A VERY DIFFERENT VIEW OF THE FAILED GREEK STATE

I love Google Scholar.

Like all things hyperlinked, Google Scholar's number one unintended attribute is that it makes serendipity not just possible, but inevitable. You look for X, you find Y along the way.

Tonight I found myself looking, for the umpteenth time, for and at papers explaining Greece's record of Total Factor Productivity Growth after the 50s, as part of my efforts to expand this article. If you'd like to follow that thread, the best I found for you tonight was this paper on the incomplete convergence of Total Factor Productivity between Greece and other European countries.

Anyway, as I was leaping, monkey-like, from citation to citation with about 30 tabs open, I stumbled onto this paper, a review of about 60 years of productivity growth in Europe. In itself, it seemed to me like  the EU-KLEMS stuff I've read so much of, only a little out-of-date. I know I'm doing some solid researchers a great disservice in saying this but hey, it's my evening, I demand something slightly more interesting.

Then suddenly I stumbled on this phrase, which sounded eerily familiar:

"Harrison (2002) considers a game between the Dictator (D) and the Producer (P) to investigate when it will pay both parties to maintain a high coercion, high effort with monitoring equilibrium."

I love that phrase: 'high coercion, high effort with monitoring equilibrium' - it implies there's an opposite equilibrium involving low coercion (well, by the standards of an abstract Dictator), low effort and monitoring. And that, my friends, sounds a little like Greece.

You see, Greece is a paradox of both over- and under-regulation, where an overbearing, omnipresent state coexists with a truckload of employer misconduct, poverty, rent-seeking, anticompetitive practices and cronyism. You can't call it socialism because profits (often in fact rents) are widely tolerated and the state's safety net was full of holes in the best of times. You can't call it capitalism, because price signals are either supressed or hopelessly distorted by state intervention. So here's my hunch: the low-coercion, low effort and monitoring equilibrium that Harrison blames for the collapse of the Soviet Union is in fact also responsible for the failure of the Greek State, which, despite undisputedly democratic elections, remained unreconstructedly authoritarian in its function except where it was forced by outside stakeholders (usually the EU) and the threat of a popular backlash to act otherwise.

Harrison (2002) is in fact this paper and I urge you to read it. Some of it is game theory; most is in fact economic history illustrated by facts, figures and equations. Harrison, as we've seen, set up a game with two agents: the producer and the dictator.

"The dictator maximises a payoff made up by the value of rents less his costs and losses, while producers maximise their income received in wages and bonuses and appropriated through theft, less the costs of effort and punishments."  

In the Greek case, for 'producers' read 'businesses and the self-employed' - the mix of 'wages' and 'bonuses' would be different to what Harrison expected under this reading but I doubt this changes much. For 'Dictator' read, of course, the State, but in a broader sense, reflecting the particular social classes and interests that hold the State captive for a particular period of time. Output theft relates to entrepreneurs' failure to render the tax and social contributions and regulatory compliance expected by the State, whether through avoidance (legal) or evasion (illegal). Of course calling these things 'output theft' is not the libertarian view of tax, but it definitely fits the authoritarian view quite well. For a quick analysis of how regulation is a tax, I would refer you to pg 14 here. You might argue that Harrison doesn't have regulation in mind when speaking of Dictator's rents, but actually he does - just check out page 21 here.

"The dictator sets coercion high or low by deciding whether or not to monitor. Without monitoring the dictator cannot stop producers stealing output. The dictator raises coercion by monitoring output, which efficiently eliminates stealing, but monitoring is costly and is a deduction from their rents. When output is monitored, high output can be rewarded and low output punished."

"Output depends on both effort and the scale of punishments. Producers decide whether effort is to be high or low. When effort is low, the value of output is positive and the producer cost of effort is zero. When effort is high and has a positive cost, the value of output is raised by the value of effort. Output depends also on the scale of punishments, because firing and forced labour reallocate workers towards employments of lower intrinsic productivity. Output is high when effort is high, low when effort is low and low output is unpunished, and lower still when low output is punished. (Because planners know who is being punished, the dictator can discriminate between the output loss arising from low effort and that arising as an indirect cost of the punishments he has imposed, so he does not try to punish the latter twice." 

In the long run the scope for high coercion depends positively on the dictator’s return from high effort, the cost to the dictator of not monitoring, and maximum feasible or credible punishments, and negatively on the costs of effort and monitoring. It also depends positively on the excess of the dictator’s discount factor over that of producers. The more the dictator is orientated towards the long run, the more he will pay to sustain coercion in the present; the more producers are orientated towards the short run, the less they will sacrifice to persuade the dictator to abandon coercion. 

So how does the system collapse? For Harrison the two key variables are the cost of monitoring the economy and the Dictator's reputation. He argues that post-industrial economies are much harder to monitor than agrarian or industrial ones, making it unsustainable for the command economy to maintain a high-monitoring equilibrium. Some reforms can, of course put things back on track rather than undermine the Dictator - but in Greece's case the reforms would have had to increase tax administrative capacity - which never worked. In fact, even to this date the reaction to every effort at increasing the State's capacity to monitor is staggering, as the IMF's most recent review of the Greek bailout reveals:

To cut a long story short, here is a summary of Harrison's findings:

• The system remains stable right up to the point of collapse.
• Command economies can secure stable high output through artificial incentives, under given historical circumstances.
• Coercion can be legitimate socially but not legally. Authority that rests on coercion cannot make binding commitments. Rather, the credibility of commitments rests on the Dictator’s reputation, which is fragile and may be lost if coercion is relaxed once. The absence of binding commitments results in a time-consistency problem for central planners.
• In exercising coercion the dictator is rationally secretive. Both the dictator and producers may exploit information asymmetries to shift payoffs in their favour. Specifically, the dictator will conceal monitoring and punishment costs, and producers will exploit the difficulty of observing effort to overstate its subjective costs and secure improved rewards.
• Command economies may be undermined by adverse trends in monitoring costs. Changes in the means and complexity of production can raise the costs of monitoring producers. When monitoring becomes unprofitable, the dictator will abandon high coercion.
• Command economies may also be undermined by bad policy. Too much and too little coercion are both destructive. Too much means overreliance on penalties. Too little means tolerating rent–seeking and erosion of the dictator’s reputation. Both can undermine the profitability of monitoring.
• Command economies can be undermined by economic reforms. Moreover, the cycle of reforms and counterreforms can harm the dictator’s reputation.
• The dictator’s surrender, not workers’ resistance, triggers the system’s collapse.

