When did Greek economic policy turn bad?

Stan Tsirulnikov forwards to me this very interesting paper (JSTOR, gated for many of you).  Here is an excerpt from the summary:

For twenty years up to 1974, Greece enjoyed rapid growth, high investment and low inflation; during the next twenty years, growth and investment collapsed and inflation became high and persistent.

After 1974, debt and deficits rose sharply as well, and later EU transfers helped postpone the necessary fiscal adjustments.  At this same time Greece was becoming more democratic, in part because the previous autocratic arrangements were collapsing.  The figure on p.150, representing the difference between the two periods, is a knockout.  And after 1974, the average rate of gdp growth goes from 7.1 percent to 2.1 percent.

The full reference is "The Two Faces of Janus: Institutions, Policy Regimes and Macroeconomic Performance in Greece," George Alogoskoufis, Economic Policy, Vol. 10, No. 20 (Apr., 1995), pp. 149-192.

Addendum: Here is an ungated copy.

Comments

That's a 1995 article.

You might want to focus on tax changes in the prior Greek administration and rampant tax evasion.

Here is a Bloomberg piece on rampant tax evasion as part of the cause of their fiscal problem:

http://www.bloomberg.com/apps/news?pid=20601109&sid=apSz28ifLL9U

Do not have any sympathy for those states which bring it on themselves, institute poor tax policies and have exclusions and tax evasion.

Goes for California, too, ala Prop 13. No sympathy. No aid.

The natural progression of democracy leads to "bread and circuses" until it actually collapses. A sufficiently self-disciplined populace can slow this effect, see Germany, though self-discipline eventually collapses under the gradual erosion of welfare and envy. More robustly, limitations on government, such as the US Constitution, can block the effect for a while, but again the power seeking of the government, coupled with the gradual corruption of the populace, will eventually lead to collapse. Propping things up via aid or borrowing is at best a temporary palliative.

How big a role did the 2004 Olympics play?

"The pre-1974 regime was politically autocratic, and degenerated into dictatorship in 1967, after which many of its elements were carried to unsustainable
extremes. Thus, the economic regime broke down completely following the restoration of democracy in 1974. The regime that took its place failed to sustain the commitment and coordination mechanisms that guaranteed high returns to the accumulation of capital. In addition, after the collapse of Bretton Woods, no institution, domestic or international, succeeded in guaranteeing a stable monetary
standard. Labour unions acquired power that for a long time was not mitigated by institutional checks and balances. The public demanded redistribution and an expansion of the economic role of the state, but no mechanisms were put in place to sustain efficiency. Distortionary taxation and indebtedness rose to finance redistribution and the larger state. The post-1974 regime created distortions that
not only discouraged private investment but also caused a reduction in the social return on the investment actually undertaken. These distortions included the financial system, fiscal policy, the labour market, the 'natural' monopolies and
public enterprises, public administration, investment grants and EC transfers."

It is the addition of formerly excluded players in the govt scramble that leads to the increase of govt in a Welfare State. The older players don't want to give ground on their participation, so govt increases. In this, I think I agree with billswift.

However, in Political Economy, all sorts of factors specific to each area play important and varying roles. I don't think there's a strict set of rules for how things turn out. But, in the EU and Euro case, with countries of differing wealth, the richer countries were going to have to subsidize the poorer countries. What's happened is that the bill is higher than expected. The machinations we've been watching to confront that bill are amazing.

I still think that the richer countries are stuck subsidizing the poorer countries. It seems to me that not facing up to this fact is simply adding to the current bill, but that's their choice.

Does it strike you as strange that you would post a 1995 article.

That was the third year of the Clinton administration.

Hmmm.

George Alogoskoufis is the single author of that article. The other two are discussants.

Notwithstanding individual counter-examples, on the whole I think democracies have better economic policies than autocracies. Autocrats spend resources glorifying themselves, erecting great building and monuments and trying to conquer their neighbors. In democracies at least the taxpayers have a say.

The U.S has a lovely little perfect storm brewing in terms of runaway spending. It has the big right wing spending project known as the industrial military complex or the military budget and we have the lovely little left wing spending project known as the welfare state. At some point something is going to have to give.

Al: switzerland also has a homogenous culture which makes everything much simpler and more robust.

@nazgulnarsil,
Is Greece less homogeneous than Switzerland?

It turned bad at the after the junta ended. It matters what the autocratic government is doing. The junta, like Pinochet in Chile, was anti-socialist, anti-communist. Probably democracy would have been restored in the 1980s sometime, if they could have held on. Hopefully by that time, leftist stupidity would have been beaten back by the evidence of reality, as we see in Chile, where the left has not undone the reforms.

This is Sunday's NYT front page article on tax cheating in Greece.

http://www.nytimes.com/2010/05/02/world/europe/02evasion.html?hp

Someone must be reading these comments.

Marian,
I think democracy would not have lead to this problem if everyone with skin in the game were paying.

Let's say you're a doctor, and don't pay taxes. What interest do you have to vote? In contrasts, what interest do civil servants have to vote?

As to Turkey, it seems that civic engagement has devolved to another way of organizing people--rather than around common control of the government because they share in tax burden and benefits--but rather around religion.

Looking at Iran, that's a real good idea.

"On the other hand, Turkey, with tax evasion about on the same level, and high military spending, seems to do quite well. Why don't you meditate on this contrast?"

Your answer:

"As to Turkey, it seems that civic engagement has devolved to another way of organizing people--rather than around common control of the government because they share in tax burden and benefits--but rather around religion."

I'm not sure how that addresses the issue of why Turkey, with the same tax evasion problem, is currently in a different situation from Greece. Your answer is that Turkey is different because civic engagement revolves around religion? I'm not seeing the connection between your answer and the previous question.

"I still think that the richer countries are stuck subsidizing the poorer countries." It's going to be hard to tell which is which.

Yancey, I am not saying that the Greeks should not correct their fiscal problems through budgetary actions, but I am saying you cannot have tax evasion of this magnitude and not have a problem. Closing tax evasion enables lower rates; what they will probably do is raise taxes in a manner that is less likely to be evaded, but which is not optimal for economic activity, unless they want to default.

Bill,

You are misidentifying the problem. Greece needs a complete new governmental system. Brushing off just few of the parasites only prolongs their misery. However, doctorpat in the comment above this one knocks it out of the park. Beautiful!

Comments for this post are closed