Thursday, August 11, 2011

Lessons from Greece

by Aristides N. Hatzis

Korean Herald
August 12, 2011

For the past 18 months Greece has been the epicenter of the European sovereign debt crisis. Its enormous national debt (127 percent of GDP before the first bailout in May 2010, reaching 160 percent by the end of 2011) and its ever-expanding deficit (15.4 percent before the austerity measures) were so scary that nobody really cared about what led Greece to this. Nobody was really interested in this monster-making machine which gave birth to both, more widely known by the euphemism “Greek Government.”

Make no mistake: In Greece, government is not only the problem; it’s also the guarantee that no solution can be successful. The Greek debt is the worst case of government debt, accumulated to these gargantuan proportions during some 30 years of irresponsible spending. How could you spend so much money?

Up until the late 1970s Greece was still considered a miracle economy since for most of the period between the mid-1950s and the mid-1970s its economic growth could be compared only to Japan. Its accession to the then European Communities as its 10th member (even before Spain and Portugal) was not only a magnanimous political decision; it was also based on this impressive growth spurt.

However this historic moment for modern Greece did not become the starting point for more economic and institutional development but the beginning of a 30-year journey down the abyss. The map for this journey was sketched by the Socialists who seized power for the first time in 1981 but it was followed religiously by the “socialists of all parties” who have governed Greece since then.

Even the conservative government which governed Greece from 2004 to 2009 managed to surpass socialists in spending and borrowing. As Thomas Friedman aptly put it in New York Times, “Greece, alas, after it joined the European Union in 1981, actually became just another Middle East petro-state ― only instead of an oil well, it had Brussels, which steadily pumped out subsidies, aid and euros with low interest rates to Athens.”

Of course, only a small portion of these funds were used efficiently in order to boost growth, invest in public goods and create an adequate social welfare net. Even though the Greek government spent nearly half of its budget on social benefits the result was a low-quality (sometimes third world country-level) welfare state. It is no coincidence that the efficiency of social welfare spending in alleviating poverty was the lowest in EU.

The inefficiency was not only the result of a bureaucracy of Kafkian proportions but also the deliberate “spillovers” of these benefits to the government “middlemen” (e.g. corrupted tax collectors) and interest groups with the power to pressure for redistribution in their favor (e.g. closed professions).

The unaccountable welfare state, the widespread tolerant attitude toward corruption in combination with an inefficient legal system, extensive tax evasion, “captured” regulatory agencies and politicians and political parties elected to serve the rent-seekers led to a textbook example of prisoner’s dilemma, typical in a Hobbesian world.


Read more about Aristides Hatzis' visit to South Korea

The President of South Korea quotes Aristides Hatzis

Read another op-ed by Aristides Hatzis on Greece and South Korea

Read Aristides Hatzis' op-ed in the New York Times

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