  

ABOUT THAT "ODIOUS" DEBT ... A FURTHER CRITIQUE OF #DEBTOCRACY

Note 1: I am incredibly grateful to Aristos Doxiadis for citing this article in his excellent book, Το Αόρατο Ρήγμα.

Note 2: This blog was updated on 5 Dec 2014 to reflect new data on the size of bribes

Veteran readers will remember my epic slugfest with our new wave of defaultniks, a propos of the release of #Debtocracy. A central bone of contention was the defaultniks’ claim that much of the Greek debt was not attributable to the will of the people and was in fact odious. The defaultniks purposefully refused to offer even an approximation of what percentage of the debt they considered to be ‘odious’ in this way but pointed to excesses in public procurement and public investment costs as indirect evidence. When pressed on the matter of how much of the debt is odious, they flitted from ‘all of it’ to ‘some of it, surely we deserve to know how much!’ depending on their audience in any given moment. 

I argued, on the other hand, that with nearly two thirds of all spending going directly to the people in the form of direct transfers, pensions and public sector wages, it is very unlikely that most of the public sector’s debt in Greece was odious. Still, I acknowledged that someof it probably is.

The months have rolled past and the defaultniks are by now so convinced of their moral and intellectual superiority (or at least the physical muscle they can command) that they see no point in following up on this argument. If they've managed to put together a self-styled Debt Audit Committee, answerable to no one and selected by buddy-up, it has made no attempt at a figure and will likely not attempt one until after La Revolucion. Yawn.

Government, of course, has no interest in such calculations so I can’t count on them. 

So screw everyone. I have to do this myself. Like the defaultniks themselves, I will start with procurement because that's where the bodies are chiefly buried. 

First, I need an estimate of the actual procurement spending of the Greek government, going back as far as possible. Eurostat provides this (if you bother to divide % of GDP by % of total contracts) from 1995 to 2009, and you can find a link to this and other interesting datasets here.

The result – about 9 to 13% of GDP (about a fifth to a quarter of all government spending) went on public procurement annually. On a typical year, roughly 60% of this was under the radar spending that was never published in the official procurement journal of the EU because the contracts were (whether really or artificially) too small. The estimated amounts spent on everything, from the Rion-Antirrhion bridge to felt tip pens, are as follows:

Now we need an estimate of the percentage of this that went on bribes. The World Bank generally calculates that 3.7% of all procurement spending globally is spent on bribes, but I prefer to use the percentage admitted to by Siemens, whose executives have had their own run-ins with the greasy outstretched palm of the Greek government official. The typical Siemens bribe is 5-6% of the contract value. Let’s take 6% just to be on the safe side. According to this ratio, the Greek state must have paid between EUR1.5bn and EUR2.2bn per year on bribes. 

But of course bribery isn’t just about paying the actual bribe, it’s also about buying inferior services or paying over the odds. The bribe is meant to convince officials to allow this. These additional economic ‘capture’ costs come up to anything from 20% to 188% of the bribe itself.  Combining this calculation with the estimates on bribes it is possible to estimate an upper and lower bound for the cost of bribery and corruption in public tenders for Greece.

Now I realise that in applying these rules to all public tenders I am making a heroic assumption – some contracts will have been pimped to death, with contractors making incredible capture rents, and others will have been done by the book. I am also assuming that bribery and capture costs remained constant as a percentage of procurement spend every year, which can’t be true as there have been procurement bonanzas that will have been milked to death during this time, as well as some years when rents from bribery were low. 

I can’t help this miscalculation given the tools at my disposal. It’s just the best estimate I have. And it looks as follows. The total costs of capture (bribes and mispricing) ran up to anything from EUR900m to EUR5bn per year.

Now, in determining the extent to which these rents contributed to Greek Government debt, I must make some assumptions about their financing. To ensure I cannot be accused of bias I will make the most defaultnik-friendly assumptions possible, in the understanding that they may be biased in favour of overestimating the odiousness of the stock of Greek debt.

First, I will assume that all of this money came from the Greek public coffers. This is patently not true as EU money flooded into the country from 1995 to 2009 and much of it went towards procurement.

Then I will assume that all of this money came from excess borrowing and thus a) we are still saddled with the interest to this date and b) this debt is indeed odious. This is a very strong assumption and one that is moreover heavily biased towards the defaultnik case.

This means I need to calculate an acceptable interest rate for the excess borrowing. Given that Greece never paid down any debt but simply refinanced existing obligations throughout this period, I feel justified in calculating our effective interest rate by dividing the total stock of debt for each period with the total interest expenditure for each period. Both can be found here. I assume that costs before 2000 (when the Eurostat series begins) were constant at the same level as 2000, i.e. 7.2%. (Note: they were actually higher).

Now all that remains is to calculate compounding coefficients for each year based on the product of the (interest rate+1) for that year and all following years. They look as follows:

Now all that remains is to add up the up-to-date figures. The Grand Total comes up to a range of EUR29.8bn to EUR71.6bn, or alternatively 9.1% to 21.8% of our total stock of debt as of end 2010. 

 

Remember, these are very generous figures, and yet even on these assumptions, the amount of potentially odious debt is almost certainly less than the nominal 21% haircut agreed in July.

With procurement out of the way only straightforward graft and over-compensation of officials remain as possible avenues for the creation of odious debt. However, I believe that the contribution of these two is negligible compared to that of public procurement as indeed it is in almost any country not run by warlords.  

UPDATE: I realise in defending these estimates that there's just no pleasing some people. If you're not happy with my figures or my assumptions, let's at least agree on this: That it is possible, in theory if not in practice, to come up with a good estimate of the amount of debt attributable to things other than the will of the people; that carrying out such estimates is desirable; and that the extent to which Greece's debt is odious is a matter of fact, not politics. My assumptions are no doubt flawed but they are transparent, they come with some justification, and they are there for all to evaluate. In fact, you can just plug in your own assumptions and try to get an estimate that works for you.

2013 UPDATE: How fair is @talws' objection in the comments below? I explore the topic here.

2014 UPDATE: How accurate was my 6% assumption on the size of bribes, on which so much of this exercise depends? There is a new dataset for the researcher to draw upon: the recently released OECD estimates on the size of bribes as a % of contracts, based on records from 55 actual cases brought to justice between February 1999 and June 2014.

