What Greece Really Needs is Reform

They are talking a lot about cutting costs in Greece, but beyond that what Greece really needs is fundamental reform so that public money is not wasted on a vast and inefficient patronage system, and they need to free up their cartel-like economy, so that the economy can actually grow and benefit people beyond a few well connected and privileged insiders.

After Bailout, Greece Wants More

Posted 07/05/2011 07:10 PM ET

Socialism: Barely a day after a multibillion- dollar bailout from the IMF, Greece’s prime minister has his hand out again for yet another loan, this one from Europe. Has his mendicant state become the Oliver Twist of nations?

George Papandreou’s call to the European Union to lend Greece another $173 billion just hours after Greece’s parliament approved a $40 billion austerity program in exchange for the last tranche of a $156 billion International Monetary Fund loan proves that throwing more money at his country just won’t work.

Successive rescues, guarantees and bailouts have put the grand total spent so far at $394 billion.

But Europe seems oblivious to reality as it scrambles to find more money, even as Standard & Poor’s warns against tinkering with bond maturities.

The London Telegraph points out that the second bailout sought by Greece is likely to last only until 2014 and will leave an even bigger debt after that. Someone will have to pay. So maybe the roots of the problem — unfunded mandates and a bloated public sector — ought to be targeted as much as Greece’s parlous fiscal picture.

The IMF megapackage addresses just one side of the problem — fiscal accounts. What it doesn’t do is address the entire socialist nature of the system that has made a hash of its finances. It’s consistent with IMF’s original 1948 mission — to resolve short-term liquidity problems by mandating cuts.

But Greece’s problem is ultimately one of growth.

IMF loans may keep the government afloat, but it’s that very government that’s keeping the private sector from rescuing Greece for real.

Bailout in hand, Greece remains a thicket of price-fixing that distorts markets, clientelism that gives some citizens — generally state employees — privileges over others, and massive regulation of the private sector that encourages tax evasion, idleness and finger-pointing.

“I think this will ultimately be a case in which the doctors kill the patient,” Johns Hopkins University economist Steve Hanke told a Cato Institute conference last year.Hanke says that despite government vows to cut spending and some tax hikes, “there are no structural reforms … in the proposals for Greece’s recovery.”

In short, Greece needs to focus on competitiveness by cutting labor costs — especially its burdensome payroll taxes, now at 7.8% of GDP. It also must make its VAT tax — which now distorts incentives — uniform.

Those changes alone would give Greece a fighting chance to grow its way out of its debts.

It worked in the case of another socialist basket case, New Zealand, under the “Big Bang” of wide-ranging free-market reforms in 1984, incredibly enough, under a government headed by socialists.

New Zealand’s Labor Party, under finance minister Roger Douglas, made sweeping structural reforms based on making the economy more competitive.

After those reforms were put in place in 1984, the Kiwi economy boomed, and its government finances improved. Such free-market reforms “should be part of Greece’s Big Bang,” Hanke said. He’s right.

Another proven example of reform that works is Chile, which rose from communist bankruptcy in 1973 with the emergence of a critical mass of University of Chicago-influenced economists who worked to restructure the economy on free market lines.

“Change must therefore be exhaustive and reach all sectors, labor and capital markets,” wrote former finance minister Hernan Buchi in his book “The Economic Transformation of Chile.”

In particular, Chile harnessed a newly privatized pension system to create a capital market and to serve as an investment pool. It worked brilliantly, and today Chile is the wealthiest country in Latin America.

Unfortunately, today there are few Milton Friedman-influenced economists between the IMF and the Greek government to push for that.

Instead, Greeks have taken about 10% of their money out of country. As for young Greeks, they’re planning to leave, taking their talent and youthful vigor with them.

Papandreou’s call for more money after the IMF bailout is a clear signal of a flawed economic model. More money would only be wasted — and would obscure the fact that Greece’s real answer lies in its private sector.

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