The EU can be a boon for Greece
By Paul Romer
Published: September 2 2010 22:59 | Last updated: September 2 2010 22:59
At first glance Greeks seem cursed by the EU. Their membership precludes an exchange-rate devaluation, the traditional way out of a financial crisis. But, on closer inspection, the EU offers a far more potent option.
Corruption in Greece is like the worst kind of tax; one that discourages economic activity without raising revenue. Yet Greek policy-makers should be able to use the credibility of the EU to cut this tax decisively.
Greece is actually making progress with
its budget problems. The IMF on Thursday released a report saying a
debt default was “unlikely”, while another recent IMF review was upbeat on the government’s fiscal measures. Yet as Monday’s report on European economic sentiment shows, households and businesses in Greece remain deeply pessimistic. Even if the government can pay its bills, they face a deeper problem: Greece is not an attractive place to get work done.
Unemployment in some areas, including Perama, a traditional maintenance hub for the Greek shipping industry, is nearly 70 per cent. Many Greek firms now send their ships to be repaired in Turkey or South Korea. The problem is not the quality of the Greek workers: it is the delays, demands and inefficiencies that result from pervasive corruption.
Press reports tend to focus on
tax evasion, but the threats to everyday business activity are much more harmful. Companies simply avoid places where these are common, just as they avoid jurisdictions where the corporate tax rate is high. Threats can range from a government official who removes a company’s operating licence unless his girlfriend gets a job, to the truck drivers who cut off the fuel supply to petrol stations to keep the government from letting more people enter the trucking business.
What to do? The experience of Hong Kong shows that a government can sharply reduce corruption. In 1974, a new elite organisation, the Independent Commission Against Corruption, was set up. Cultural pessimists said that corruption was an inextricable part of Chinese culture, but the ICAC dramatically reduced it, making Hong Kong among the least corrupt places in the world.
To repeat the ICAC’s success, the fundamental challenge is to address a political problem that is as old as democracy in Greece. If guardians enforce the law, who guards the guardians? In the wrong hands, an anti-corruption agency could use selective prosecutions to give a political party a huge advantage.
Such political competition is like a fist fight in a bar. In most countries, creating a powerful new anti-corruption commission could be like tossing a gun into the middle of the brawl. Political parties in Greece remember how strong state powers were abused during the military takeover in the 1960s. On their own, the parties might reasonably agree that new powers would be destabilising and dangerous.
Greek politicians seem to have concluded it is better to live with a weak state than a strong one that could be abused. Yet in Hong Kong, the ICAC reported directly to the governor general, who was himself an appointee of the democratically elected British prime minister. The commission could be trusted because it was held accountable to an offshore democracy with a stake in Hong Kong’s prosperity. Greece can use its membership in the EU to recreate these conditions.
In short, by relying on the credibility of the EU, Greece can stop corruption without threatening its electoral process. The details could be handled in many ways. The Greeks could propose candidates for the leadership of the anti-corruption commission. The EU’s president could make an appointment from the list, retaining the power to remove, replace, or re-appoint the commissioner.
A similarly neutral commission could also bring the most basic elements of management to the Greek civil service. People who do their jobs well should be rewarded, with the EU as a neutral arbiter. People who don’t should be advised to change or be fired. With this approach, essential organisations like the courts and tax agencies could drastically improve.
Greece has options. If the country resigns itself to levels of high corruption it will be forced to compete for investment by offering wages that are correspondingly lower, causing a deeper and longer recession. Alternatively, the government can use the EU to make corruption as low and wages as high as in the rest of Europe.
The writer is the Henry Kaufman Visiting Professor at New York University
(Financial Times)
