The Fall of Greece

When the Syriza party emerged victorious in Greece's national election last week, many citizens rejoiced at the promise of an easing of austerity measures. Professor George Serafeim believes having fresh people in government is a positive development, but fears they could point the country backward, away from competition and free-market forces.
by George Serafeim

Editor's note. On Sunday, the left-leaning Syriza party and its leader Alexis Tsipra won a decisive national victory in Greece, partly on pledges to reduce current austerity measures and to seek a restructuring of debt commitments to European partners. George Serafeim, Jakurski Family Associate Professor of Business Administration and a native of Greece, offers his insights into what the election means for the country.

Many people ask me what the recent elections in Greece mean for the Greek economy. While I agree reforms are needed, I am skeptical that the new government, Syriza, can deliver them by favoring reform based on central government control rather than the forces of competition, meritocracy, and individual accountability.

Let me be clear about one thing: the previous government, as most previous governments, failed Greece. In my opinion, it did not implement needed reforms and, in any case, did not manage to reform the country in a fast enough pace. Driving from Athens to Thessaloniki in 20 hours is hardly an achievement—even if there is a lot of traffic. Moreover, I am happy to see old faces go: I am a big believer of the saying "you cannot teach an old dog new tricks." Individuals raised in an environment of favoritism, nepotism, and cronyism are unlikely to let old habits go.

I am afraid, though, that the new government will cause damage for one primary reason: it seeks to suppress any signs of competition, meritocracy, and individual accountability in the country. (Note, this has nothing to do with the discussion around whether the debt level is sustainable; I actually agree with Syriza that the debt level is not sustainable and that the implemented extreme austerity measures are not optimal.)

For example, the government's commitments include:

  • Not allowing establishment of private educational institutions on equal footing with public institutions. The best educational institutions in the world are private and I am proud to be a faculty in one of them.
  • Rehiring public sector employees who were laid off because of inadequacy to perform their jobs. Common sense suggests why this will lead to an inefficient public sector.
  • Nationalization or reversal of planned privatizations of economic assets. I have not seen not even one credible academic study that suggests that state-owned enterprises are run more efficiently than private ones. To the contrary the poor utilization of assets, especially in poorly governed countries like Greece, is dramatic.

The emerging status is pretty clear: a deeply socialist state where central planning by politicians will command the use of scarce resources. These politicians have little if any work experience and rather disappointing professional careers. One can check this easily by searching on Google the members of the new government.

My sense is that 2015 will be another year of great uncertainty for Greeks as the new government presses forward with its program. Just three days after the election, the Athens stock market index is down by almost 20 percent and the bank index by 45 percent. Investors, which are so badly needed in order to restart the Greek economy, are fleeing the country expecting that the economy will get worse, not better. This reallocation of wealth is real. Money is being transferred from people that support the Greek economy to people that bet against it, through sorting of stocks and derivatives.

Why am I not focusing on what everybody else is talking about, the country's debt? Because I am less worried about this government, or any government, causing damage on the liability side of the economy by pressuring to restructure the debt etc.. I am incredibly worried that it will cause significant damage on the asset side of the economy by destroying any emerging effort to create a competitive environment that could lead to innovation and economic growth.

Furthermore, even if the debt is reduced now, unless you create a competitive economy you will end up with a lot of debt tomorrow. Such inter-temporal transfers of wealth have been a characteristic of the Greek society for the past 30 years. The young generation is left to pay the bill. Faced with a huge bill, an increasing number of young Greeks are leaving the country causing perhaps the most damaging effect of them all, brain drain.

One of the most robust academic evidence is that an economy where the means of production are controlled by individuals (and where property rights are clearly allocated in competitive markets) is far superior to a centrally planned economy where the means of production are controlled by the political process. And the superiority does not come only in terms of economic growth, but also employment, access to health care and education, social mobility, social cohesiveness, freedom of speech, and non-violence.

Greece badly needs the creative destruction brought by the forces of competition—not a destruction brought by outdated and failed political views. However, with both financial and human capital fleeing the country little hope remains at this point.