The average OECD estimate is 10.9%, which is significantly higher than my assumption. Bribes, of course, range widely by sector, from 14% for health- related spending (one of my Big Five deficit-drivers) and 17% for admin services, to 6% for scientific and technical consultancy, and 4% for construction. Ironically, the types of projects most commonly cited by defaultniks back in 2010 (Olympic construction for instance) attract relatively small bribes (less than my original estimate), while services- and consultancy-based projects are much worse. Anyway, please note these figures are based on a vanishingly small sample, involve foreign bribery only and do not seem to include any cases involving Greece. Still, if this estimate is accurate, then my estimate of our odious debt should grow by 81% to roughly 16.5% to 39.5% of Greece's 2010 debt. The mid-point of this range is now above our original creditors' haircut, but nowhere near the total debt jubilee defaultniks were after.

Once again, the facts simply don't bear out the Debtocracy story. They do reveal a good amount of debt we could have done without; and I wouldn't mind defaulting on that even now. But at least we would be seen as credible and honest, as opposed to opportunistic and hypocritical.

SUSTAINABILITY EPIC FAIL

The most dedicated of readers may remember this post from our more innocent pre-bailout times, when I noted:

We in Greece do not have to choose between socialism and climate change denial - we believe in nothing and can therefore disbelieve whatever we like.

This was the story of our Minister for Climate Change being told off by our energy unions in a remarkably sub-human way for not being too keen on Brown Coal – our ‘national fuel’ apparently.

Well, she’s in trouble again. She’s come up with an outrageous idea was that it should be illegal to build outside residential zones if they have been included in the Natura programme for the preservation of pristine animal habitats.

Predictably, half the Socialist party pounced on her, citing over-sensitive regulation that will finish off our struggling construction sector, whose output is down 21% from the last year.  This strikes me as odd – construction is down because people don’t have money to invest, because house prices are falling and because banks won’t lend as easily. When demand is the problem, deregulation doesn’t really provide much by way of stimulus. Right?

Even more hilarious is the manner, once again, in which the Minister’s suggestion was dismissed. Giannis Vouros, yet another actor-cum-politician popping his greasy locks above the parapet these days, was hilariously quoted as saying:

'This ecology stuff is all very nice but it should not be allowed to turn into eco-fetishism. We can’t expect [people to] sit and think oh where are the pelicans going to be laying their eggs, and derail an entire development plan’

Even so, my friends.

This is a dilemma for me because I find the case for protecting animal habitats compelling. On the face of it, it is much easier to do this if there are clear land use regulations in place. However, I also believe that the less power the Government has, the better. I’ll suspend judgement until we’ve considered the evidence. I haven’t followed very much of that with regards to degradation of animal habitats, but I know a little about the deforestation literature, which works in a similar way.

The evidence suggests that an area is much more likely to be deforested if the level of prosperity of its inhabitants is high, or if the area is mostly agricultural. This is corroborated by evidence that arson is more likely when GDP per capita rises and fuel and wheat prices increase.

Here’s the trick though: the evidence suggests demand for urban and rural living space did not lead to deforestation. Demand for quality, expensive dwellings, however, did. We know because deforestation grows with GDP per capita but not urban demand and because housing booms correlate with deforestation. If the same holds for habitat destruction, it would explain why the Socialist MPs (rightly) point out that regulation will hit construction – because they are referring to demand from well-to-do citizens who have not been affected by the recession.

Of course, structure also matters. The municipal and public ownership of peri-urban forest certainly made it easier to reclassify for other uses (this is important because illegal land use is not very strongly correlated with deforestation), not least by allowing corrupt officials to facilitate the process. On the other hand, deforestation tended to go down as the number of hotel beds increased. Tourists don’t like fires or wastelands and hoteliers don’t like losing money.

So who’s eating up our forests? Subsidised farmers and demand for land by rich folks – through deforestation and arson. How do we keep them from doing this? By making each forest someone’s livelihood (if you can’t stomach making it someone’s property, which I understand), saying no to farm subsidies and of course fighting corruption at the local level.

Now I wonder if the natura habitats can be protected in a similar way.

I CAN HAZ STATEHOOD?

Foreign readers may not have noticed a key piece of Greek news this week, amidst coverage of the 'successful' Spanish, Portuguese and Greek debt auctions (courtesy of the ECB, Japan and friends), Portugal's direct sale of EUR1.1bn to the Chinese, as well of course as the news that all of the Maghreb and beyond is in flames over sugar and other commodity shortages. This is of course important news as it demonstrates that the world is about to go to shit big time, but the news coming out of Greece should worry people just as much.

The cover story is that TV-heartthrob-cum-mayor Apostolos Gletsos has taken it upon himself to tear down a toll barrier with a tractor after realising his constituents had to pay tolls to travel within the municipality. Clearly an absurd proposition to which the good mayor rightly objects, but his very photogenic piece of activism comes in the context of a nationwide movement against tolls, amply supported by Greece's abundance of orange blogs. Members of the movement need only shove the toll barriers aside.

At first I did not realise how many people were involved in the movement, until I heard that toll operators had applied for permission to photograph and invoice maverick drivers and that the government had announced they intend to renegotiate road maintenance contracts. Before I knew it, all manner of institutions had thrown their varying weights behind the movement, from the Communist Party to a popular football club and even some elements within our ruling Socialist Party.

The arguments employed by the movement vary substantially, but those that make sense tend to be as follows:

1. The original licences granted for the building or maintenance of roads were abusive - allowing contractors to levy tolls long after their original outlay plus reasonable profit had been recouped and refusing to reward frequent users with a monthly or annual scheme. This is probably a fair point as fixed-term concessions have been shown to have this effect under demand uncertainty. There is also fairly robust evidence that, at 85% of total motorway costs, capital accounts for a larger share of the cost of running Greece's roads than those of other countries. But the solution, as this study proves, is to adjust the concession terms, not to refuse payment.
   
2. The Greek Constitution guarantees the free movement of citizens in the Greek state and any infrastructure built with the people's money should be free at the point of use. This argument is faulty to the extent that all arguments in favour of free-at-the-point-of-purchase are: it is simply a demand for subsidies which may or may not be justified by the externalities produced by road transport. However it does raise the valid point that road regulation is only a partial substitute for public ownership and cannot ensure universal coverage. In fact, even though roads are a classic public good, their benefits even through externalities are much more likely to accrue to their users and neighbours. Therefore, some element of tolling and local authority funding needs to be maintained at all times.
   
