MARKET REFORMS IN GREECE 19902008 Failures and Opportunities

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MARKET REFORMS IN GREECE 1990-2008Failures and
Opportunities

• Nicos Christodoulakis
• Athens University of Economics and Business
• Hellenic Observatory, European Institute, LSE
• June 2009

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Phases of reforms in Greece

• The abandonment of the Stabilization Program
• and the years with serial elections 1989-1990
• The phase of hostility 1990-93
• The timid comeback 1994-96
• Acceleration towards EMU
• The post-EMU reform-fatigue
• After the Global crisis Action or inertia?

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The crisis hypothesis Fernandez and Rodrik
(1991) Drazen (2000)
Pre-crisis The cost of changes falls unequally
on the various groups of society. Reforms are
delayed because some groups veto policies that
are deemed to be disproportionately costly to
their vested interests. Post-crisis The
occurrence of a crisis reveals which group
suffers a higher cost from postponing the reforms
and this eventually weakens the resistance of the
status quo. ? cf. How the 1994 forex crisis
changed the attitudes of Trade-Unions vis-à-vis
the EMU
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A regime change Desai and Olofsgard (2006).

• Previous practices are overturned and new
  socio-economic paradigms are established.
• e.g. Eastern Europe after the collapse of
  communism in 1989-90.
• Latin America after the fall of military
  dictatorships in the 1980s.
• Reforms gain socio-political support if voters
  are convinced that the benefits will be widely
  shared and not expropriated by new powerful
  nomenclatures.
• cf. The new policy agenda prevailing in Greece
  after 1990.
• Greece was even termed as the last
  Eastern-European state

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Imposing external conditionalityGiavazzi and
Pagano (1988) Alesina and Drazen (1991)
Market-reform requirements emerge when a country
seeks to become a member of a supranational
institution where some kind of eligibility
criteria applies. e.g. - IMF Structural
Programs - Terms of reference in international
aid. - Participation in the World Trade
Organisation - Membership in the European
Union. ? The country has the obligation (or
the opportunity) to adopt and implement a
reform-agenda
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But there are some conditions for the reforms to
be successful

• Strong Governments (Large majorities)
• Not very hostile party infighting
• Preparedness Not too late, while in office
• Time-frames
• Clear benefits open to all

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International Monetary Fund World Economic and
Financial Surveys WORLD ECONOMIC OUTLOOK April
2004
Advancing Structural Reforms , Chapter III
Fostering Structural Reforms in Industrial
Countries
Data from 20 industrialised countries Y
Measuring the extent of reforms (scaled 01) X
Economic and political determinants of
reforms Panel estimation Regress Y on X
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The five areas of reform
(i) the regulatory environment in product
markets (ii) the banking sector (iii) the tax
system, and (iv) the public sector and public
utilities In IMF (v) the openness of the
economy Most of reforms accomplished by the 1992
Single-Market Program Labour market practically
immobile
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11 Reform indicators

• Annual growth rate of Bank assets
• Growth rate of bank branches operating in the
  country
• Annual growth rate of loans to enterprises
• Corporate to households direct taxes
• Direct to indirect taxes
• Privatisation revenues
• Reduction in Government debt
• Balances in all public utilities
• The reduction in new loan guarantees
• Quality of the regulatory framework.
• Control of corruption index
• No labour market indicator used (almost static)

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The banking sector increased enormously
and Lending Rates to Enterprises dived
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Shifts in the tax system 1. More corporate tax
revenues vs. labour 2. More direct tax revenues
vs. indirect
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Exposing Public Utilities to market pressures (
of sorts) Flotation, Privatisations and Business
Plans
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Market-environment improved in the way to EMU
and faded a few years later
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Changes in the labour market 1904-2004 1. Some
active labour programs (exclusively CSF) 2.
Limited flexibility 3. Heavy social security
costs
ALP Active Labour market Programs, TSS Tax
and Social Security, EPL Employment Protection
Indicators, UBS Unemployment Benefit System,
WFIR Wage Formation and Industrial Relations,
FLX Working-time Flexibility, ERIP Early
Retirement, Invalidity and old-age Pensions).
Source Duval and Elmeskov (2006, Table 1).
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Determinants of reforms

• Governments inclination to reforms
• How strong is the government
• How well prepared to undertake reforms
• Political uncertainty (elections, protests)
• Economic environment Prospects
• External factors Shocks, conditionality

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6 Determinants of reforms

• Ideology of Government C2, L0, Centre-left1
• Majority in Parliament Seats over 150
• Election years 1 if elections, 0 otherwise
• First year in office 1 the year after elections
• Growth rate (current or moving-average)
• EMU process At 200010, else 10-t

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The political landscape 1. Six alterations in
Government 2. Two Governments with slim
majorities
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The economic perspective 1. Volatile growth in
1990-93 2. Growth accelerates in the run-up to
EMU 2. The post-Olympics fatigue
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What determines reforms in Greece ?
Path-dependent process Governments strong,
but unprepared Growth and EMU critical
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Some conclusions

• Reform process is path-dependent
• New governments unprepared for reforms
• Weak governments difficult to accomplish reforms
• Strong growth enables the reform process
• (compensation payments, new opportunities)
• EMU the main catalyst for reforms

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What lessons for the future?

• Governments beware
• - have a clear mandate for reforms
• - avoid coalitions
• - avoid frequent elections
• - act quickly (learn from Obamas 100days)
• Fight the recession
• Reforms as a promise, not a punishment
• Conform with EMU requirements

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LISBON Strategy for Growth no more suitable as
a reform framework

• Came late (cf The Maastricht Criteria)
• Launched in 2000, after EMU began!
• Unfocused (cf Stability Growth Pact)
• 2000 EU the knowledge society by 2010
• 2005 Re-launched Growth and Employment
• 2006 Four priorities (Barroso, Jan. 2006)
• - Education Research Innovation
• - Unleashing the SMEs
• - Employment / Participation /
  Security
• - Energy / Supply

3. Implementation Loose and same across EU27
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Especially for Greece

• Focus on the New Asymmetries
• Current Account Deficits
• GNI / GDP asymmetries
• Openness/Competitiveness, attracting FDI
• Indebtedness Huge cost of borrowing
• ? A major reform drive is needed

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Some suggestions

• Public awareness Measure (and publish) the cost
  of avoiding the reform
• Benchmark information from other EU countries
• Set major priorities to achieve critical mass
• (avoid the endless reform menus)
• Identify gainers and opposers
• Single and identifiable decision-making
• - Eliminate co-authority on reforms
• - Reduce veto-points
• Make reform-opposing practices to bear (or at
  least share) the cost of foregone opportunities

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• Thank you for your attention!
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