Breaking the Unholy Alliance

Makyneia, Hellas, a.d. XII Kal. Jul. MMDCCLXIX A.U.C.,

Recently the Eurozone and Greece managed to agree on a new disbursement of bailout funds for Greece, as Greece had complied to all the requirements. Moreover, creditors have finally agree on debt relief, finally realizing that Greece’s debts were completely unsustainable. However, to make Greece’s reforms sustainable, it might be worthwhile to look at the political sustainability of the reforms, instead of mostly at the financial sustainability of the reforms. A short explanation of Greece’s political economic situation and its influence on Greek social policy is necessary to explain this. When it comes to social policy, Greece has never had a universal welfare state. Social policy were rather used by politicians to win the votes of narrow constituencies, by protecting jobs of the privileged, by giving jobs to the politically connected, and by assuring profits of certain companies or professions. In economic parlance, these laws and policies were club goods which helped creating rents. This so called patronage system is the major reason that Greece fell pray to its debt crisis. Even if during the debt crisis austerity was necessary to balance the budget, many people, especially those people who already suffered from exclusion of the patronage system in the first place, were subjected to a very harsh punishment for Greece’s errors. These people need help from their government, and will continue to vote for political parties that promise to help them. However, these politically unconnected people are joined in their opposition to the austerity measures by former beneficiaries of the patronage system. They are still the politically connected individuals and the well organized interest groups. In order to prevent a return to the former patronage system and to break down what is left of it, it is necessary to split the rather unfortunate, unholy alliance between the politically connected and the weakest members of society. To win Greece for free markets it needs to prosper, but it is also necessary to provide the weakest members of Greek society with a safety net to fall back on, as they must gain from those free markets as well, lest they support politicians who promise to help them, but in reality rebuild the patronage system.

What Went Wrong in Greece

Often people assume that if the government intervenes in the economy, it does so to protect the weakest members of a society. For instance, Kleinman defines social policy as: “government interventions that are designed to affect individual behaviour or command over resources or to influence the economic system in order to shape society in some way.” Amongst the purposes that social policy can serve are: “risk management and insurance against interruptions in earnings; redistribution across households: from richer to poorer, from capital to labour, […].” In the Greek case, however, it is essential to note that risk management and insurance against interruptions in earnings have often been used to redistribute from the poorer to the richer, from labour to capital, and from consumer to producer. The essential concept to understand this political-economic system is patronage. Patronage is: “The power to give jobs or provide other help to people as a reward for their [political] support.”

The Greek government used social policy in two ways to attract voters, firstly through directly giving incomes to individuals, through jobs or through welfare benefits, secondly, through restriction of competition in a wide variety of professions and markets. With regards to the first kind of redistributive interference, there was an extensive system through which politicians and bureaucrats appoint individuals to positions based on their party affiliation. Similarly, the Greek government has always bestowed lavish pensions on its former employees: “In pre-crisis Greece, pension expenditure (which equalled 11.7 per cent of GDP in 2007) was among the highest in the OECD, which averaged a mere 7.2 per cent (OECD n.d.).

The second way through which Greek politicians gained support was through regulatory intervention in the labour market and in product markets. This is reflected in the ‘Ease of Doing Business’ benchmark presented by the World Bank, which looks at the regulatory climate of a country. Greece ranked number 100, which is slightly better than Ethiopia, but worse than the Dominican Republic. Rather than serving as fair and just protection against a volatile free market, these interventions create rents for those with protected jobs, protected profits and protected minimum prices. For instance, employment protection regulation can also serve as a hurdle for start-ups, thus helping both employees and oligopolistic employers of existing firms to handsome rents. Even in 2011, after the full scope of the economic crisis had become clear, the Greek government protected the oligopolies of at least 130 professions through expensive licenses.

All in all this led to a dualist social policy, in which some were protected very well, in fact so well that they received rents, while others were unemployed and left without much protection by the government. Moreover, this patronage system hurt economic growth and led to ballooning government expenditure. It is safe to say that this cronyist system led to Greece’s recent economic and financial crisis. It is important to note that this system is neither socialist, because it redistributes from the poor to the rich, nor free market capitalist, because politicians prevent the occurrence of (relatively) free markets in exchange for political support.

Policy Responses to the FInancial Crisis

We do not have to spend much attention to the actual policy response to the financial crisis. The IMF and the EU have forced Greece to reduce the size of its welfare state, which ironically mostly hurt those who already depended on the rather feeble welfare state that existed. Moreover, taxes were increased, also for the less well off. This has caused poverty to increase, as Table 1 shows. Looking at the ‘Fixed’ column we can see the poverty rates in 2011, calculated from the median income of 2009. We can see that several many ‘outsider’ groups, such as a large share of pensioners and the unemployed, have become much poorer.

