By Michael G. Jacobides, Richard Portes and Dimitri Vayanos
After a period of intense political turmoil, Greece has converged on a coalition government tasked with implementing the decisions taken on 27 October 2011. Lucas Papademos, who heads the new government, has only been given a few months and a handful of new cabinet members to achieve this. Nevertheless, Papademos has the formal support of both major political parties, and his popularity in recent polls exceeds 70%. There is therefore an opportunity to address not only the symptoms of Greece’s malaise, the debt and its proposed restructuring, but also the underlying causes, the structural and administrative failures which have brought Greece to the brink of bankruptcy (European Commission Task Force for Greece 2011).
Of course, creditors and the IMF should consider whether the proposed debt relief is sufficient for sustainability and growth (see past cases discussed by Sturzenegger and Zettelmeyer 2007). The focus in Greece, however, should now change from fiscal targets and debt restructuring to operational restructuring. The debt restructuring plan alone will not stave off a potential bankruptcy but will only delay it if the pathologies that brought the country to its current situation are not tackled. So, what should be the main priorities for reform? How can the new government build on the reform efforts made over the past one-and-a-half years, and how can the mistakes made during that period be avoided? These questions were the subject of a meeting that we hosted at London Business School a month ago.
The meeting was attended by former ministers and current MPs of both major parties in Greece, as well as by senior policymakers, bankers, regulators, and academics from Greece and abroad. It is sobering to note that this was the first event of its kind, whether inside or outside Greece. Very positively, despite the range and diversity of the participants, a remarkable consensus emerged on the way forward. We are thus convinced that a set of bold structural reforms can have broad political support, provided that political parties can take the courageous step of severing their own ties to practices which led to the onset of the problem.
Our report (Jacobides et al 2011), informed by the meeting, focuses on four key areas: tax evasion, public administration, privatisations, and the financial sector. Reform in the public administration is essential for the better functioning of the state and hence for the success of all other reforms. The main directions of reform are to make the public administration more independent from the politicians, while also introducing greater accountability and incentives.
In the area of tax collection, for example, lack of accountability and incentives have generated a highly inefficient and corrupt system, which strongly resists change. For example, local tax collection offices have not followed up on demands by the Ministry of Finance to engage in audits of suspected tax evaders. They also have resisted the online publication of data on their performance, compiled by the ministry. The monitoring of tax collection offices is further hampered by an inefficient bureaucracy within the ministry.
We believe that such a system cannot be improved by marginal changes (Rothstein 2011), and the established routines and practices cannot change by gradual evolution (Nelson and Winter 1982, Romanelli and Tushman 1994).We propose instead to abolish the current tax collection offices, and move tax assessment and collection to a new independent authority. This agency should have an arms-length relationship with the Ministry of Finance. To minimise corruption and ensure good incentives, staff at the agency should be hired on limited-term contracts, be evaluated based on key performance indicators, and rotate frequently across units. Interestingly, the transition costs of such a change would be small. Even if all tax collection offices were shut down, state revenues would not suffer noticeably because currently most of the taxes actually collected are withheld at source or paid through electronic transactions.
Independent authorities with tight governance and accountability could be useful in other areas as well (Quintyn 2009). We propose three additional such authorities: one on healthcare procurement, one charged with the overall monitoring of structural reforms, and one on corruption reduction. These authorities may help jump-start the change effort throughout the Greek government and its associated institutions. All authorities should be staffed by competent technocrats and be accountable to the Parliament as opposed to the government. Their senior staff should be appointed for periods longer than a parliamentary term, to ensure continuity and independence from the political parties. Moreover the selection of senior staff could be approved by parliamentary committees, perhaps by supermajority, to prevent populist opposition and appointment of party loyalists.
The Healthcare Authority would be in charge of procurement of medicines and hospital equipment. Healthcare is one of the largest sources of government expenditure, and Greece’s expenditure in medicines and hospital equipment has been the highest per capita in Europe for many years. This is partly because medicines were not being re-priced to take into account cost savings due to the expiration of patents and the introduction of generics. Lack of coordination across ministries, as well as influence by vested interests in the healthcare sector, were preventing the re-pricing. Efforts have been made recently to rationalise procurement by monitoring the purchase prices of medicines in other EU countries. We propose that these efforts be systematised and institutionalised through the creation of a Healthcare Authority responsible for procurement. This agency could include representatives of private insurance companies, since they have a stake in efficient procurement.
We additionally propose the creation of a Reforms Authority, responsible for monitoring the implementation of the agreed structural reforms. A problem encountered in implementation so far has been a lack of ownership of the reforms. The government has been focused on the short-term management of the debt and the deficit, and not enough thought has been given on the sequencing of the reforms, on their economic effects, and on the practical problems in implementing them. And while the troika has carried a more thorough economic analysis than the government, its monitoring has been arms-length, and has (understandably) given more emphasis to the fiscal targets that should be achieved rather than the details on how to achieve them. We believe that a government agency with a tight mandate to monitor implementation, and possibly recommend sanctions such as budget withdrawals in case of non-compliance can fill this vacuum.
An additional proposal to improve the quality of the public administration is to reinstate Permanent Undersecretaries of State, appointed for periods longer than a parliamentary term and accountable to Parliament. As with the independent authorities, this would bring technocratic skills, continuity, accountability, and independence from the political parties into the public administration.
