Greece could boost its economy if it pursues these two reforms

29 September 2015
Comment

As the dust settles on yet another Greek election, calls for economic reform from Brussels are getting ever louder. While improving tax collection is well known to be top of the government’s to-do list, there are other urgent priorities for the administration to pursue: cutting red tape, and leading a serious inquest into the domestic factors that led to the crisis.

 

It takes 13 days to start a business in Greece

Without reform, Greece will continue to languish below Rwanda and Tunisia in the World Bank’s Ease of Doing Business Index, countries which produce a fraction of Greece’s economic output.

Greek consumer demand is that of a developed country, yet its supply side is on par with the developing world. In the absence of an effective private productive sector, the country’s economic growth will only ever be driven by consumption. This means it will continue to rely mostly on foreign imports, rather than domestic production, to meet consumer demand. It will have to borrow to do so. This will herald continued cycles of political and economic risk.

While most Greeks believe the expansion of the welfare state supports social justice and income security, it is the public sector, not the private sector, that presents the biggest problem because it has squeezed private sector enterprise. The share of public employment at 22% is itself not problematic – this is around the OECD average (oil-rich Norway is at 34%). However, the problem is that as a share of economic output, at nearly 25%, public administration is too large. Greece’s manufacturing sector is a meagre 8% of the economy, a fraction of Germany’s (which the World Bank puts at 22%).

Supporting entrepreneurship would boost Greece’s supply side and increase social welfare by diversifying the sources of growth and increasing job opportunities. One of the reasons the US economy bounces back quickly is the confidence of its entrepreneurs. Greece lacks just this. It’s time to unleash Greek entrepreneurship with the right kind of economic incentives.

It takes 13 days to start a business in Greece. Compare this with seven in Rwanda and three in Singapore, according to the World Bank. The Tsipras government needs to make private enterprise worthwhile for the staggering 60%-odd of the young adult population who are unemployed. With the right opportunity and renewed hope, aspiring young business leaders can revive Greece’s spiralling economy and help deliver social justice.

Greece’s leaders must come to terms with past mistakes

Greeks have lost trust in their public institutions. Less than half of the population voted in the latest election. And although a truth commission was set up to investigate its skyrocketing debt, it has so far been a damp squib. Most problematic is its scope: the narrow focus on debt is underscored by the flawed assumption that Greece’s crisis was solely driven by external factors. This leaves little room for the introspection necessary, within Greece, to tackle its entrenched institutional problems.

Nevertheless, such accountability initiatives are crucial for societies emerging from crises to learn from their mistakes. Only by assessing the institutional and regulatory failures that allowed debt build-up and reform fatigue to set in can the appropriate policies be put in place. And only then can the economic burden associated with austerity be fairly distributed. What’s more, coming to terms with past mistakes will help Greece’s leaders regain public trust and confidence.

Learning from previous policy failures also helps guide effective political reform. The recommendations of the Pecora Commission, set up to investigate the causes of the 1929 Wall Street crash, staved off further crises in the US banking sector for decades. Additionally, following the 2008 financial crisis and the financial instability that ensued in Iceland’s banking system, Iceland’s truth commission and its rigorously collected evidence empowered authorities to make recommendations to avert a similar crisis in future.

Crises are opportunities. Greece cannot afford to miss this chance to drive through economic reform and deliver sustainable change. Part of the solution will include some income redistribution, a highly contentious political issue.

By making economic opportunity an issue of social justice, and by seeking out the truth about past mistakes, Greece and its entrepreneurs-in-waiting can avoid further bailouts, reduce poverty and breathe hope and new life into Greece’s and the Eurozone’s economy.

This blog includes extracts from an piece co-authored by Dr Iosif Kovras, Research Fellow at the Institute for the Study of Conflict Transformation and Social Justice (Queen's University, Belfast).