I am optimistic though: I believe that Greeks will soon realize, after initial disappointment once again at the failed promises of a new government, that democracy, an institution born in Greece, is compatible only with competition, meritocracy, and individual accountability. Once that realization takes place, Greece will enter a new phase where prosperity will be a reality and not part of political speeches.

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    • Peter Kottke
    Selling state assets at fire sale value for quick cash to give to european banks at the cost of an overall drop in government revenue in exchange for more bailout loans and increased debt isn't about improving competition. It's about squeezing every iota of money they can out of Greece regardless of the social cost.
    • Leon W
    @Peter Kottke

    An organization w/o competition, meritocracy, and individual accountability leads to an environment that fosters abuse by the individual for short term selfish gains. This is a classic 'tragedy of the commons" example. I do not get the impression that this article is in support of squeezing Greece dry; merely, PM Alexis Tsipras' plan sounds great in classrooms around the country, that is, until brutal economic reality sets in.
    • Vasileios Chatzikos
    • Aeronautical Engineer, Aviaseven Ltd
    Actually everything depends on the system of reference and based on that I am obliged to, at least, respect Mr. Serafeim's academic point of view. However, if we are to accept the theory of a referential system, we must also allow other systems to counteract and place their arguments. Obviously, an infinite number of such systems could be theoretically acceptable but talking in terms of sociology, if I may say so, nowdays there are two main trends. One of them was presented and defended very elegantly by Mr Serafeim, whilst I am taking the liberty to defend, if you like, the remaining one. Indeed, in a very bulky way of putting it, what we are talking about here is the battle of privatisation versus socialism. So, here we go. Let us start.

    At a first glance the article posted by Mr. George Serafeim is quite an interesting article I must admit. However, if you dig into it further, one must also admit that there is a significant amount of misleading information. To do so, of course, one must be aware of the facts. Let's try and see these misleading information, as quoted in the article.

    1. "Driving from Athens to Thessaloniki in 20 hours is hardly an achievement even if there is a lot of traffic". Driving from Athens to Thessaloniki is actually a 6 hours trip if you consider a stop. I agree however with Mr Serafeim that it would be 20 hours when you drive in reverse.

    2. "Rehire public sector employees who were laid off because of inadequacy to perform their jobs...". Actually, noone will hire back employees that didn't perform their jobs. However, many employees of the public sector were sacked unlawfully and in complete contradiction to the Constitution, as judged by the Hellenic Council of State (HCS). A very important parameter, that should not be forgotten, is that the HCS along with the Supreme Civil and Criminal Court and the Court of Audit are the highest courts in the nation.

    3. "nationalization or reversal of planned privatizations of economic assets (I have not seen not even one credible academic study that suggests that state-owned enterprises are run more efficiently than private ones...". This is inaccurate as well. One example I can think of is the privatisation of the British rails. The rails did not run better after the privatisation and let us not forget the various, fatal sometimes, accidents because the company decided to reduce the costs related to the safety. For your information please refet to the following report: The Great Train Robbery: rail privatisation and after. A report produced by CRESC, University of Manchester, University of London and Open University. Whether these institutions are recognised as credible or not, makes the question a rhetorical one.

    4. "...(which in this case have little if any work experience and rather disappointing professional careers...". I would rather not to make any comment on that since it's quite clear that this is an argument of prejudice.

    5. "We should never forget that one of the most robust academic evidence is that an economy where the means of production are controlled by individuals ....". Again not true, unless someone is reading only neo-liberal books.

    I cannot of course deny points of pragmatic facts revealed by Mr. Serafeim's article. For an instance, the huge brain drain Greece is facing and of course the non sustainability of the country's debt. But really, people are talking for the sake of the argument and not to agree on something.