We argue that the privatisation process has been hastily designed. In particular, targets are grossly unrealistic. Greece has raised about €8 billion from privatisations during 2004–2009, while the current target is to raise €50 billion until 2015, in much worse market conditions. Failure to meet the target will further undermine the confidence in the Greek economy. An additional problem is that the Privatisation Fund is understaffed, and its mandate does not, as it should, include the increase in value of the assets for ultimate disposal. The resources of the Privatisation Fund must increase, and its mandate should be the increase of long-term value of formerly state-owned assets. It should work with private-sector specialists to help rationalise and restructure organisations; institute corporate-governance changes; and overall improve the value of the companies to be sold, thus increasing the value retained by the government. To do so, it needs to be seriously upgraded from a staff of a handful of executives to an organisation with resources, but also accountability to improve its portfolio.
We propose additionally that the focus of the privatisation programme shift from immediate sales to a scheme supported by a moderate amount of debt financing using the assets as collateral. (To ensure that debt financing is kept at low levels, a minimum rating on the debt could be mandated.) This would not only help avoid fire-sales, but would also provide incentives to the government to help increase the value of assets to be sold. Indeed, as assets are sold, debt raised by the Privatisation Fund could be used to purchase government debt in the open market at low prices.
Finally, we point to the risk of increased political interference in banks as an unwanted side-effect of their recapitalisation process. Such interference has been common in the past and has harmed the corporate governance and efficiency of the affected banks, as well as their sound supervision. The recapitalisation of banks using public funds should not be viewed as an excuse for the government to regain control of the banking sector. This would be a big step backwards in the reform of the Greek economy. Indeed, state ownership of banks is harmful for productivity and growth (La Porta et al 2002).
The agency in charge of recapitalising the Greek banks is the Hellenic Financial Stability Fund. The fund should be able to withstand political pressures, and to implement the necessary changes in banks’ corporate governance. Since the fund’s mandate is likely to be no less than recapitalising the entire Greek banking sector, the fund should be given enough specialised resources, and receive expert support from European authorities. In particular, a new European-level institution with the mandate to exercise corporate governance in banks (which, for example, the European Banking Authority does not have) might be helpful in supporting and complementing the Hellenic fund in the recapitalisation process of Greek banks.
A related and fundamental concern is that financial supervision should be strengthened in Greece – as noted by a number of reviews (IMF FSSA 2006). This applies both the Bank of Greece, in charge of bank supervision, and to the Hellenic Capital Markets Commission in charge of capital markets supervision. Delays in investigating financial-fraud cases should be drastically reduced, and current cases, if any, should be investigated promptly. The poor state of the justice system with extreme delays (leading to the de facto inability to prosecute) must be tackled as an issue of priority, and more resources should be allocated to the prosecution of white-collar crime.
Of course, labour- and product-market reforms are also essential. Yet structural reforms need to be pursued now, as vested interests have slowed down progress. Austerity has reached its limits, and the imposition of further taxes as opposed to the pursuit of a growth-enhancing reform agenda can lead to popular unrest. Structural reforms can both deliver growth and, crucially, increase the sense of fairness and faith in the state. The success of this reform project depends on the faith Greeks put in it, and a clear and public shift of emphasis to administrative and institutional transformation could be the catalyst.
The cross-party government should seek consensus to engage in far-reaching reforms that no party alone would dare to initiate. Anything short of this will quickly lead to Greece being marginalised and expelled from the Eurozone. If political forces miss this opportunity, they should be held individually and collectively accountable by the Greek population for the collapse of their financial sector, the destruction of productive forces, and the wealth reduction and redistribution (from the poor to the rich) that inflation and a return to the drachma would entail.
Michael G Jacobides
Sir Donald Gordon Chair of Entrepreneurship and Innovation and Associate Professor of Strategy and Entrepreneurship, London Business School
Professor of Economics at London Business School and President of CEPR.
Professor of Finance and Director, Paul Woolley Centre for the Study of Capital Market Dysfunctionality, LSE
European Commission Task Force for Greece (2011), First Quarterly Report.
International Monetary Fund (2006), “Greece: Financial System Stability Assessment”, Country Report 06/6, January.
Jacobides, M, R Portes and D Vayanos (2011), “Greece: The Way Forward”, White paper.
La Porta, F, R Lopez-de-Silanes and A Shleifer, (2002), Government Ownership of Banks, Journal of Finance, 57, 265-301.
Nelson, R and S Winter (1982), An Evolutionary Theory of Economic Change, Boston: Belknap Press
Quintyn, M (2009), “Independent Agencies: More than a Cheap Copy of Independent Central Banks?”, Constitutional Political Economy, 20, 267-295
Romanelli, E and M Tushman (1994), “Organizational Transformation as Punctuated Equilibrium: An Empirical Test”, Academy of Management Journal, 37, 1141-1166
Rothstein, B (2011), “Anti-corruption: the indirect ‘big bang’ approach”, Review of International Political Economy, 18, 228-250
Sturzenegger, F and J Zettelmeyer (2007), Debt Defaults and Lessons from a Decade of Crises.