The economic crisis and the retardants of growth in Greece
Business File, April-May 2017, No. 110
Unemployment is rising, social inequality is widening, and prudent governance is being prevented. Even when some temporary economic growth is achieved, it is accompanied by high jobless rate. Any attempt to change, reform and adjust society fails because of the strong resistance of the Retardants of Growth until the inevitable occurs for both the economy and society. ese special interest groups are detrimental to economic growth, full employment, prudent governance, equal opportunities and social mobility. ree academicians, Professor Constantin Zopounidis, Assistant Professor George Atsalakis, Dr. George Baourakis, and handle this delicate yet very serious issue in their survey for Business File.
In Greece, there is a high number of special interest groups in operation, which have “diverted” from their real role and turned into covert income redistribution organisations for their members at the expense of the entire society, particularly against those groups that, despite having many members, cannot organise themselves into one single group to protect themselves. Special interest groups have formed a signi cant number of protected and semi-protected markets that create dis- tortions and rigidities in every type of market in Greece, such as the purchase of goods and services, the labour market, the tax system etc. They force the state to intervene with extensive regulations that limit competition in the mar- kets and impose taxes on third parties, which in reality constitutes indirect in- come for their members. The key to economic prosperity in a society as a whole is free access to all markets, even to its weakest citizens, so that neither private nor public groups in the form of oligopolies and monopolies can be created. Behind all obstacles to free access is a privileged interest group that is being protected.
Interest groups misinform society so that their privileges are not revealed. The most popular tactics used to conceal their privileges are to devise an “enemy”, especially an “enemy” that cannot easily be understood, nor can it be “beaten”. All blame has been heaped on this vague enemy, for any damage the society suers, to ensure that citizens are not worried, and will not realise how much they have been damaged by the treacherous plans and privileges of special interest groups.
The power of interest groups
Moreover, these powerful interest groups essentially “govern behind the scenes” and do not allow the state to exercise prudent governance in order to create a rule of law that will de- fend the interests of the whole society against these special interest groups. They act behind the scenes before eve- ry act of new legislation, pushing for the adoption of favourable laws or regulations or to avoid arrangements that do not favour them. The lack of transparency, the systematic reduction of the accountability of their members in the legislature, and the executive and judiciary powers enhance the power of interest groups since they recruit board members to preserve and expand their privileges. In most cases any new legislation favours an interest group to the detriment of the majority of citizens. Decisions are not taken on the basis of what is fair for the whole of society but by the pressure of a privileged group.
Sometimes privileges may be “illegal”, and take the form of corruption. Due to systematic undermining of fair and pru- dent state operations, interest groups may consider illegal proceeds as being just as attractive as legal ones. Thus, bene ts can be obtained by morally un- acceptable blackmail and raw deals by both legislative and executive powers.
They have managed to distribute the rewards and the various state bene ts not on merit but on the basis of participation in various groups which are intertwined with the political establishment to create customer relationships. Essentially, redistribution, complicity and corruption ensure success, which should have been assured by honest hard work, skills and talent. Further- more, the idea of individual responsibility is significantly degraded, while every problem is due to the vague notion of the “State”. It is noteworthy to mention the damage that interest groups have brought about in education. Education does not equip society with the necessary knowledge so that people can take advantage of opportunities or cope with the threats that exist in an open and globalised competitive environment.
Passage of legislation without any control and lack of transparency do not disclose the amounts that these groups collect without any efort or business value. Neither does it reveal the burden that these amounts put on the entire community to the bene t of the members of the favoured interest groups, ensuring them a comfortable and easy life. Protecting the privileges of these groups increasingly strengthens them, restricting fair competition and requiring the consumer to pay high prices for goods and services, while excluding in particular young people from work.
The intervention of the state in favour of these small interest groups results in the already excessive costs of the government, distributing income without any transparency, which is being paid out as royalty income to certain interest groups, with the result that the state provides poor-quality services to citizens and no money for investment and development of infrastructure that could stimulate entrepreneurship to create jobs for young people.
Interest groups have succeeded in pushing Greek governments for more preferential bene ts, increasing general government expenditure to 55% of GDP, compared to 39% for Ireland, 43% in Spain and 44% in Germany. Greece, with a very small tax base, almost no export companies and no multinational companies –which in other countries bring capital from around the world and pay the greatest part of the taxes– should not have more expenses than Ireland, which hosts a large number of huge multinational companies. Citizens cannot afford to pay so many taxes to cover the state’s excessive expenses, while receiving poor- quality public services. The production base in Greece is too small, consisting of just 2.7 million employees. Of these 2.7 million, about 600 thousand are self-employed farmers, and about 700 thousand are self-employed in SMEs, 80% of which on average employ up to 5 people. The remaining 1.4 mil- lion workers are private employees, of whom 350 thousand are part time workers. On the other hand, pension- ers amount to 2.7 million. The ratio between pensioners and workers is one to one, compared to Europe’s ratio where pensioners are one in four. Civil servants number about 700 thousand, while the unemployed come to 1.2 million. These ratios, apart from being unsustainable, create more social in- justice and more economic inequality.
