Posted in openDemocracy, 23 September 2010
Rebuilding the Greek economy will require creative interaction with the underlying realities of Greek society: the family, the small business, the habits of rentocracy and of low-trust opportunism. (This article was first published in Greek in the Athens Review of Books, June 2010)
Formal and demotic language
The way we talk about the economy has changed dramatically in the past few months. Before our own debt crisis erupted, public discourse was not very different from that in western countries. We would discuss the merits of public vs private, of boosting demand vs cutting expenditure, of liberalism vs social democracy.
A few observers did insist on Greek specificities. For example, on how the public sector is not public when it has been captured by private and ‘syntechnic’ interests [there is no English equivalent for the Greek word ‘syntechnia’ in its current usage; it means ‘trade union’, but in the particular sense of defending the common privileges of a certain narrow occupational group, rather than class interests – like guilds used to do in medieval cities]. Or how the private sector is not private when it lives off the public purse. But these voices were not present in the discourse of political parties and of talking heads, nor did they influence government policy.
Technocrats would plan for the ostensible, rather than for the real. For example, they would decide the official corporate tax rates, but not the taxes that enterprises actually paid; which were much higher than official rates when the tax inspectors descended on honest and cheat alike; and much lower when the business owner could work the system.
There was a great gap between the formal language of government, of politics and of technocracy on the one hand, and what we all felt and discussed in coffeehouses, on the other, but would not articulate in public. In formal speech, we talked about investment, planning, competition, productivity, incentives, regulation, laws. In demotic, about arguments, delays and Greek ingenuity. We knew that official intent would never be realized, but we would say: let’s try, and if we achieve ten percent of the target, OK – so we won’t fall too far back away from “Europe”.
Now public discourse has changed, and it suddenly sounds like coffeehouse talk. The dilemma between public and private has mutated into “are you for the idle bureaucrat or for the tax cheat?” That between unions and employers has mutated into “shall we crack down on retiring at the age of 52, or on scandalous overpayments for medical devices in the NHS?.” We have begun discussing the real Greece, not some generic mixed economy. Everyday experience has melded into the big picture. This is healthy. It is the start of self-knowledge.
But the economy is a complex system, and our experience is chaotic, diverse and contradictory. It is easy to exaggerate, denounce and talk at cross-purpose; to lose sight of causes and of prospects. Out of coarse experience we must rebuild a learned theory of the Greek economy that will focus on the basics, will explain them and will define our options.
Theories of diversity
A good way to start is to identify how we differ from those developed western economies that we consciously or unconsciously try to imitate. Even when we criticize them, they are the standard to which we compare both private consumption and public services. For this purpose a neo-institutional approach is useful; one that analyses the different national forms of capitalism and links them to the history and institutions of each country.
The concept of institutions is rather general, and it is variously defined. In the broadest of definitions, it includes both formal institutions (the school) and informal (tutorial schools, private teaching). It includes rules (medical legislation), organizations (the hospital) and also common practices (bribing the doctor). In some theories it also includes ideology (‘what is progress?’) and culture (work ethic).
Neo-institutional theory tries to illuminate and explain the micro-behaviors that shape the macro-phenomena. Why have we let the pension system go bankrupt? Why aren’t we paying taxes? Why haven’t we got exportable manufactured goods? Why do high school students take private tutorials? How are we different from the Germans on this level?
An immediate empirical answer consists of a very long list: corruption, clientelism, bureaucracy, familism, cronyism, conspicuous consumption, learning-by-rote at school, mistrust, but also, flexible enterprises, graduates, ambition, mobility, political activism, foreign language proficiency, hard work (sometimes), international outlook. However, such a long list is not very helpful. It is more useful to identify just a few fundamental elements of difference from the more developed economies. I consider that the basic elements of Greek specificity are the following:
· The large number and small size of enterprises, in combination with widely dispersed ownership of real estate (owners)
· The extent and distribution of various forms of rent (rentiers)
· A deficient ethic of cooperation, and a rational response to incentives and disincentives (opportunists)
Greece is a capitalist economy with a welfare state, like many others. And like any other, it has its own dynamic, which is shaped by its specific characteristics in combination with the general elements of capitalism.
A fundamental institution
There is no other European country and no other member of the OECD that has as many self-employed and as many micro-employers as Greece pro rata to its population. In Greece 57% of those employed in the ‘non-financial business economy’ (NFBE) are either self-employed or employed in firms of under 10 employees. The value of this index for EU-27 is 30%. Italy comes second with 47%, Portugal third with 42%. France is at 27%, the UK at 21%, Germany at 18%. Our newest role-model, Denmark, is at 20%.
Agriculture, which is not counted in the NFBE, is even more fragmented. In the region of Corinthia, the average grower of table grapes for export has less than three hectares, and the biggest has less than 20 hectares. The competitors of the Corinthian growers in Murcia, Spain, have over 100 hectares each. It is the same in California, South Africa, Chile, Egypt.
In the economy as a whole, businesses of more than 250 employees employ no more than 9% of the labor force; and this includes banks and utilities.
How did it happen that we have so many small businesses – vineyards, olive presses, rooms-to-let, mini markets, doctors’ practices, theaters, clothes boutiques, clothes makers, IT workshops – and why so few large employers?