    Therefore, I cannot agree when Mr Serafeim says "Greece badly needs the creative destruction brought by the forces of competition--not a destruction brought by outdated and failed political views." I suppose that Mr. serafeim assumes socialism is an "outdated and failed political view". Practices of the Nordic countries for example, have achieved a pragmatic socialistic approach either we like it or not. So, if a society of people on the planet managed to do so, I strongly believe that is feasible for every other society to conquer. On the other hand a very opposite example, that is a result of purely capitalistic recipes I can think of, is the almost 50 million citizens of the Unites States that do not have access to free healthcare. This is almost 15 % of the population. Can you really imagine that? Or, what about the almost 60,000 homeless of New York city. Let us not forget that behind those numbers there are humans just like me and you. And, as I am sure eve
    ryone is aware of, this is not the only problem the citizens of the States encounter.

    Mr. Serafeim also states, and with which I agree, the following:
    "And the superiority does not come only in terms of economic growth, but also employment, access to health care and education, social mobility, social cohesiveness, freedom of speech, and non-violence." However, there is a contradiction to what Mr Serafeim is saying with the policies of the very same country he is living in. Employment, access to health care and education, social mobility, social cohesiveness, freedom of speech, and non-violence do not affect in a positive way the citizens of the States via the political agenda of the latter's officials. This may sounds very remote to most of the readers but I am pretty sure people of the ghettos would agree keenly enough.

    Societies need to target and accomplish political decisions affecting their group members in a sustainable way that will include, amongst others, free healthcare access, free educational system, compliance with human rights, etc. Capitalistic penetrations, as a new datum in a modern society, must not of course be ignored and treated as an "unsolved problem". We, however, as humans owe to find a solution for this problem that will not negotiate, by no means, self-evident needs of our species. The problem, believe it or not, is technocratic not a philosophical one. This automatically makes it easier for the humans to solve it. Now, why we are not able or willing to solve it, is the philosophical aspect of the problem.
    • Momo Amadu Alhassan
    • Ph.D Candidate, Czech University of Life Sciences in Prague
    Greece as a country is suffering from massive corruption and misappropiration of funds. I come from a developing country so i know what am saying. Politicians are have been the cuase of the absurdity in Greece and any other poorly managed economies across the globe. I believe the new govt can do better if they focus on domestication and slightly take a seat back position from the EU to make sure things are abit ok before joing the mainstream activities of the EU.
    • Ziad Ferzly
    • MD, Cedarwood Advisors
    While the author is afraid the new government will "suppress any signs of competition, meritocracy, and individual accountability" and is afraid of the emergence of "deeply socialist state where central planning by politicians will command the use of scarce resources" in Greece, what does he think about what happened in the US starting in 2008?

    The US government bailed out the banks, with trillions of dollars (if you consider all kinds of support) without any of the bankers being held accountable. Where was competition and the free market economy? How do you describe the government and its actions?

    I am no expert on Greece, but it seems that the Greeks experienced so much destruction that there might not be much room for more destruction, even the creative kind.

    In a true market economy, the Greeks would be allowed to default on their debt and leave the euro. The lenders would lose their money (what do you expect for lending a country that has no chance of paying back?). The Greeks would suffer more and eventually find a way back using creativity. This "solution" is not politically acceptable.

    Good luck to the Greeks. They need it.
    • Aim
    • Drilling Supervisor, KOC
    Mr. Sarafeim,

    I noticed the fact that you made significant assumptions about future of Greece and its people. These assumptions, I believe are a product of the tower (environment) you are in.

    Have you ever wondered that your assumptions about meritocracy and individual accountability may not actually work in certain societies in its current form? Have you ever wondered that what you propose may not work in time for the current people who are suffering in Greece? Have you ever wondered that they are in such a difficult situation and are so captivated by the negativity to even think of the future generations? (that no matter how much they try it will never make an effect on their own lives, hence the brain drain or face misery due to absence of something basic like a health care).

    You see, building a capable nation based on meritocracy, honesty and accountability takes...well in the case of the United States (the tower you are in) about g-zillion civil wars, gynormous innovations to perform the two world wars, cold wars, civil rights movements, i-phones, Fords, fracking for that matter...on and on and on. In other words, tremendous amounts of effort, sweat and blood.