Interest groups have pushed for in- creased expenses by the state in relation to GDP to redistribute them as benefits to their members. In 2009 state expenses amounted to 70% more than state revenues. In 2015 state expenditure as a percentage of GDP will be about 55%. The excessive state costs led to the financial crisis and bankruptcy. They were the cause of all four previous bankruptcies in the country during the drachma period in the last 195 years. Excessive government expenditure destroys states, which is equivalent to a national disaster. Excessive government spending is the reason why excessive taxes are imposed, which citizens are ultimately unable to pay. In the past, overspending led to excessive government deficits covered by excessive taxes, which led people to rioting. World history is filled with examples of revolutions due to over-taxation, while “fair” expenses promote countries.
This ratio was achieved by the per- verse role of interest groups pushing for continued preferential treatment towards early retirement with the effect that the majority of employees were retiring prematurely, with only a small minority who had not managed to organise themselves into a group reach- ing the higher retirement age. Early retirement costs are mainly responsible for high social security contributions and taxes in Greece. According to a re- cent OECD report, the cost of taxes and contributions amounts to 43% of a salary, compared to 26% which is the EU average. This is a serious deterrence in attracting investment; the unemployed are still left without employment prospects and the already employed lack a decent salary, which they could receive (increased by a minimum of 20%) if contributions and taxes were set at European levels.
The public debt of 320 billion (or 450 billion before the 2012 “haircut”) was largely created by the pressure from the demands made by special interest groups for the redistribution of income to the bene t of their members. The relationship between the banks and the government also contributed to the financial overburdening of the state, when banks lent lavishly at high rates to the state, in exchange for state protection of the banking cartel from free competition.
Nobody could resist the greed of the special interest groups for privileged access to public money. They never al- lowed the establishment of an independent authority of a council for auditing the state’s finances, which could have protected needy citizens from the squandering of public money and pre- vented waste of state revenues which, if utilised appropriately, could have turned Greece into one of the most remarkable European economies.
The privileges of these groups are now supported by a political party; in this way, interest groups are not revealed in the foreground, so it is di cult for the ordinary citizen to understand that the strategies of the party on a number of occasions are to protect the privileges of lobbyists who have joined the party and in influence its management and strategies. Many times, when it becomes impossible for the party to promote or protect their privileges, they leave that party and join another one which they believe will soon be in the seat of government. This role of political parties should be disclosed to the public and should be denounced in all manners, because as long as there are political parties that foment and advocate interest groups, their devastating damage to society and the economy will grow.
The above-mentioned special interest groups in Greece are detrimental to economic growth, full employment, prudent governance, equal opportunities and social mobility. They have led to the inelasticity of society, the lack of reforms and the lack of competitive- ness, which have resulted in a progressive decline of both the economy and society until the inevitable occurred.
Different approaches to economic development such as Olson suggest the withdrawal of any legislation or regulation that enables special interest groups which, having gained privileges, prevent the adoption of changes, liquidate high prices through cartel proceedings, abuse their power and harm society. The withdrawal of protective legislation should be made by common accord at least among most political parties; or by non-participation of interest groups in decision-making as the centre is moved to another level which group members cannot access.
Citizens should be informed that excessive government costs and waste have been created by small but powerful special interest groups which distributed gains preferentially to their members at the expense of unsuspecting citizens. Excessive government costs created government deficits. In the past, government deficits were covered mainly by borrowing. Excessive borrowing to cover deficits led the country to the brink of bankruptcy. Now that the country cannot borrow, excessive government spending is being paid for by the over-taxation of citizens. Mar- kets do not trust Greece to lend to her, because the country has such excessive government costs and so much government debt. More loans can only be obtained from other EU member states but they require the reduction of excessive state expenditures as a percent- age of GDP, which means reducing the privileges of special interest groups. For this reason, these groups want loans to continue to enjoy their privileges but without commitments.
For citizens to be alleviated from the burden of over-taxation, excessive state costs need to be reduced, so that the taxes citizens have to pay will also be reduced accordingly. But privileged interest groups, who are protected by the respective government, even after six years of being in recession, still do not allow the reduction of state expenditure. They continue to create excessive government waste, since other unsuspecting groups pay for the costs; thus they prolong state borrowing and the over-taxation of citizens. This over-taxation becomes even more unfair as some groups pay more taxes than what should be accorded to them be- cause of the existence of tax evasion. Over-taxation and borrowing reduce the individual freedom of citizens and the sovereignty of the country; all this is happening because of some interest groups, because of the protection afforded to them by some governments, continue undisturbed to harm both society and the economy with their outrageous privileges.
It is reasonable to expect that scholars and those who draw up development policies become increasingly aware of this fact over time. This knowledge will eventually spread to ever wider sections of the population. This wider awareness will greatly reduce the loss- es in society from lobbyists, i.e. special interest groups. This is an expectation that concerns everyone espousing a society that will gradually minimise economic and social inequalities.
If this is achieved, the fastest growth will occur in societies which have not recently experienced upheavals but are expected to see stability in the near future. We hope the recent and upcoming transformation of the structure of society and the economy will be successful, to remove the retardants of development and to lead Greece to sustainable and stable economic development, free of the economic and social inequality that interest groups create behind the scenes. Public ad- ministration and other institutions can be reorganised on the criterion of being beneficial to society, and not by the pressure of lobbying for preferential treatment. This will also improve the state’s finances. A Greece free of the harmful behaviour of special interest groups will resemble a teenager. May- be she will make some mistakes, but she will leap ahead with momentum towards sustainable development.