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Costas Azariadis
Washington University in St.Louis
Federal Reserve Bank of St.Louis
Hellenic Observatory Annual Lecture
March 5, 2012
1. THINKING THE UNTHINKABLE
Why no structural reform? Special interest groups
The collapse of oligopolistic socialism
Consequences of standing pat
immediate issues
the medium and long runs
A meltdown in the making: GDP falls by 50%
Can we avoid a humanitarian crisis?
The looming tragedy: Sophocles vs the economists
2. MOTIVATION
a)
Public attitudes
80% of respondents oppose reforms and austerity programs
Voting intensions: 25% for hard left, 29% for moderate left
virtually all parties(include large fraction of ruling coalition)
opposed to structural reform
no to smaller public sector
no to private universities
no to privatization/ deregulation/competition
2. MOTIVATION
b) Recent Actions
Modest expenditure cutbacks (2% of GDP)
Large increases in tax rates; large decline in 2012 tax
revenue (7% below 2011)
Closed professions remain closed
Labor unions hold veto power over entire public sector
3. THE MAIN QUESTIONS
Q1: What are the consequences of continuing for the
next 10 years with the economic/social institutions of
last 20 years?
Q2: What is the likelihood of this event?
Q3: Will Greece become a modern capitalist society? An
isolated bastion of idiosyncratic socialism?
4. CURRENT STATE OF THE ECONOMY
a)
Most distorted structure in EU
Oligopolistic socialism with some capitalist features
Public opinion hostile to profit and foreign investment
Weak laws and property rights; declining public order
Average frequency of major strikes(1980-2010):5 per week
Average frequency of demonstrations in downtown Athens(2011): 5 per day
Infrastructure and education of lower-middle-income country
Productivity=80% of EU-27% average
4. CURRENT STATE OF THE ECONOMY
b) Detailed data sources: Eurostat, Ellstat, National
Bank of Greece
Latest data (November, December 2011)
Industrial production down 11%
Unemployment rate 20.9%
Youth unemployment rate 48%
2011 GDP down 6.8% from 2010
2011 GDP down 14.5% from 2007
Industrial production: cumulative fall 24% from 2008
4. CURRENT STATE OF THE ECONOMY
c) Anecdotal observations
Greece ranked low on global business comparisons
109/183 in ease of doing business (2010); 71/133 in
global competitiveness (2009); 80/190 in corruption
perception index
Espresso cup in Rome costs 50% of the price in Greek
countryside
4. CURRENT STATE OF THE ECONOMY
(d)
What do the data show?
Consumption way above productivity: 105% of EU-average vs 80%
Extremely high youth unemployment: nearly 50%
Low value added for education: 3.5% rate of return on tertiary education vs 7% in other
developed nations
Shortage of skills/human capital
Low technology, invention, innovation: last in EU by large margin
Highly protected labor/product markets
High income inequality: 30% below poverty line
A tale of two classes?
---- insiders vs outsiders
5. WITHOUT REFORM: THE SHORT RUN
a) Immediate bankruptcy
Nominal debt=160% of GDP and rising
At 6% interest rate, debt≈9.6% of GDP
Cost of paying 1.0 million public and 1.9 million retirees
≈18% GDP
Default likely even with zero public debt: too few
producers/too many consumers
5. WITHOUT REFORM: THE SHORT RUN
b) The Argentina experience: Is it relevant?
Argentina trades with world, Greece with EU. Role of
natural resources
c) Greece outside the Eurozone
Can the drachma co-exist with the euro?
How much seigniorage for the greek government?
Who wants the drachma back?
5. WITHOUT REFORM: THE SHORT RUN
c) Greece outside the Eurozone
Public finances under the drachma
Government saves 8% of GDP in interest services
Government draws 5% of GDP from printing money
total gain ≈ 13% of GDP
What will happen to GDP outside the Eurozone?
Loss of foreign credit
6. WITHOUT REFORM: THE MEDIUM RUN
Banks collapse and are nationalized
Large public deficits financed by the printing press
Deficit-to-GDP ratio explodes to 10%
EU forgives Greek debt. Greece becomes privileged partner
Loss of credit/trading access to EU, lower GDP by another 10-
15%
Unemployment rate tops 25%, massive emigration, strong
pressure to provide jobs in public sector
7. THE LONG RUN: A DOOMSDAY SCENARIO
A doomsday scenario: public sector hires 400,000
unemployed. Private sector shrinks
Ratio of public-to-private sector jobs changes from 1:3 to
1:1.
Total number of jobs shrinks to 3 million with 2 million
unemployed. (40% unemployment)
Government offers jobs to all unemployed workers. Private
firms employing more than 50 people are nationalized.
7. THE LONG RUN: A DOOMSDAY SCENARIO
GDP drops to the level consistent with infrastructure
and skills of its people. [Bulgaria, Turkey]
Growth in public sector reduces GDP per capita to
FYROM/Albania level.
Social consequences: class war, xenophobia,
withdrawal from EU
8. SEARCHING FOR A MIRACLE
The Sophocles solution: Deus ex Machina
Job one: Restoring confidence
Can Greece make credible commitments?
The Taming of Brazilian inflation in the 1990’s
Wiping the slate clean
The voter’s mea culpa
A new constitution
A flood of public works
War on corruption
The Constitution: where to start
100 M.P.’s with 12-year term limits
Draconian punishment of public-sector corruption
Constitutional commitment to balanced budgets
Ironclad protection of FDI
10-year revocation of employment security in the public sector
Abolition of government monopoly on tertiary education
Public Works
Privately financed ports, airports, highways,
marinas
99-year leaseholds on public land
Big-bang auction: simultaneous leasing
The War on Public Sector Corruption
Constitutionally defined as high crime
No statute of limitations
Adjudicated in specialized courts
Ostracism for the guilty
Wealth expropriated
Loss of citizenship and civil rights
Lifetime exile in remote island camps
9. TO REFORM OR NOT?
Will there be a miracle?
The burden of youth employment
The cloud of political uncertainty
Decline of law and order
Symptoms of a failed state
Disaster and Recovery
The Asia Minor debacle, 1919-22
The war and civil war, 1940-49
Existential Questions
Risk-taking vs the social safety net
Egalitarianism vs enrichment
Socialism vs capitalism
Public opinion at a crossroads
Thanks for Listening!!!