Saturday, December 17, 2011

Is the Greek Bailout Failing?

The IMF has just released its fifth review of the Greek program, delivering a sharply negative assessment of the outlook for Greece. In a midst of an ever deepening recession, fiscal and other targets are being revised downward, while 71% of Greeks are against the “memorandum.” If this is not a failing program, then what is? This is, by far, the most common way to look at the Greek crisis. But it has been and it remains the wrong way to look at it. To judge whether the program is failing we have to ask two questions, what is success; and what are the alternatives? When put in that context, it is clear that the IMF-led program is a good thing for Greece, and that Greece is best served by a stricter implementation of its provisions.

The Three Levels of Success

We can judge success on three levels: economics, political economy and political philosophy.

Economics is about Greece’s finances being put on a sustainable path. The relevant metrics are the budget deficit, the debt level, the amount of government revenue and spending, the country’s ability to borrow money from financial markets at reasonable rates, etc. On that level, the program is a failure. Yes, Greece cut its budget deficit in 2010, but it could not keep up on that path in 2011. The target level for debt in 2020 has been revised upward many times: from an initial 118% of GDP estimated in May 2010 to 130% in July 2011 and then to 152% of GDP without the haircut agreement. Government revenues in 2011 were meant to rise by 8.5%; they have instead fallen by 3.1% even after the Medium Term Fiscal Strategy (MTFS) bill passed this summer; similarly, spending was supposed to rise by 6.6%; in fact, spending so far in the year has risen by “only” 6.2% but this is due to the MTFS which targeted a smaller increase of (5.7%). Yields on Greek 10-year bonds have reached 18% - an imperfect but sure sign that markets have yet to buy into the Greek program. As a result, Greece wants to secure a second bailout coupled with a haircut in its existing debt.

A second level on which to judge success is by the extent to which Greece’s political economy is changing. Greece faces three political economy challenges: First, it needs to shrink the public sector and to stop it from being a platform for political favors. Second, it needs to deregulate the economy by abolishing the restrictive and quasi-monopolistic measures that protect a large number of professions (from lawyers to pharmacists to taxi drivers). And third, it needs to crack down on tax evasion by corporations and by individuals in order to boost revenue and enhance the legitimacy of the Greek state.

How is Greece doing on these fronts? On the first, employment in the public sector is supposed to fall by 150,000 from 2010 to 2015 (a 22% reduction). While positive, this will be achieved chiefly through attrition and a more selective reduction in contractual and political employees. However, there no guarantee that once the fiscal pressure dissipates, politicians will not turn, once again, to the state sector to gain political favor. What Greece needs is a system of true accountability coupled with systematic dismissals – as well as a strategy to upgrade the quality of people in the state sector in order to ensure better service provision. Auspiciously, the Greek government, for the first time in a long time, actually knows how many people it employs, which will hopefully make the use of public sector jobs for political gain easier to track and attack. On this front, there is some but limited progress.

How about restrictions in the private sector? On paper, parliament passed a law liberalizing regulated professions in July 2011. But ministries are entitled to ask for exemptions which will be then reviewed by the Hellenic Competition Commission. At best, the exemptions will be mostly about time, giving professions a grace period before new rules kick in; at worst, they will keep protections for politically important professions. It is hard to know what exactly will come from this process but two things are clear: first, the number of regulations will decrease; and second, several professions will remain, in one way or another, restricted.

How about tax evasion? Two realities are clear when it comes to tax evasion: first, the Greek government has not done enough to collect taxes that are owed to the state; and second, that the failure to collect taxes remains one of the most politically explosive issues that continues to feed public discontent and distrust. On paper, there are a number of steps that the government is taking; in reality, few people believe enough is being done. That said, fighting tax evasion requires not just political will but also an upgrading of capabilities, and the government is clearly enhancing its ability to collect taxes by merging functions to boost efficiency, developing its IT infrastructure, simplifying judicial procedures to resolve disputes, and focusing its auditing powers. While these measures may not yield revenue quickly, there is clearly an improvement in the ability to collect taxes – although whether these abilities are deployed properly will depend on the willingness to collect taxes going forward.

From a political economy perspective, therefore, it is hard to call this program a failure – surely, the pace of change is slow and erratic, but reforms are mostly moving in the right direction. Given the scale of change, it would have taken exceptional leadership for things to have moved much faster – leadership that, alas, is in short supply.

The third level is political philosophy, which I define as “the set of boundaries that the body politic places on public life. [Political philosophy] defines what is and what is not acceptable; it delineates what the public can tolerate and what it cannot; and it contains the language and symbols that the public uses to make sense of political life.” This is a battle for the under-40 generation – these are the people whose expectations, values and beliefs will determine what kind of country Greece will be in 2030. The evolution of political philosophy will hinge on how the public answers two questions: first, how did this crisis come about; and second, was getting an IMF bailout a good idea?

“How did this crisis come about?” is the most important question facing the Greek public today, at least from political philosophy perspective. And broadly speaking, the Greek public can seek blame either externally or internally. External blame means to find the roots of the crisis in the international financial system and the greed of bankers in New York and London; or it means seeing the crisis as the result of structural deficiencies of the Eurozone and in the straightjacket that a common currency imposed on smaller countries such as Greece. Internal blame can take many forms but it can focus either on elites (corrupt politicians and the “rich”) or it can focus on the public at large whose chief question has always been “what can the country do for me?”