3. Each driver pays road duties, ostensibly in order to buy access to the road network. This should cover all roads in the land. This would be a reasonable argument if tolls hadn't been common in Greece for decades. A person my age has known tolls to exist all of their lives and older drivers will have known them as long as the fancy motorways they helped finance. It is not part of the social contract, so to speak, that road duties equal access to all roads.
    
4. The toll system creates abusive monopolies as there are few safe alternatives to the tolled motorways. This is also a fair point, and in fact it has been proven that tolls can reduce road safety outcomes overall.
   
5. The system whereby these contracts were allocated is corrupt and therefore all contracts are null. While corruption is undoubtedly a problem in Greece, much more evidence would be required before the contract for an individual section of motorway can be challenged, and it should be up to the law to decide when and to what extent such challenges can take place.
   
6. The quality of Greek motorways is very poor and thus current toll levels are not justified. Perhaps; subjective evaluations for the Global Competitiveness Report suggest that Greece's roads are, at no. 57, worse than Rwanda's. This would be a good argument for renegotiating contracts; in fact, periodic quality assessments should have been incorporated into the incentives provided by the original contract. But it's not a good argument for not paying at the point of use, unless the road is in fact unsafe or unusable.
    

The problem with this movement is that, frankly, the Greek state needs to honor its contractual obligations. We collectively chose, at some point in the past, to saddle our future selves (and our children) with the cost of paying for these roads rather than pay tax for them. Now we don't want to pay the tolls either. Well, roads don't fund or maintain themselves.  If this movement manages to do what it has set out to do, it will demonstrate that, in some cases, the people can effectively repeal the signature of the Greek state and default on any collective obligation. This is not a statement to be made lightly: our credibility depends on an implicit commitment not to abuse our ability to default.

The state's credibility also depends on its ability to impose its commitments upon the people - this is essentially equivalent to its ability to regulate or levy tax. Anything that weakens investors' perception of these two is bad for Greece because it means fewer people will be willing to finance our continuing deficits.

MINERALS? I SHITS 'EM (PART II)

I blogged last night about the age-old conspiracy theory of how Greece’s endless reserves of natural resources have been hidden from the sainted People in order to keep Greece under the thumb of evil powers. And of how the Government now appears to be taking cues from these tall tales of life-changing resource reserves in order to dole out more of other people’s money to its favourite rent seekers.

Me, I hope we never find oil in my lifetime. And to save everyone a bit of extra money, I hope we never go drilling in the first place.

Why wouldn’t anyone want oil, or gold or the very rare and expensive element LOL-ium, which literally jumps out of the ground in Greece? As one commentator put it:

Let’s not take a one-sided view – natural resources are a public good that NO-ONE has said no to… on the off chance that it ends up leading them astray. Whoever feels weak can sit this one out. Professors should stick to their schools, analysts should stick to their forums, layabouts should stick to their cafés. And those of us with a passion for creation should man the battlements.

[I note this person was not writing from the Sudan and seems to have a lot of time on their hands. Methinks they do not create very much up there on the battlements.]

Since before the widely-cited paper by Sachs and Warner back in 1995, economists have known that growth was, on average, slower among resource-intensive nations. This effect was sensationally dubbed the ‘resource curse’ or ‘oil curse’ and was found to manifest itself in many unpleasant ways (reviewed here). Among other things, people argue that natural resource reserves fuel conflict and civil strife, drive corruption (including a lack of transparency in the private sector), and kill investment.

Not everyone agrees, of course; fans of the ‘big push’ school say that the discovery of natural resources can create rents which give rise to investment and development. Proponents of oil exploration claim that as long as a country’s institutions are sound to begin with and the economy is diversified, oil abundance can be good. In particular, they explain that oil dependence is the problem, not oil abundance. However, this begs the question of how long institutions can remain sound following oil discovery, and whether oil abundance can be kept from turning into oil dependency.

A very instructive and well-studied natural experiment in São Tomé and Príncipe revealed that corruption jumped substantially following the discovery of offshore oil reserves in 1997-9, and established the mechanism through which this came to be. Basically, rent-seekers went absolutely apeshit, savagely elbowing their way into power in time for the oil bonanza. This led to widespread vote-buying as well as widespread peddling of state jobs and access to elite education. I am particularly keen on this paper because its approach for measuring corruption is the same as the one I propose here. Generally speaking, having factional or personalised politics to begin with can get an oil-rich country off to a very bad start. Sound familiar?

In fact, I would argue that Greece has already had its own institution-corroding oil bonanza: it’s called EU membership. See here and here for my past commentary but also see here and here for how much EU funds acted like a resource bonanza, slowly replacing our export base.

The premise of this new Greek oil push is that it can pay off our national debt. That sounds like hopes of oil dependency, not abundance, to me – swapping our addiction to debt for an addiction to oil. In fact, if we are to avoid the resource curse, the literature suggests that it is important to save rather than spend the actual revenues. This is what countries like Norway do, putting revenues into a fund so that they do not directly feed into aggregate demand, or indeed the government budget. Chances of this catching on in Greece? ZERO. One could argue that paying down debt would also be saving of sorts but I doubt it will fuel investment in any meaningful way.

One of the most intriguing studies claims that there is no oil curse as such, and that oil reserves can help push countries out of the Malthusian trap by boosting fertility (through migration) and thus, in the presence of externalities, economic growth.


First, if the authors of this study are right, Greece can only reap the benefits of oil discovery through mass immigration. Something tells me that, unlike the corporate types at Energean, the nationalist nutcases behind our ‘big push’ aren’t ready to welcome millions of immigrants in the name of oil, especially considering the fact that they will mostly be Turks settling on islands near Greece’s border with Turkey.

Even then, however, all is not as it seems. Flip to pg 24 of the study and you will find that it is basically oil price booms that account for most of the positive effects of oil discovery. Or turn to pg. 32 to find that, after accounting for extreme outliers with unreliable data (basically the UAE), the negative correlation between per capital GDP and oil comes right through – it just doesn’t hit home until two or three decades post discovery, when there’s FA anyone can do about it.