Poverty Greece.png

Meanwhile, Greece still only ranks 60th on the Ease of Doing Business, a rather lackluster performance. In other words, we still have no reason to assume that Greece will turn into a Hellenic tiger, as markets are still not free, and entrepreneurs still have to deal with a sluggish and prohibiting government.

Breaking the Unholy Alliance

The way the austerity measures and reforms have been executed has led to what could be dubbed an ‘unholy alliance’ between insiders and outsiders of the patronage system. The current structural reforms are, understandably, extremely unpopular, because they create income insecurity for many Greek citizens. However, it is important to keep in mind that there are several groups in Greek society who oppose the current reforms and austerity: the unemployed, those who benefited from social housing, pensioners with standard pensions and employees of private companies who are no longer covered by collective bargaining, i.e. the outsiders, and the insiders, such as many public employees, professionals in banks and ‘liberal professions, and pensioners on special pensions. Even if the latter have been hurt less badly by austerity and deregulation than the former, they have lost many privileges, which they certainly want to win back.

The unholy alliance forms a direct danger to Greece’s future prosperity. Under the banner of social justice (a very lofty goal) the political insiders can start lobbying for privileges again. This would bring back to Greece where it was before, instead of to a socially just system which can produce economic growth. Meanwhile, the outsiders of the political system would once more not have a real choice to vote for a party which will actually help them.

However, the EU and Syriza could play a very important goal in breaking this unholy alliance, and give Greece a political-economic system capable of protecting the weak and spurring economic growth. Such a system could copy the Danish or the Dutch system, which combine a welfare state and free markets. Given the left wing tendencies of many voters in Greece, it is very likely that support for free markets can only be won if people are also protected from the volatility of those markets by a social safety net. This is exactly what countries like Denmark and the Netherlands do. They have very free product and labour markets, combined with a rather large welfare state. This is shows that this combination is compatible, and maybe even complementary. It also means, however, that many people support free markets, as their livelihood is not directly threatened by market volatility.

So, debt relief is a very good start, as it gives Greece some breathing space. However, it is now also time to focus on giving Greece a proper, universal welfare state, while focusing more on reducing labour market and product market regulation. If Syriza and the EU pull this off, the weakest members of Greek society, the true socialists, are no longer allied with the political insiders who have enjoyed Greece’s patronage system for so long. The socialists can vote Syriza, and expect to be protected by the Greek government, but at the same time the EU can push Syriza to reduce over regulation and all kinds of rent creating policies for the political insiders. Once the insiders will have to compete in free markets, their political power will likely also be reduced, as they will have less money to spend on ingratiating themselves with politicians, as their large profits and rents will disappear because of competition.

So, even if you do not believe that welfare states are good for a country, there is no way in which Greece will even have free labour and product markets without also having a ‘socialist’ welfare state. There are not many real liberals here, and Syriza is still quite popular and leads government. So, the trade off between a new patronage state on the one hand, and a Danish system is quite real. Moreover, there really are many very poor people in Greece these days. They need help, they desperately need help. Surely, free markets are necessary to create the prosperity which can be redistributed in the first place, but we cannot wait for this prosperity to trickle down. After all, in the long run we are all dead.


Bottom Line: Greece never had a universal welfare state, and never had free markets. Currently there is much support for a welfare state, and much support to revert to the crony patronage system of the past. What Greece needs for economic growth, however, are free markets. Fortunately a universal welfare state and free markets can be combined. This combination might very well receive sufficient political support if Syriza and the EU support it.

Sources

Rüdig, Wolfgang, and Georgios Karyotis. “Who protests in Greece? Mass opposition to austerity,” p.509.

The World Bank, Doing Business: Comparing regulation in 178 economies.

Mitsopoulos, Michael S., and Theodore Pelagidis. “Vikings in Greece: Kleptocratic interest groups in a closed, rent-seeking economy.”

Moutos, Thomas, Labour market measures in Greece 2008–13: The crisis and beyond.

Pappas, Takis S., and Zina Assimakopoulou. “Party patronage in Greece: Political entrepreneurship in a party patronage democracy.”

Pappas, Takis S. Populism and crisis politics in Greece.

Kleinman, M., Continuity and Change in European Welfare States.

Mitsopoulos, Michael S., and Theodore Pelagidis. “Vikings in Greece: Kleptocratic interest groups in a closed, rent-seeking economy.”

Hatzis, Aristides N. “Greece as a Precautionary Tale of the Welfare State.”

Papadoulis, Konstantinos J. “Clientelism, corruption and patronage in Greece: A public administration approach.”

Pappas, Takis S. Populism and crisis politics in Greece.

“Patronage.” Merriam-Webster.com. Merriam-Webster.

Matsaganis, Manos, “Social policy in hard times: The case of Greece.”

 

 

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