Download New Research Challenges in Political Economy: the redistributive role of the state in Greece

Panos Tsakloglou
Athens University of Economics and Business
New Research Challenges in Political Economy:
the redistributive role of the state in Greece
I would like to begin by expressing my thanks to the organisers for
the 1st LSE PhD Symposium.
‘Political Economy’ is a wide and varied topic. I have therefore
agreed to focus on the redistributive role of the Greek state. What
follows are my summary notes on this topic – offered here as a
stimulus to further thoughts and discussion.
I begin with the premise that in modern societies the role of the
state and its redistributive mechanisms is very important
As a result of state interventions: winners and losers / not
necessarily a zero-sum game ) positive- or negative-sum game)
As a result of state intervention, individual preferences and
behaviours are influenced and around them political and social
coalitions are built
Aim of my presentation:
To highlight areas where relevant empirical research has been
carried out in Greece (report very briefly on the main findings) and
identify areas where research has not been carried out yet.
Mostly economics, but to the extent that my knowledge goes
beyond economics, I will try to identify relevant fields in other
social sciences (mostly sociology and political sciences).
Theory: Competitive markets achieve equilibria that are optimal
according to the Pareto criterion
Why state intervention:
If markets are not competitive (monopolistic or oligopolistic)
If there are public goods
If there are externalities
If there are missing markets
If there is asymmetric information
Interventions:
Regulatory or redistributive (the latter less frequently justified in
this framework)
In most modern capitalist societies far from this Smithian state:
Revenues of all layers of government between one third and half of
total GDP / Difficult to justify state intervention of this scale in this
framework
But: Pareto criterion. Not very useful for distributional analysis
Hence: State intervention in order to alter the distribution of
resources (income)
Again from a theoretical point of view, we know that it is preferable
to redistribute endowments (assets) rather than play with the price
mechanism (difficult to achieve in practice).
State interventions: Regulatory or redistributive
Redistribution: Financed mostly through taxation (direct and
indirect)
In cash or in-kind
Over the life-cycle / across generation / within generations
Social Insurance / Social Assistance / Other policies
Short-term and long-term effects
These policies generate effects in terms of aggregate welfare,
inequality and, to a lesser extent, poverty (as well as particular
winners and losers in terms of socio-economic groups)
So much so for the general framework. What has been done in
practice in Greece and where are the gaps that are likely to be filled
by people like you?
Baseline scenario: Structure and evolution of aggregate inequality,
poverty and welfare. Relatively well-researched area.
Some results contrary to claims made in the public discourse (or,
even, general perceptions)
Inequality emanates mostly from differences within rather than
between socio-economic groups
Poverty is more prominent among the elderly, those with low
educational qualifications, those living in rural areas and, in recent
years, members of HHs with unemployed heads (but not all
unemployed)
Inequality and relative poverty declined sharply in the years
following the collapse of the military dictatorship and did not
change substantially afterwards. Their levels still substantially
higher than those of most EU member-states.
In absolute terms, aggregate welfare (living standards) has risen
monotonically but not linearly during the last 25 years, while
absolute poverty declined sharply.
What is the impact of state interventions? (How do we reach these
levels?)
Interventions that I am mostly interested in:
Taxes
Direct
Indirect
SICs
Benefits
In cash
In kind
What do we know about the distributional impact of each of these
interventions? Let’s take them each in turn.
Taxation: Until some years ago, Greece by far the highest ratio of
indirect to direct taxes in the EU
Not such large difference any more
Examination of tax progressivity mostly in a static incidence
framework
Direct taxation
Perception of the general public: progressive (reduces inequality)
Calls of left-wing political parties for changing the balance between
direct and indirect taxes
(Surprisingly) Existing studies relatively few and rather old
Results show a rather modest impact
Why?
Many low income earners do not fill tax returns
Relatively highly graduated marginal tax schedule
Reasons have mostly to do with tax evasion
Much more research is needed in this field. Data are hard to come
by, but there are modern techniques for dealing with such problems
(esp. tax evasion).
Field very interesting to political scientists, too.
Indirect taxation
Perception of the general public: regressive (in proportional terms
the poor pay more than the rich)
More and more recent studies examining the distributional impact
of indirect rather than direct taxation:
Results show a rather modest impact, too.
Why?
Richer people save more (no indirect taxation)
But, VAT and excise duties higher in commodities consumed by the
rich
Most of these results obtained in a static framework. No studies
examining in detail dynamic impact of tax policies (for example,
effects on labour supply). Some research currently under way /
more could be done using dynamic micro-simulation models.
By the way, using such models it is easy to identify winners/losers
of proposed tax reforms and use this material for a political
economy analysis of tax reform.
Another very interesting topic for research that has been analysed
empirically to a limited extent only in Greece, is that of the impact
of taxation and, especially, government spending on growth.
(I skip SICs now and I will talk about then when I refer to pensions)
Regarding cash transfers, one should distinguish between pensions
and other cash transfers.
Pensions: Taking into account the rapid ageing of the population,
the problems of the pension system are justifiably on the top of the
political agenda in Greece.