All of this leads me to add one more scenario to the five I discussed last time. It is possible that past Greek Governments, in their boundless wisdom, had chosen not to engage in oil prospecting precisely in order to avoid the oil curse. Our current Government believes that, with the quality of our institutions now controlled by our creditors and thus exogenous, it may be an excellent time to embrace the resource bonanza without fear of the resource curse.

Somehow I doubt this is what they are thinking.

I CAN HAZ VOTE? NO THKS

Greece-watchers will have noted by now that the municipal and prefectural elections in Greece have been and gone, our new deficit figures are out and 17 November, the only day that really matters, has come and gone without incident.

In the run-up to this most crucial of anniversaries I wrote, perhaps too cynically, on FB:

“40% of the nation refuses to vote. The legitimacy of the state is in tatters. Yet somehow I have friends cheering one candidate or another. Why do you bother? Come 17 November Athens will burn and the streets will run with blood. Does it really matter which second rate politician will have to clean up?”

This provoked a good deal of reaction from friends back home.  A.S., a high-flying friend who is busy rebuilding the brand of a major, newly privatised company back home, argues that the basic difference this time around (apart from the superior calibre of the winning candidates in our two major cities) was that Yorgo essentially won an internal battle against the rest of the Socialist party by betting – correctly – that well-respected and untarnished outsiders with grassroots support (a former Ombusman in Athens and a seasoned winemaker and environmentalist in Thessaloniki) could do just as well as any party apparatchik with a deep clientelist operation.

Intuitively, I agree that this is an important point to prove to both major parties, as it immediately reduces the returns on the enormous investment required to build a clientelist network – reducing the advantage held by incumbent politicians vis-à-vis newcomers and reducing incentives to tolerate or foster corruption. Both very very good things on a macro level.

In fact, the end result would be similar even if the winning candidates were truly second-rate and their grassroots support entirely manufactured (for the cynics out there). In the latter case, the signal is that investing in a clientelist operation is not as good a deal as investing in an Astroturf political operation. I’m still happy with that.

One thing, however puzzles me in A.S.’s account. Why now? In previous elections it was generally felt that old-school candidates were the safest pair of hands. Something must be different this time around, which made Yorgo think he could get away with his gambit. I think I’ve got a complementary explanation that is consistent with the above theory on the rise of nominations based on merit but can also explain the sky-high levels of abstention in 2010. It is simply this: the State has no money.

Remember my analysis of the bursting of Greece’s Higher Education bubble? Well I think there are a lot more examples of this sort of thing waiting to come out. One such bubble is the ‘market’ for clientelist network services. These are valuable only because they allow buyers (who pay, in part, with their vote) to influence the distribution of the State’s resources.  With fiscal policy largely out of the Greek government’s hands, resources extremely scarce, and scrutiny tightening, no-one can guarantee that they can deliver these clientelist services anymore. Their networks thus become weaker and less valuable to voters. However, the price of clientelist services is fixed at one vote – which is all anyone gets. This rigidity means that as the value of clientelist network services falls, the ‘market’ can never clear. The variability of abstention statistics is essentially a function of the value of clientelist services.  

One bizarre implication of this theory is that, the more abstention rises, the better the candidates we will end up electing – as the first voters to drop out of the system will not be disaffected voters but subsidy junkies.

Don’t forget, network effects work exponentially so any fall in the value of clientelist networks is big news. If we can deliver this in two successive elections, then we Greeks just might have a chance at sanity.  The problem is that the rising trend in abstention (see graph) is extremely steep and could end up invalidating elections just as the electorate finally begin to get their preferences right. The implication is that Greeks should be encouraging swing voters to show up and vote blank or invalid rather than abstain.

(See here for my national elections data, here for my European elections data. The rest have been cherry-picked from press reports.)

I CAN HAZ GUNZ AND GUCCI JEANS?

Another big news item this week was Greece’s continued slide down the scale of Transparency International’s Perceptions of Corruption Index to the dubious accolade of ‘most corrupt EU country.’ I simply cannot summarise my impressions on this better than the inspired Twitter user @divinejudge1 [note by ‘lower corruption’ he means ‘lower transparency score]:

But that’s just perceptions. How about a stab at the facts? Well, there's no facts to be had about corruption but as readers may recall, I am particularly fond of a particular methodology for measuring the size of the shadow economy, which I also cite here.

According to Schneider (here), after a bumper year in 2009 when it grew by 0.3%, the Greek shadow economy is due to shrink by 3.2% this year, on the optimistic assumption that GDP is going to fall by 4%. Schneider’s estimate is that Greece’s shadow economy should reach 25.2% of GDP this year – still comfortably the largest in the EU in relative terms but also just barely over 2007 levels.

These figures underscore the point made by the IMF in its recent review of our adjustment programme: the resilience of the shadow economy is no insulation from the pain of recession or fiscal austerity. When the informal sector is large enough, it invariably comes to depend on the formal sector for demand. Fans of decoupling narratives always come to grief in this way and when they are governments the implications can be severe. I remember being subjected to this narrative by some of our leading lights back in 2008 – the same people that told me to stop worrying and learn to love the deficit.

Of course some academics will rush to explain that these ‘perceptions of corruption’ are just another bourgeois construct, or a way for the Americans to put us down and that the formality of economic activity is irrelevant. 

To this I can only say: try to read through this without rolling it into a joint.

TAX ADMINISTRATION EPIC FAIL (UPDATE)

Dear readers, I must apologise for the radio silence. I have been extremely busy since my failed play-by-play of the Hellenic Observatory’s Fiscal Management Conference. Now that I finally have a bit of time, I am happy to announce that details of the event (including all presentations) are now online.

However, by far the best was an explosive presentation by one Dr Vassilis Manessiotis of the Bank of Greece. I have previously been unable to find his presentation but it is now available here.

This presentation was made even more timely by the recent revelation that the IMF has written to our Government expressing alarm about our failure to meet our tax revenue targets. Plainly, our frequent claim that missing the revenue target is not a problem as we can compensate by cutting expenditures even deeper than originally planned is pure madness. However, the IMF should have been more vocal when it mattered – this is after all a pre-election period and we all know what happens during Greek pre-election periods.

Anyway, back to our story.

