The Foundations of Greece’s Failed Economy

by Edmund S. Phelps

NEW YORK – Too many politicians and economists blame austerity – urged by Greece’s creditors – for the collapse of the Greek economy. But the data show neither marked austerity by historical standards nor government cutbacks severe enough to explain the huge job losses. What the data do show are economic ills rooted in the values and beliefs of Greek society.

Edmund S Phelps2

Greece’s public sector is rife with clientelism (to gain votes) and cronyism (to gain favors) – far more so than in other parts of Europe. Maximum pensions for public employees relative to wages are nearly twice as high as in Spain; the government favors business elites with tax-free status; and some state employees draw their salaries without actually turning up for work.

There are serious ills in the private sector, too – notably, the pervasive influence of vested interests and the country’s business and political elites. Profits as a share of business income in Greece are a whopping 46%, according to the latest available data. Italy came in second at 42%, with France third, at 41%. (Germany’s share is 39%; the United States’, 35%; and the United Kingdom’s, 32%.) Insiders receive subsidies and contracts, and outsiders find it hard to break in. Astoundingly, young Greek entrepreneurs reportedly fear to incorporate their firms in Greece, lest others use false documents to take away their companies. According to the World Bank, Greece is one of the hardest places in Europe to start a business. The result is that competition for market share is weak and there are few firms with new ideas.

This stunted system springs from Greece’s corporatist values, which emphasize social protection, solidarity instead of competition, and discomfort with uncontrolled change. These values may well be beneficial for family life; but, even with the best of intentions, they are a recipe for a static economy and stultified careers.

Indeed, Greece’s labor productivity (GDP per worker) is only 72% of the level in the UK and Italy, and a mere 57.7% of that in Germany. And surveys indicate that mean life satisfaction in Greece is far below that found in the wealthiest EU countries (the EU15). Contrary to claims by the Greek government, corporatism impoverishes the less advantaged. EU data on poverty rates in 2010 put Greece at 21.4% – far higher than the mean EU15 rate of 16.7%.

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