout this period it was the system of political clientelism as the central organizing principle of Greek society.

Of course some things changed: from the middle of the 1930s onward, political parties ceased being simply loose coteries of personalities heading extended patronage networks and became more centralized. The clientelistic orientation, however, remained intact.

Another thing that changed was the rhetoric that legitimized the distribution of benefits. Client groups today receive benefits in the name of “social justice” (κοινωνικη δικαιοσυνη) or of “national necessity” (εθνικη αναγκαιοτητα) or of “acquired rights” (κεκτημενα δικαιωματα).

There are 3 main ways that wealth is transferred from political party to its clients (and viceversa)

We can briefly distinguish three types of benefits that a party in power provides today to its clients:
a) Employment in the public sector;
b) The establishment of rules and regulations that limit competition and create “closed shops;”
c) The imposition of levies on transactions for the benefit of organized groups that are not part of the transaction.

The first is about how every Greek wants to be in civil services/public sector.

Providing a job in the civil service continued through the years to be one of the main instruments used by the political class to ensure the loyalty of voters. But a very significant change took place in 1911. An article in the constitution was adopted which granted life employment to those employed in the civil service. The people who introduced this constitutional article had the best intentions. They wanted to provide the civil service with continuity. Until that time, every party that came to power used to fire the previous lot and hire its own people. However, instead of getting a more rational bureaucracy, Greece simply got a bigger bureaucracy. Political parties continued to staff the civil service with their supporters, only now they could not fire the previous lot, so the bureaucracy grew enormously.

Today, according to the Athens Chamber of Commerce, there are around 1,2 million people employed by the state—this includes clerks, teachers, doctors, and priests—which amounts to almost 27 percent of the total working population of the country (France24 2010). Thus one out of four working Greeks is employed wholly or partly in the public sector. More than 80 percent of public expenditure goes to the wages, salaries and pensions of the civil servants.

Getting a civil service job in Greece is widely perceived as being granted a sinecure and not as a contractual obligation to work. The resulting inefficiency of the civil service reinforced a system of promotions based on seniority and not on merit or talent. One can only move up the ladder more quickly if one has good connections with politicians and trade unionists.

This huge bureaucracy just keeps making laws. From 1974 onwards, 100,000 laws were passed around 2857 per year!

Then there are rules limiting competition. You pay a fees to lawyers for everything. You need a degree licence for doing anything in Greece:

The second way the system of benefits operates is by setting up closed shops and rules that limit competition. In Greece one can find a whole set of laws mandating opening and closing hours of various enterprises, or defining the geographical proximity where two similar establishments can operate, setting minimal prices for various professional services, issuing licenses and preventing or limiting competition.

Lawyers, for example, represent one of the most heavily regulated professions. Their presence is compulsory in many transactions including in the signing of any contract concerning the buying and selling of real estate from which they receive a fee fixed by the state. Moreover, the state also mandates that lawyers charge a fixed minimum fee for their various services, which of course prevents competition from new entrants into the profession. Similar rules apply to engineers and architects. They all receive a minimum fixed percentage of the price of the construction as their 

Similar restrictions apply to the operation of drugstores. You are only allowed to own and operate a drugstore in Greece if you hold a degree in pharmacology. The same applies to opticians. You can only own a shop selling spectacles if you hold a degree in optics!

Third way is to impose levies on anything and everything.

  • If you have a business and you want to advertise your brand or product you have to pay an amount equal to 20 percent of the advertising expenses to the pension funds of the journalists.
  • Each time you buy a ticket on a boat, 10 percent goes to the pension fund of the harbor workers. A part of the ticket price that covers the insurance of passengers goes to the sailors’ social security fund.
  • If you sell supplies to the Army, you will have to pay 4 percent of the money to the pension funds of the military officers. When you buy a ticket at a soccer game, 25 percent of the amount goes to the pension funds of the police.
  • It is estimated that there are more than 1,000 such levies whose total cost amounts, according to some calculations, to over 30 percent of the country’s GDP
There is case where levy is imposed for  something which does not even exist!!
All these developments have reinforced the belief that state is good and markets are bad:

Greece is a society dominated by rent seeking rather than wealth producing activities. The fact that two thirds of the electorate is living partly or wholly on government hand-outs significantly affects the ideological narratives that are popular in the country. Marx was once again right on the mark with his thesis that people’s consciousness is influenced by their economic mode of existence. The rent-seeking worldview occupies a hegemonic place in Greece. All narratives from the left to the right simply represent different nuances of the overriding theme: “The State is good, markets are bad.”

That view is understandable. In societies where rent seeking dominates, all activities—including activities related to the market—are seen as redistribution. That perspective applies also to the activities of the entrepreneur which are seen not as wealth creating but as a form of the redistribution of existing wealth marked by pervasive inequality.

Well even Weber was right in a way as both consciousness and economy reinforce each other.
They oppose privatisation as many Greeks feel public services they are already privatised as they pay a bribe for everything. So there is this vicious cycle of people hating private sector even more.
Superb. Read the whole thing. Is a must to understand why Greece cannot really improve any time soon.
What about India? Well, the founders of the nation had great ideas but it just became like Greece over the years – kleptocratic. Even in India:
  • We had a large government
  • Preference for Employment in the public sector
  • The establishment of rules and regulations that limit competition and create “closed shops;”
The corruption and cronyism have been rampant all along just like seen in Greece but somehow we did not become Greece. India was lucky to  have civil servants who were willing to serve the country (atleast some if not all) and things chugged along.
And then we had the 1991 crisis and lots of things changed.
  • Rules and regulations changed to bring foreign investment and competition
  • As competition came in, rules of the game changed. Preference of employment shifted to private sector. Working in public sector isnt seen as a prestigious thing anymore except IAS services. Parents who have served their lives in one public sector company take huge pride seeing their children earning many times more in private sector
  • The culture changed from cronyism to meritocracy where students from IITs and IIMs getting great jobs in India
However, the story does not end there. When things were going great for India we discovered that amidst all this transition, corruption and cronyism was not just there but increasing. Scams in  large IT company and 2G auction showed the success stories of IT and telecom were not as good as they were made out to be.
We discovered that a government run by some really able and honest men (perceived) was the most corrupt we have ever had. The scams have enfolded like never before and suddenly the whole cycle looks suspicious. Foreign investors are jittery and no one is sure what  is cooking between business and government.
This comparison to Greece raises some interesting qs. Is all this corruption ingrained in India as it was in Greece? As a result, it just stays no matter what you do. Is this phase of Indian high growth with high corruption similar to US gilded age and corruption issues will die like gilded age? Or is it like Greece where corruption will stay no matter what you do? Very important issues to introspect.
The current government has clearly dented a lot of India’s hopes. It  also suggests that it is not enough to elect reforms talking people to run the government. You need some rules to ensure they walk the talk..

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