George Alogoskoufis

This article is adapted from an article in Greek in the newspaper To Vima, October 27, 2024. It is based on research reported in GreeSE paper no. 198, published in July 2024 from the Hellenic Observatory, London School of Economics, and a forthcoming book in Greek, George Alogoskoufis, Before and After the Political Transition of 1974: Institutions, Politics and the Economy in Greece, Gutenberg, Athens, which provide a more detailed analysis.

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The poorest 50 percent of the world’s population earns less than one-tenth of total global income and owns just 2 percent of total net wealth. This disparity is mainly due to disparities between and not within countries, which contribute to about two-thirds of global income inequality. Furthermore, living standards in poor countries do not converge with rich countries over time. On the contrary, in most cases income disparities between countries are widening.
Institutions and Economic Development
Poor countries differ from rich countries in the immediate determinants of economic growth, such as investment, population growth, human capital accumulation and productivity. Moreover, they differ in the nature and quality of political and economic institutions – the human-made constraints, both formal and informal, that determine social, economic and political interactions. Institutions have a decisive influence on the incentives to accumulate physical and human capital and to adopt innovations that affect productivity and thus are the main determinants of economic growth.
These facts were more or less known even before the work of the three economists who were awarded this year’s Nobel Prize in economic science. For example, Robert Solow was awarded in 1987 for his theoretical model emphasizing the importance of investment and technical progress, while Douglas North was awarded in 1993 for his historical analysis of the importance of institutions in driving processes that contribute in economic development.
So why don’t poor countries simply copy what rich countries have done in terms of investment, technical progress, and institutions in order to close their income gaps over time? This year’s prize was awarded to three scholars – Daron Acemoglu, Simon Johnson and JamesRobinson – whose research helps answer this critical question.
Their central conclusion is that institutions are shaped by social and political processes that depend on the social, political and economic situation of a country. This determines which social classes exercise decisive political influence. Those with de facto political influence can either maintain the institutional status quo or change it. If maintaining the status quo is in their interest, then institutions will remain as they are, even if they do not contribute to economic growth and development. Otherwise they will change. Institutional change is a slow process even if the balance of political power changes.
Politics, the Economy and Institutions in Recent Greek History
The work of the laureates regarding the formation and importance of institutions helps to better understand the recent historical development of the Greek economy.
After liberation in 1944 Greece experienced a bloody civil war. Its inclusion in the West at the beginning of the cold war determined both the outcome of the civil war and the nature of post-war political and economic institutions. Greece had the benefit of significant foreign aid through the Truman Doctrine and the Marshall Plan, but it also introduced a series of political and economic institutions that helped boost economic growth during the first fifty years after the civil war. However, these institutions, although parliamentary until 1967, were not compatible with the equality, fair distribution of income and freedoms that prevailed in the rest of Western Europe, both because of the wounds created by the civil war and because of the democratic deficits of the post-civil war political regime and the extra-institutional interventions of the ‘palace’ and the US.
At around the early 1960s the major social and economic realignments created by economic growth led to a gradual questioning of the post-civil war political institutions, despite continued rapid growth. The emerging middle class sought an enhanced political role. The imposition of the dictatorship in 1967 suspended these processes, but its collapse in 1974, under the weight of its national, political and economic impasses, created the conditions for a major institutional change.
With the transition to democracy in 1974, the problematic post-civil war political regime was replaced by a genuine parliamentary democracy. The emphasis on security, economic development, monetary stability, as well as the anti-communism, which characterized the previous regime was replaced by a new system of values, social priorities and institutions that emphasized political and social freedom, equality, redistribution of income and wealth, employment protection and national reconciliation. However, the pursuit of economic growth and monetary stability de facto took a back seat.
Thus, after the initial euphoria following the restoration of democracy, the economic recovery from the recession of 1974 and the accession of Greece to the European Economic Community (EEC), the forerunner of today’s EU, the post-1974l period was associated with long periods of economic stagnation, fiscal and monetary instability, ineffective economic reforms and adjustments and painful economic crises. Like the accession to the EEC, the accession to the euro area was carried out without the necessary institutional adjustments and reforms. The climax of the crises was the “great recession” of the Greek economy in the period 2010-2016, after the great international recession of the period 2008-2009, and the implementation of the adjustment programs envisaged in the three memoranda of 2010-2018.