Dr Manessiotis explained that, as with all developing nations (yup!), tax administration in Greece is tax policy. How we get the money in is at least as important as the nominal rate of tax or the choice of direct or indirect taxes (see here for a detailed academic discussion). He explained, for instance, that VAT took 20 years to introduce in Greece (late 60s to late 80s), as administrative failures forced policymakers to delay its introduction 4 times.

In the context of very poor tax administration and high rates of evasion or avoidance, Manessiotis said, the Laffer curve simply doesn’t work – lower rates of tax simply lead to lower revenues and that is that. The hard-to-catch populations are of course the self-employed and small businesses as I have discussed here.

An interesting aside – the European Commission compiles a database of financial statistics for the small business sectors of all member states, which can be found here. Both in 2007 and 2008, the micro-enterprise sector in Greece appears to have made losses every year once an imputed wage for their self-employed directors is taken into account. In fact they lost 23 cents for every 1 Euro of value they create. Yet despite this, their share of Greek GDP continues to rise. How is this possible? Come on. Guess.

Back to our story though: Dr. Manessiotis explained that Greece’s tax evasion and avoidance is mostly of a low level of sophistication, not the financial wizardry that one might find perpetrated in the City of London. It starts with simple failures to issue receipts and maintain accounts. Something which will no doubt be exacerbated by the European Commission’s recent proposals (endorsed with some changes by Parliament) to exempt micro-companies from publishing their accounts. At any rate, tax audits are perceived (correctly) to be very rare and any findings are only actioned after a substantial time lag – some years to be more precise. Overall, Greek officials believe that ca. 30-35% of all potential tax revenue is lost to avoidance and evasion. Academics have worked out that these serve to increase inequality and poverty, thus inflating our social transfers budget and creating incentives for further fiscal expansion.

Greece has 286  tax offices (listed here), an enormous per capita figure by OECD standards, created in the past two decades for clientelist reasons (see similar stories on regional investment and universities). In the 1980s, 1990s and after 2007, large numbers of civil servants were moved into tax offices from other parts of the civil service without the necessary skills or training. Manessiotis does not explain how this worked but happily I do know as there as some such civil servants in my own family, transferred in the 80s from the civil service to their local tax office – you see, the geographical dispersion of tax offices was a great parking system for civil servants wanting to work near their families. 

The actual set-up of tax administration is an invitation to corruption – not only do tax officers have ‘unbelievable’ levels of discretion, they can only be disciplined by a committee of their own colleagues and the Greek Finance Minister must personally approve any transfer of a tax officer. The problem of corruption is acknowledged by the Inspector General of Public Administration and has deteriorated substantially in the past 10 years. It does not help that in Greece the quality of tax services by civil servants is extremely low; citizens are generally expected to know the law in minute detail and there is little to no support forthcoming when they inevitably do not. Thus they are entirely at the tax officer’s mercy in most cases.

Greece has no tax dispute resolution mechanism involving mediation – every contested case goes to the Tax Courts, which are currently facing a backlog of 150,000 cases worth a total of EUR30bn (ZOMFG). The average case takes 7-10 years to resolve. Taxpayers are technically required to pay 25% of the tax due in order to appeal in the first place, but the courts have the option of waiving this sum, which they exercise about 90% of the time (and, one is tempted to think, not without earning a bit of commission).

Finally, Greece has a long history of tax amnesties – 10 in the past 32 years, with the most recent taking place this year. A total of EUR17.5bn was written off in this manner between 2000-2008. Tax amnesties are by now built into the expectations of Greek taxpayers and their tax advisers (mostly notaries and accountants), encouraging a cavalier attitude to the law, which at any rate changes every month or so.

Greek Governments instroduced 104 major pieces of tax legislation between 1986-1995 alone plus a number of ‘emergency’ levies on businesses. As a result, the tax system is teeming with exceptions and ad-hoc provisions. The obvious implication is that tax information systems are rudimentary and non-integrated and in fact certain pieces of legislation have their own dedicated information systems that are impossible to reconcile with any other tax information. Amazingly, where tax systems have been computerised, the effect has been to simply digitise what was once a manual process – with no saving in time or effort at all and certainly no additional functionality. In fact the amount of paperwork has often increased as a result. Amazingly, tax officers cannot use what information systems they do have to consider a particular taxpayer’s tax history (no such functionality exists in the system), nor can they check their historical record of violations and/or errors. In many cases, taxpayers are required to submit their latest tax return themselves in order to fill in the gaps.

A law for the overhaul of tax administration was to be submitted in October but was sadly delayed ahead, one cannot help but thinking, of our crucial municipal and prefectural elections.

Overall, the cost of collecting taxes in Greece is 1.6% of the amount levied, twice what it is in Canada. In personal income tax, this ratio rises to 2.4%, which is 4 times the US level. This does not include the costs borne by citizens, who must collect all receipts on pain of losing half of their tax allowance.

The IMF knows all of this, and of course this knowledge cuts both ways, as per the Vayanos et al critique discussed here. One way of seeing all of this is to say that Greece has enormous potential that is being squandered by administrative failure – the Government/IMF line. If we could fix this, Greece’s public finances would be sustainable. Another way of seeing it, however, is that we simply do not have the time to overcome all of this massive failure while in the throes of a debt-fuelled death spiral. Greece has a poor record of institutional reform, which at any rate is a very tricky business.

Unless of course we suspend the electoral cycle, which I guess I would not be happy with.

YO'MAMA-NOMICS 101

The last few months have been very hard for Greece, with not only the sustainability of our public finances but also the moral fibre of our people coming into question. The response of many Greeks to this has been a tribal one: ‘so-and-so can’t call us corrupt/insolvent/a failed state! What’s so great about them anyway? We all know about their dirty little secrets!’ This kind of response is typical not only of the great unwashed but also of many MUPPETS among our political elite (such as this one and this one) and of course a number of economists for hire.

I call this type of analysis YO’MAMA-nomics. In a YO’MAMA-nomic argument, the issue quickly becomes not how badly Greece needs to up its game but how we can avoid losing face right now. Note that most of the accusations leveled at Greece regarding corruption or the parlous state of our public finances were things that one could have heard mentioned casually around dinner tables around the country for years and years prior to the IMF bailout. Indeed, one of our best-ever comedy series established the caricature that everyone is now so familiar with all of 21 years ago.