    It requires a lot of history to say what you said confidently and what you said certainly do not pertain to Greek people. Your assumptions are about an entirely different society which maintained their history and built along the way such systems of rule and government that every coming generation would leave their inheritance in a better shape than they found it in. You just never mind the 50 million people who do not have the access to health care mentioned by Vasileios, the important thing is that they have a voice and (relatively speaking) less corrupt government. They do have a shot at fixing their lives with the next election. That is a fact.

    Collectively speaking the Greek society is not built through hard ships but rather through a lot of bribery and corruption; it does not have a history of significant suffering in the name of innovation, technology, social processes, rule of law, human rights...etc. to deserve a civilized society but empty aspirations of magical life on Greek islands without any intent of hard work (come to think of it, majority of failed states are in the same group; nope I do not certainly accept dictators as excuses because the US fought off the two dictators of their time: Brits and the French).

    Mr. Sarafeim, I value democracy and hard work but I certainly do not value copy pasting same norms onto other society without deeper contemplation about underlying social dynamics. What you said, simply will not work among Greeks, Arabs, Russians or the Chinese (with due respect to these nations) because the cultural norms are entirely different than the U.S. (and different does not always mean bad!)

    Based on this, the mess brought on by collective Greek attitude of corruption will never go away by deeds of one man, no matter how powerful. Wealth never forgives dishonesty! It will take decades of social trust building in order to just agree on accountability and most importantly maintain it.

    Best regards,

    • bowlweevils
    • reclining, carbon-based with semi-bilateral symmetry
    I am no expert on Greece. However, I find a basic criticism of the current leadership to be odd. Specifically:

    "These politicians have little if any work experience and rather disappointing professional careers."

    It was my understanding that Greece, prior to their economic austerity package-deal, had an extremely high unemployment rate for young adults.

    It was my understanding that this extremely high rate became even higher over the past 6 years.

    So how, exactly, do you cobble together a government that represents the younger generation of Greece that has substantial private-sector work experience?

    There already was a brain-drain. Now there will still be one. Perhaps at some point, that will end. But expecting a generation starved of work experience to embrace the diktats of nations with nearly-full employment and extensive opportunities for education leading to practical employment opportunities such as Germany, the Netherlands, and Finland seems like you expect a unicorn to be at the end of the rainbow.

    The functioning of these economies did not happen in a change of governments, or even a change of generations. The Netherlands and Germany were partakers in the invention of a market-based economic system largely detached from the political structure, and did so over several hundred years. Greece spent most of those same several hundred years as an exploited colony of foreign powers.
    • Charalambos Vlachoutsicos
    • Adjunct Professor em and Senior Fellow, Athens University of Economics and Business
    I fully agree with your analysis and am very pessimistic, less about what Tsipras and his inexperienced and dogmatic will do, and more about what he will undo. Whether he likes it or not, Merkel runs Europe and our survival depends on her handouts. Antagonising her, therefore is suicidal. For the sake of our country, I hope to God that I am wrong!
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited
    It seems a bit bizarre that the author has lot of negative beliefs for the way the new government may act. It would be better to watch their performance and then comment on where they fail or succeed in due course. Yes, we need to reward performance and merit for there is no way out if success is to be achieved. The genuine mistakes committed by the previous government need to be analysed and corrective measures initiated. A focused approach taking all factors into account is what can lead to a turnaround.
    • Assistant Professor, Rama University, Kanpur, UP, India
    The Author has draws the line which are relevant for the economy like greece. But he forgot to mention financial bankruptcy. 1. Domestic demand has collapsed, 2. International trade is in downturn. No body is ready to invest or showing any kind of faith. Just because the world bank and IMF are bailing out money for Greece, This Ancient country is not going to revive. We have to see the core problem. e.g Reviving the bad loans, generating demand, and check the feasibility of get the money back when giving loan.
    With Regards