Greece is in the unenviable position to spend a comparatively high
proportion of her GDP on pensions and have the highest poverty
rate among elderly persons in the EU. Apparently, something is
going wrong.
In the framework of the recent attempts to reform the pension
system, a number of studies were carried out, most of them in a
multi-period accounting framework. The main, issue, of course
was the viability of the system, while relatively little attention was
paid to distributional issues (both differences between pensioners
and the rest of the population and differences within the group of
pensioners).
Apart from some very interesting questions of distribution over the
life-cycle, an important question that has been researched to a
limited extent is that of the rate of return of the investment made by
the pensioners in their pension funds (combining SICs and pensions
received).
In fact, despite the high rate of poverty among the pensioners, from
the little we know, the average rate of return, at least for IKA
pensioners is quite respectable and inversely related to the worker’s
earnings.
The reason: several of those receiving low pensioners had very low
contributions, too.
Questions related to the political economy of pensions reform from
the point of view of political science are also very important and I
am aware that research in this field is currently under way.
Non-pension cash benefits in Greece are both low and not very
well-targeted.
In fact, many such benefits are channelled through the tax system.
There are relatively few studies of the distributional impact of these
benefits. Two conclusions that seem to emerge are:
In a cross-sectional framework, those that operate outside the tax
system seem to be progressive but quantitatively not very large
Those that operate through the tax system are larger and
predominantly regressive.
However, since some of these benefits cover unexpected
contingencies (e.g. unemployment benefit), it is also important to
examine them in a life-time as well as cross-sectional framework.
Turning to benefits in-kind, we should distinguish between those
whose distributional effects can be identified and those where such
an identification is difficult.
Two important fields where these benefits can be identified are in
education and health
Education: Relative dissatisfaction of the population with the
quality of the services offered. Also disappointing results in
international comparisons (PISA, etc)
In a cross-sectional framework progressive but, unlike the claims
made in the public discourse, the progressivity comes from primary
and secondary education. Tertiary education transfers seem to
increase aggregate inequality.
Health: A peculiar situation. Longevity in Greece much higher
than that anticipated on the basis of her DGP per capita and habits
(smoking). Strong dissatisfaction with the quality of the public
health services. To my knowledge, no study of the distributional
effects of public health expenditures. Logical to expect that since it
is used predominantly by the poorest segments of the population it
should be progressive. Note though that tax exemptions to private
health expenditures are highly regressive.
Very important: Since most of our health expenditures in the last
year of our life, the above distributional impact should be examined
in a life-time rather than cross-sectional framework.
Other forms of public subsidies and transfers in-kind difficult to
evaluate either because of identification problems (e.g. policing), or
create important externalities (e.g. public transport).
A few recently introduced measures of this category both
innovative and well-targeted to some of the most vulnerable groups
of the population (Home help).
In recent years, many attempts to introduce reforms in health and
education systems. Most of them faced strong opposition and
failed, even though the expected benefits were very high.
Important question for political scientists and economists alike.
Why? Who blocked the reforms and what sort of coalitions should
be built in order to have successful reforms in the future?
Concluding this section of my talk, let me return to something that
emerged several times till now. What is, perhaps, the most
important question that has to be answered is: “What is the
distributional impact of all the above state interventions taken
together from a life-time perspective?”.
Very difficult question and, certainly, Greece is not exactly a
Scandinavian country in terms of longitudinal data availability, but
an effort should be made in this direction, even using heroic
assumptions
Apart from redistributive interventions, regulatory interventions,
too.
More difficult to quantify precisely the distributional effects of
regulatory policies.
However, very interesting topic.
Examples:
(a)
Privatizations:
(b)
Deregulation/Regulation: (Banking system,
Telecommunications, Radio and Television Broadcasting)
Very interesting questions of political economy (some serious work
in recent years, mostly from political scientists)
Nevertheless, no studies to identify Winners / Losers, evaluate
impact in terms of aggregate welfare, inequality, (and, perhaps,
poverty).
Finally, a little beyond the narrow field of the direct redistributive
impact of government policies there are a number of very
interesting research questions that have not been investigated indepth from a quantitative point of view in the case of Greece.
A few examples:
(a) Distributional impact of inflation
Public discourse: Very negative. Evidence?
(b) Inequality and economic growth
International evidence: bell-shaped. Low (incentives), High
(exclusion / fear of radical redistribution leading to low
investment)
Growth effects of redistributive policies. Very few, but very
interesting studies exist.
Also effect of growth on inequality (High profits, but, also low
unemployment). No study that I am aware of – data problems.
(c) Attitudes to redistribution and voting behaviour.
A number of studies exist, but something more detailed on a
representative sample may be needed.
(d) Distributional effects of clientelistic policies (especially, public
sector appointments and corruption: some research under way on
their impact on growth, but winners/losers/aggregate
distributional impact?)
In conclusion, In recent years important progress has been made in
researching the redistributive role of the state in Greece, but I hope
these brief notes have already indicated that many important
research questions are still open for investigation.