I have now found my favourite example of YO’MAMA-nomics and I’d like to share it with the world. It comes, as you might imagine, from a Greek academic with substantial activist credentials. The treatise in question can be found in an old paper by one Dr. Peter Bratsis, formerly of LSE and now of Salford University, that perfectly encapsulates the YO’MAMA-nomic mindset. Remember, this is not the rantings of a tro(ma)ktiko reader, but rather the abundantly referenced thoughts of a professional social scientist:   

“The point of departure for the present paper is to reverse the gaze, to not look to Greece in order to discover the source of its ‘corruption’ problem. Rather, this paper looks from Greece outwards in order to uncover why it is that people judge Greece to be corrupt. The paradoxical position of this paper is that the sources of the problem of corruption in Greece can not be found in Greece, they are to be found in the seemingly less corrupt states of the West (particularly the United States), in those concepts, rituals and myths that enable countless instances of private regarding within the public to be judged normal and acceptable and which shape our perceptions of Greek political life as being pathological. Although I do not doubt the presence of clientelism or bribery in Greece, I do question why these things (and not many others) should be considered a corruption. For example, why is it that clientelism should be a corruption but not corporatism or interest group politics? The spontaneous understandings and categorizations that we hold in our heads and which lead us to characterize some phenomenon as a corruption and others as not are what this paper seeks to uncover.”

Did you get that? Later in the same paper, he gives an excellent example:

“The tendency to give ‘envelopes’ [ed: a reference to bribes in the health sector] in order to receive preferential or attentive service is well known. From the typical western perspective, such endemic ‘bribery’ is sure to be labelled an example of corruption and this form of allocating medical care is likely to be judged undesirable. Indeed, I suspect that most Greeks would consider it a corruption and something that should be done away with. However, if we ignore the informal nature of the exchange itself and focus on the larger questions of how egalitarian the distribution of medical care is and how much money (bribe included) this care costs compared to other systems – we may very well judge the Greek medical system to be superior to many that are perceived as ‘uncorrupt’. Is an informal exchange between doctor and patient really more troubling than the power that the American Medical Association or the pharmaceutical industry have within the U.S. legislature? It could be, but the point is that an argument has to be made, the labelling of something as corrupt cannot trump real political discussion and analysis. What if we formalized ‘envelopes’ and called them co-payments? They would then likely fall under the category of not being corrupt, but would the Greek medical system be any better than it was before?”

You read correctly. The intuition that there is something deeply wrong with one’s doctor requiring an additional payment behind closed doors in order to do their job is irrelevant. Corruption is a Western gimmick, another word that the Americans use to put ‘us’ down. Bribery is the Greek way and who is to say it’s an inferior way? At any rate, what is desirable and what is not is a matter for ‘political discussion and analysis’ – i.e. for the good Doctor and his socialist circle-jerking friends to decide.

At any rate, the suggestion that people in ‘the West’ do not see most forms of corporate lobbying as corruption is naïve (whether one considers ‘the West’ in terms of its elites or in terms of the man on the street) and, one suspects, simply an assertion made to fit Bratsis’ narrative. More to the point, the contention that formalising bribery into a registered transaction would make no difference is so fantastically ignorant that it brings me to tears. The quickest rebuttal I can offer can be found here. I suspect the good Doctor would resent the suggestion that a price can be placed on public services, but I can’t win them all, can I?

A simple (economist’s) test that might help people gauge the relative toxicity of corruption in Greece vis-à-vis lobbying in the West would be the following: how easy is it to claim a piece of the action in each of the two processes? It ought to be the case that, the more rent-seeking the function of each group, the tougher the barriers to entry that incumbents will erect, and the higher the premiums that intermediaries will be able to charge. How hard is it for an ‘outsider’ to become a lobbyist in Washington or Brussels as opposed to a ‘fixer’ for corrupt civil servants or politicians in Greece? How expensive is it to hire each of these? How hard do Western politicians fight to ensure exclusive use of their lobbyist connections, and how hard do Greek politicians fight to maintain exclusive access to clientelist networks or shelter their corrupt henchmen? How much do these politicians ask in return for their services?

The first test is simple. There is an obvious entry point to the lobbying industry. You can apply and be interviewed. There is none in the ‘fixer’ industry in Greece. You have to rely on unique personal connections, usually built over many years of putting up posters for a political party, manning the phones at a pre-election call centre, carrying somebody’s briefcase or performing sexual favours (you laugh? Greek readers may remember this. That’s a former secretary-general of the Greek Ministry of Culture and his secretary). 

On very rare occasions, 'social partners' will put out an ad when they run out of lackeys who understand statistics or speak English, but even then they do so under cover of anonymity. All of the above suggests to me that ‘fixers’ are much more rent-seeking than lobbyists.

As for how expensive it is to hire a corrupt political fixer, the notorious case of Siemens gives us an appropriate benchmark – having paid a very substantial amount in bribes to Greek government officials from 1999 to 2006. According to insider accounts, the typical Siemens bribe would be 5-6% of contract value but could rise to 40% in especially corrupt countries.

Compare this to lobbying firms in the US, which earned a very modest $3.47bn in 2009, or 0.025% of US GDP. 

The champion lobbyists of the health sector paid only 0.046% of the sector’s GVA in lobbying. The notorious financial services sector paid only 0.015% of its GVA. The communication and electronics sector, arguably the most suitable comparator to Siemens, spent 0.024% of its GVA on lobbying (GVA of US industries available here). 

Fair enough, most of this business would have gone on without lobbying, as opposed to Siemens’ dirty dealings, but while the return on Siemens’ corruption spending was between 150% and 2,000% (assuming the figures quoted above refer to Siemens’ profit from the deal, not the amount quoted to the client), the return on individual firms’ lobbying spend in the States appears to be much higher, with figures of 600% to 2,000% and even a much as 22,000% mooted in some cases. Or even higher, if you’re willing to go out on a limb. In fact, management almost certainly foregoes more than the extra cost when using bribes as opposed to lobbying: first there is the risk of substantial penalties, and then there is the fact that, whereas the future returns from lobbying are partly factored into share prices, which makes money for clever managers, the future returns from bribery can’t be.

Clearly, it is much cheaper to promote one’s interests through western-style lobbying than Greek-style corruption, because bribery is a much more rent-seeking industry than lobbying. The rest of my economic test I simply don’t have the data for, for obvious reasons. But I suspect it would yield the same results. Corruption can subvert institutions in a way that no amount of lobbying can do. We know this because people are willing to pay the kind of money to corrupt officials that they wouldn’t dream of paying to lobbyists.