The second big political philosophy question deals with the assessment of the bailout. The bailout is, in many ways, failing to achieve its objectives. It has pushed the economy into an ever deepening recession and it offers no clear blueprint for regeneration. It is inflicting on society an immense amount of pain through increased crime, physical violence, mental agitation and even outright depression. That much is virtually indisputable. What is debatable is why. Here again, the public can lay blame either externally or internally. External blame would put the onus on the recipe of recommendations proposed by the IMF and the Europeans; it would say that their “austerity” program was doomed to fail and that the results we now see were predictable. By contrast, internal blame would say that this program could have worked if the government was more willing and more capable; and that the Greek public would have supported reforms and would have tolerated pain as long as they saw that it would be evenly distributed.

There are, in other words, four possible outcomes for Greece. The first is a scenario where both the roots of the crisis and failure of the program are judged to have been external: in this case, the Greek crisis was really a European crisis and the Greek people had no real chance to escape it. The other extreme is that crisis was born in Greece and the solutions put in place could have saved Greece if it had been blessed with a better government. This is a view of the crisis that says “made in Greece, broken in Greece.” The other two options would mix internal with external blame: either the crisis was created by foreigners but the Greeks messed up the fixing or the crisis was generated by Greeks but the foreigners prevented us from solving it.

From a political philosophy perspective, the “made in Greece, broken in Greece” point of view is the most desirable one because it is the view most likely to produce change (it is also my own view). If Greece thinks its crisis was created abroad, it is unlikely to do much soul-searching; it is unlikely to probe and ask deep questions. And why should it? If the crisis was born overseas, it can hardly blame itself. In that case, the crisis would produce little change in attitudes, perceptions and beliefs and so little political change.

Of course, it is hard to know where the Greek public will end up – insofar as this battle will be a battle of historical interpretation, there will never be a definitive answer. My view is that a close read of the facts produces a “made in Greece, broken in Greece” view of history – this is a crisis made in Greece, and the bailout could have succeeded with a more resolute and competent government that was faster to cut spending and collect taxes and that really helped trigger a supply-side revolution by opening up markets.

There is also evidence that the Greek public is sympathetic to this view. There is recognition, for example, that chronic corruption and a clientelistic political system helped drive up debt. There is recognition that the rich and even the middle class systematically evade taxes and hence worsen the government’s finances. There is talk of ending lifelong tenure in the public sector, and there was a law to reform (however, meekly) the governing of universities. There is outrage at the excessive salaries in public sector and in state-owned enterprises, and there is growing frustration at the restrictions that certain professions enjoy. And there is also, perhaps most importantly, a strong anchor in the form of external auditors from the IMF and the European Union to ensure that these structural deficiencies remain at the forefront of the public debate.

Therefore, when assessed from a purely economic angle, the bailout is a failure. But Greece’s political economy is changing, however slowly, as its political philosophy. There is a growing constituency that is willing to debate and that wants to change some of the absurdities that pushed Greece into this crisis. The public is talking about issues that it would never raise five years ago. And there is more receptivity that certain long-standing practices need to change. In that sense, this is not a failing bailout.

What Alternatives?

Even if one deemed the bailout to be a failure, we ought to ask ourselves “compared to what?” The alternative to the bailout is a (greater) restructuring of Greek debt coupled with a possible exit from the Eurozone. The oddity about this alternative is that it would have likely produced a better outcome from an economic perspective. The recession would have been deeper but shorter. Wealth would have shrunk by a considerable amount, and for a short period of time, basic goods would have been scarce. But sharp currency depreciation would have stimulated economic activity as would have government spending (by printing money). After a period of greater pain, it is likely that by now Greece’s economy would have stabilized and perhaps even started to grow.

But from a political economy perspective, it is unlikely that Greece would be changing. In a crisis, political interests retrench to protect their privileges – the only force that prevents them from doing so in the current crisis is the IMF and the Europeans. Without such an auditor, it is hard to see Greece pushing for a systematic effort to shrink the public sector, trying to dismantle regulations and restrictions in the private sector, or working to upgrade its capacity to collect taxes. If anything, these practices would become more entrenched as special interests lobbied for protection against the free-fall of an economic crisis.

A similarly bleak outlook would await the country’s political philosophy. A default in mid 2010 would have been seen as being caused by the global financial crisis. The Greek people would have resented the unwillingness of the Europeans to help them out, perhaps triggering anti-Europeanism similar to the current strand of anti-Americanism. In the panic of an economic crisis, it would have had less time to ask questions such as “why did this happen?” It would have had no external pressure to reform and so it would have no chance to have the debate it is currently having – if nothing else, the IMF-led program has forced Greece to catalog many uncharted ills such as the number of public sector employees, the extent of tax evasion and arrears, the amount owed by sectors such as hospitals, and the nature and composition of the state’s assets?

The reason that the bailout is succeeding more than people give it credit for is that it is lifting a mirror that allows Greek society to see itself – and to do so in bad but not catastrophic conditions and to do so also in the company of outsiders who are there constantly and are willing to help. To judge the bailout by this month’s budget deficit or next year’s debt level is necessary, but it is also too narrow and too insufficient. We need a bigger scale and a broader one, and on that scale, the bailout is not as bad as it seems. In fact, it is perhaps the greatest hope for a better Greece.

No comments:

Post a Comment
