Vikings in Greece: Kleptocratic interest groups in a closed, rent-seeking economy.

• Author: Mitsopoulos, Michael

Last December, downtown Athens experienced three nights of street battles, arson, and looting that became headlines in the international press. We argue that the reasons for this extreme social turbulence are related to the regulatory and institutional rigidities that still prevail in Greece's economy, despite the strong growth that it enjoyed until recently. Furthermore, we describe the pattern of state intervention, institutional sclerosis, and high administrative costs that secure and allocate "rents" to interest groups that obstruct all efforts to reduce these rents and to open up the economy. (1)

In particular, we argue that these numerous rent-seeking groups curtail competition in the product and services markets, increase red tape and administrative burdens, and actively seek to establish opacity in all administrative and legal processes in order to form an environment in which they will be able to increase the rents they extract. At the same time, they actively strive to ensure that the rule of law fails to such an extent that the society will not be able to hold them accountable for their actions. We finally argue that certain salient aspects of the design of the Greek political system suggest why Greek politicians are unable to champion reforms and effectively confront the designs of these predatory interest groups.

The design of an effective strategy that may initiate an unravelling of events that can lead to the construction of strong institutions and that will improve the quality of governance in Greece also requires a clear understanding of both the factors that have driven the strong growth of the past years as well as the causes that lead to what can broadly be described as the widespread failing of institutions in Greece today. Both of these factors shape the stakes of those who gain from perpetrating the status quo, which forms an environment that obstructs progress and that steadily excludes those who are not well connected with the interest groups from participating in economic and social activities.

The Paradox of Strong Growth with Weak Institutions

The OECD (2007) attributes the strong growth performance of Greece--according to Eurostat, average annual growth of real GDP of 3.8 percent from 1996 to 2008, with the lowest annual growth being 2.4 percent in 1996--to the following factors:

* The liberalization of the credit markets during the 1990s coupled with entry to the European Monetary Union (EMU), which led to macroeconomic stabilization and a steady increase of private credit after 2000.

* The deregulation of telecommunications and certain product markets, which had been heavily regulated, even though regulation in Greece still remains very high compared to other OECD countries (Conway and Nicoletti 2006).

* The growth of the shipping and tourism industries, which helped increase domestic demand and mitigate the huge trade deficit.

* The fiscal stimulus from the 2004 Olympic Games, which led to the improvement of certain key infrastructure facilities.

* The inflow of funds from the European Union, within the context of the EU structural funds and the Common Agricultural Policy, which also led to key productivity enhancing infrastructure facilities. (2)

Figure 1 shows the size of the net inflows from EU funds and the expansion of private credit, both expressed as a percentage of GDR from 1981 to 2007. It also shows how private credit replaced government deficit spending after 1997 as the main way to finance the expansion of consumption in Greece. These developments played an important role in promoting Greece's prolonged period of economic growth. Therefore, the inclusion of these data is appropriate and necessary in order to obtain the most useful conclusions from an analysis of the macroeconomic developments of the country. It also should be noted that repeated revisions of the data on the actual size of the general government budget deficit could mean that ultimately there was no fiscal retraction after 2000.

The rapid increase of new investment depicted in Figure 2 demonstrates the impact of the surge in investment that was largely encouraged and financed by the EU structural funds. The fact that a significant part of the increase in investment follows from infrastructure projects is not incompatible with the fact the information and communication technology (ICT) share of the total investment in Greece is one of the lowest in the OECD. As a matter of fact, the rush into EU financed infrastructure investment was matched by an acceleration of private investment mainly in those sectors that enjoyed deregulation, especially in the growth sectors of banking and telecommunications.

Despite Greece's impressive growth performance, the economy still suffers from four serious structural weaknesses: (1) the inflation differential with the eurozone; (2) the persistent and widening large trade deficit; (a) the low level of competitiveness relative to other members of the OECD and the eurozone; and (4) the relatively low level of foreign direct investment (FDI) inflows.

The inflation differential affects both tradable and nontradable goods and services. Thus, a plausible explanation of the differential is that, in the wake of the significant inflows from the EU and the rapid credit expansion, the Greek economy has remained relatively weak in terms of competitiveness. The combination of high demand growth paired with no matching increase in the competitiveness of a still tightly regulated economy has also led to a widening trade deficit: from 12 percent of GDP before Greece's eurozone accession to 17 percent in recent years. Also, according to Figure 3, FDI inflows as a percentage of GDP are very low for almost all years, in line with the established link between the attractiveness of the business environment and FDI (see Hajkova et al. 2007).

The compelling case for the low competitiveness of the Greek economy is documented by a number of surveys such as the OECD Regulation Database, the World Economic Forum Competitiveness Survey, and the World Bank Doing Business and Governance Indicators. In addition, the European Commission (2006) estimates that in Greece the administrative burden is exceptionally high, around 6.8 percent of GDP compared with 3.5 percent in the EU-25. Patterson, Fink, and Ogus (2003) find that the regulation of professional services is high with regard to entry and price setting and that qualitative standards are excessively lax. Likewise, the World Bank (2008), in its Doing Business 2009 report, ranks Greece at the bottom of eurozone members in terms of its business environment. A good depiction of the regulatory and institutional rigidities in Greece's economy is provided by the OECD Structural Indicators Database for the year 2003, as unfortunately Greece is one of the few countries that have not provided updates for the year 2007. The methodology used and first described in Conway, Janod, and Nieoletti (1998) reveals the pattern of widespread state intervention in the decisions made by companies regarding resource allocation and pricing, high administrative costs, and low regulatory quality. As is shown in Figure 4, although Greece made some progress in deregulating product markets since 1998...