I PAID A BRIBE AND I DIDN'T LIKE IT

Hat tip for this one to the otherwise deranged Keynesian accountant Richard Murphy.

I too have not paid a bribe, but hopefully the title of the post caught your eye. In fact, I haven't had an opportunity to do so, having worked outside Greece my entire working life. My last run-in with bribery was back in 2001 when I got my driver's licence - the instructor asked, just before my test began, whether I wanted to do a deal with the examiners. I didn't, and happily still passed. I now hear that the typical bribe for this is EUR300, which strikes me as a very lucrative business to be in.

The website I Paid A Bribe comes straight from Bangalore, India, a place that is, incredibly, even worse than Greece for such things. The idea is simple: if you've paid a bribe, blow the whistle on the relevant business or  public authority anonymously. The clever bit is that the website refuses to record which individual you bribed as such (guessing correctly that this would open up the whistleblowing process to extreme abuse) but focuses on changing processes.

It also accepts reports from people who were asked to pay bribes but refused, people who didn't have to pay bribes where they had perhaps expected to and want to congratulate the authorities, and people who are currently being blackmailed for a bribe and are unhappy with this arrangement. All stories are posted online.

What is even more ingenuous is that the website posts the amount of bribes paid, which effectively makes it a price comparison website for corruption. I am particularly interested in this because, in cultures where bribery is entrenched it can take decades to eradicate through the "hearts and minds" approach. On the other hand, a price comparison website can drive the price of corruption "services" down, which is almost as good. With time, people will find that the returns do not justify the risk and just go back to the day job.

Note to all the Troktiko clones out there: set up a website like this and I promise I'll stop calling you and your readers semi-literate clowns.

HIGHER EDUCATION FAIL (SQUARE)

The Hellenic Quality Assurance Agency for Higher Education has just released its report into Quality in Higher Education (surprise!). It is both a window into the crooked timber of Greek education and a glaring example of quis custodiet ipsos custodes?

Going only by the reception the report has received, one would imagine that the Agency is some kind of austere “expert group”, issuing tomes of doomed tough-love precepts that drip with lofty disdain for the world of mortals and their follies. How I would have welcomed that.

Instead, the Agency spends more than one third of its report listing all the rubbish presentations it’s given about its own work to “stakeholders” and whingeing about how the last two governments have not allocated enough money to itself and its contractors/consultants, or how audacious Treasury auditors have kicked back many of its requests for more taxpayer dough, thus getting in the way of the “absorption” of funds. In fact it spends more pages on this than on its findings, and the whole thing reeks of a sickening mixture of officiousness and advocacy. It runs something like this (pg. 11):

“[...] it is very difficult to absorb National Strategic Reference Framework funds without the necessary administrative infrastructure and the right institutional framework. Thus, the operation of the Agency essentially relies on the selflessness of its members (many of whom, it ought to be noted, must also travel outside Athens in order to meet their obligations to the Higher Education Institutions in which they teach) as well as that of its small but committed number of secondee officials and staff.”  

  

How these people have the nerve to publish this in an official document I don’t know – perhaps they are secure in the knowledge that no Greek taxpayer will EVER bother to read the actual report. Anyway, they have found room among all of this drivel to publish a few nuggets of gold – nothing original mind you, but at least it is finally in print for all in government to read:

• Vague human resource development goals at the national level 

• Geographic dispersion of Universities that is unjustifiable on quality grounds, with some small rural towns and islands hosting singular departments within a University, and others hosting “twin” departments duplicated at the University’s nominal seat.

• A proliferation of departments and degree programmes whose subjects are often vague and overlapping

• A disproportionately high number of departments, programmes and students compared to the country’s population.

• “Rubber-stamp” departments admitting students without having any permanent staff or infrastructure

• Arbitrary development of specialisms and cross-disciplinary departments at the undergraduate level which ought to have been pursued at the graduate level

• A large number of graduate programmes without clear admissions policies and no clear career paths, as well as poorly structured Ph.D. programmes., and insufficient specification of pre-requisite courses in either case.

The agency forgot of course to put their finger on the billion Euro question: are we spending taxpayers' money correctly? We know, for instance, that the basic reason for the pointless dispersion of universities is our conflicted and pointless regional investment policy. Universities = students = consumption and rented accommodation = natives of rural areas stay put instead of moving to cities and property prices go up. Want proof? Check out the latest stats. The only Universities in which enrollment fell lat year were in Athens and Thessaloniki.

As for the value of education itself, luckily some academics are earning their keep and looking into this subject - too bad they work and publish abroad. I am particularly indebted in this case to a certain Ilias Livanos (no acquaintance unfortunately), who has crunched reams of LFS data to estimate the returns to education by subject and type of institution. The report on this research, available here, includes the findings summarised in the table above. It also features the following amazing quote: 

“for most of the fields, besides those of Medicine, Law, Economics and Business and Social Sciences, the impact of a degree on the earnings of public sector graduates is strong at the bottom quantiles, yet declines as one moves up the ability/wage distribution. As the reverse seems to hold true in the case of the private sector, this indicates that an educational degree acts as a substitute for ability in the public sector, as opposed to the private sector. Such a result is consistent with the fact that market forces are less likely to affect the remuneration of individuals who are employed at lower-level state jobs, given that the latter offer automatic wage premiums to job candidates who possess certain academic qualifications.”

Are you getting a sense of déjà vu yet? You may remember one of my earlier posts on union membership:

" ... we’re the only EU country in which people with lower education levels are, ceteris paribus, less likely to be union members. So Union membership in Greece is not about protecting oneself from ruthless competition in a rapidly upskilling world where one’s place in the labour market is increasingly precarious. In fact, according to the same study, we are also the only country, along with Finland, in which people whose parents were educated to a lower level are more likely to be union members. Simply put, union membership in Greece is a means for those who invested in education in a bid to secure an advantage in the labour market to hold on to their status in the face of competition." 

The amazing thing is that, according to another one of Livanos' papers, the ridiculous wage premium secured by unions for graduates in the public sector are matched (not surprisingly) by substantial wage penalties in the private sector. The union-driven public sector wage premium sends more poor souls into degree subjects and specialisms that are useless to private sector employers, thus forcing the public sector to find positions for them.