In a a recent working paper (Before and After the Political Transition of 1974: Institutions, Politics, and the Economy of Post-War Greece, GreeSE Paper no. 198, Hellenic Observatory, London School of Economics), and a new book of mine (Before and After the Change of Regime: Institutions, Politics and the Economy in Greece, Gutenberg, Athens, 2024) I examine these developments in detail in the light of the ideas of the three scholars who were awarded this year’s Nobel Prize in economics.
One of the central conclusions is that political disincentives to the required institutional reforms and the consequent absence of government-binding institutions and rules for economic policy contributed to the disappointing economic performance of the post-1974 period, the 2010 debt crisis and the Great Depression of the 2010-2016 period, from which the economy has not yet recovered. The main axes and political conditions of the required reforms in order for the country to overcome the problems of the last decades and enter a period of high and sustainable growth are also analyzed.
The Institutional Problem of the Greek Economy
A number  social and economic groups in post-1974 Greece have secured significant privileges that allow them to benefit from significant rents at the expense of the rest, as the costs of these privileges and rents are distributed more broadly across society. These social groups include business groups in non-competitive industries, members of particular professions, unions in the wider public sector and others.
Although no social group or productive sector is politically dominant, as the post-1974 political system is broadly participatory and inclusive, such social groups are able to politically protect the privileges and arrangements that guarantee them these economic rents, i.e. have secured a right of veto over reforms.
Any particular social group has little to gain from reforms that reduce the privileges and the rents of other social groups, so it does not support them. Worse, each social group calculates that if it agrees to reforms that adversely affect other social groups, it may later find itself in a position to defend its own privileges without political allies. On the other hand, each individual social group has sufficient motivation and political power to block reforms that affect the special privileges it has secured.
On the other hand, governments face significant political costs from reforms that negatively affect specific social groups in the short term, with the overall economic and social benefit usually expected in the distant future or spilling over to the rest of social groups in a way that each particular reform is small to insignificant for each. from them. Given these facts, governments lack the political incentives to adopt difficult but beneficial reforms.
Contributing to this is the competition between political parties for power, partisanship and corruption in public administration, the control of a large part of the media by business interests, the increased partisan influence of public sector unions, and indifference or even fear of the wider social majority in promoting beneficial changes and reforms.
Consequently, the interplay of political and economic institutions ultimately leads to inertia regarding the required reforms. In this way, Greek society has been trapped in an ineffective economic and political equilibrium, which is anything but favorable to reforms that would contribute to greater economic efficiency and rapid economic growth.
Any attempt at reform, even if it directly affects a small minority, meets with strong political reaction from those directly affected and indifference, if not hostility, from the large social majority. This is probably the main reason why socially beneficial reforms do not proceed.
To deal with this impasse it is imperative that a minimum political consensus is sought regarding the direction and scope of the required structural reforms in the economy and the state.
The required reforms are very broad and concern at least six areas:
1. the non-competitive operation of markets for goods and services,
2. the dysfunctional labor market,
3. the non-competitive financial system,
4. the inefficient public sector and bureaucracy,
5. the tax and welfare system,
6. the educational system.
Despite some efforts by previous governments, the biggest problems in these areas have not been addressed.
The reforms required entail short-term costs, due to the fact that their implementation implies losses for some social groups. Even if those affected by the individual reforms are a minority, these losses entail political costs for any single government that attempts them. On the other hand, the benefits of reforms usually do not appear immediately, but over time. Consequently, post-1974 governments generally avoided these difficult but beneficial reforms, the costs of which would be borne by themselves during their tenure, while the benefit would most likely accrue in the future during the tenure of their successors. Thus, also due to the inability of the political system to promote political consensus, each government chose the path of the minimum reform effort, with extremely unpleasant results for the economy and the country.
The current government has a historic opportunity to push through the difficult reforms that its predecessors have largely avoided over the past 35 years. Because of the political hegemony it has secured, especially after the result of the 2023 elections and the crisis of the opposition parties, the current government does not have the constraints of its predecessors. The government has a particularly long political horizon, as there does not seem to be an obvious credible alternative government solution in the medium term. It can therefore push through the required reforms with the near certainty that their short-term political costs will not be sufficient to overturn it, even if it cannot secure the consent of the opposition parties. It is In this sense that the occasion is historic. Of course, the ideal would be a minimal consensus between Greece’s political forces, so that the foundations of the reforms are on a more solid basis.

Link to GreeSE Paper no. 198 Hellenic Observatory, London School of Economics