We owe it to history, which prevented the primitive accumulation of capital that occurred in the west; to the institutions of our modern state, which assist the survival of small business and hinder enterprise growth; and to our culture which makes it hard for us to cooperate.
Western Europe came into the industrial era with large landholdings and an army of landless workers, the result of feudalism. The new state of Greece was established in a society of smallholders, a result of Ottoman policy which supported the small peasant and discouraged large holdings. Land policy in the new state continued favoring small plots. Even the large chifliks of Thessaly in central Greece were broken up over time. The great majority of families had some land in the country or in town where they set up farms or shops or houses. In this, Greece was very different from all of non-Ottoman Europe. As for our Balkan neighbors, those who had extensive small-holdings lost them in the socialist era.
Small business is still the prevailing form of organization in the private sector after 180 years of modern state, with bourgeois institutions and more or less free markets. This is remarkable, as in a modern economy size is an advantage in a great many business activities. But here enterprises on average are not getting bigger. Let us list the causes.
Families that own a business, even a small one, do not send their offspring to become workers. If they decide to become low-paid white collar employees, this is done only in positions with job security and a good pension – i.e. in the public sector, or in banks. Otherwise, they prefer their parents’ farm or shop. The owner-household resists proletarianization.
Regulations are not uniformly enforced. Taxation, social insurance contributions, labor legislation etc are more of a burden on bigger enterprises, because it is easier for small ones to evade these. If the family handles receipts and payments, it can hide sales and pay uninsured workers. If invoicing and hiring is done through an accounts department, tax and contribution evasion is riskier. So in Greece anomie favors fragmentation. The state as a rule does not go after the smallest.
Foreign direct investment has been discouraged. In other peripheral economies large-scale industry was often created by foreign capital. Here bureaucracy, corruption, resistance by local communities and populist rhetoric have meant that relatively few foreigners have invested in Greece, and even fewer have remained. There are important exceptions in the non-tradable service sectors: banking, telephony, retail trade. In these, foreign capital moved in because the high cost of entry and operation is not prohibitive – it can be recouped by higher prices. In the tradable sectors, where competition is global, this is not possible.
To this list, add the maze of rules and prohibitions that protect the current way of doing business, and the small size of plots of land.
Institutional bias in favor of the small scale is so strong, that neither the 1.5 million of incoming Greek refugees in 1922, nor the huge wave of poor immigrants since 1990 became a permanent proletariat for big employers, as has happened elsewhere. It was small employers who became rich in farms and in building sites on the back of the immigrants.
Self-employment, micro-employment and family business is a stable and fundamental institution in our economy, perhaps the most fundamental. Their share in employment and output will not shrink under normal circumstances. Not even a long and deep recession will change this. Only a revolution in institutions would.
An important point is this: it is institution that determines specialization, not the other way around. That is: because we are a society of small business, we do not build electronic devices; rather than: because we don’t produce such devices we have small businesses. This insight often escapes policy makers. They believe that with the right funding and infrastructure we may grow competitive businesses in industries that require a larger scale. In every era, small businesspeople will do the work that suits them. Yesterday diving for sponges, today letting rooms to tourists, tomorrow what?
In a small-scale economy households make different choices from those in an economy of salaried employees and large organizations. The family will seek stability in polyergy: in having varied sources of income, as many as it can find and appropriate. There is family solidarity: multiple incomes require multiple hands. The father has a petrol station, the son studies information technology for the upside, but if it doesn’t work out he will not starve. The daughter preferably becomes a teacher or a municipal clerk – something secure which leaves free time to care for elderly parents and for the next generation. If the family shop does well, the whole family will work there; if not it will be maintained by one or two members. The system is admirably stable, flexible and long-lasting.
In a small-ownership economy household saving and investment is also different. It is channeled, quite rationally, into real estate and into education. In western economies savings are invested collectively through pension funds, mutual funds and bank deposits. They end up funding industry, technology, infrastructure, and in general, sizeable organizations. In the Greek micro-economy monetary savings have few reliable collective outlets.
Human capital takes a different form. In western economies human capital can develop in standardized career paths – that is, by building relationships inside organizations. Higher education is useful mostly as a first step in a career – if the jobs market does not demand it, the young will not insist on getting it. In small ownership, the value of a person is vested in their individual characteristics. The jobs market does not give clear signals. I want an engineering degree not in order to work at Volkswagen, but because I will have numerous options, as a reseller, contractor, consultant, retailer or just possibly a middle manager. That is why families overinvest in education for the young: in English language tutorial schools, in university exam tutorial schools, in living expenses for out-of-town studies, and even for studies abroad. In national accounts these expenses appear as consumption, but they are investment.
The owner-household is a stable institution as long as it can provide enough income for its members, albeit with crises and mutations. However, there are only a few cases around the world of local small-business economies being internationally competitive – most are in “third Italy”. In Greece, small scale agriculture and tourism have sometimes been competitive; and incomes from working on ships or in western factories made a big contribution to GDP. These were usually not enough, and we complemented those with loans and subsidies from abroad.
Now that the loans have dried out, Greece may need to become competitive in more sectors. Can small businesses achieve that?
Moving into new activities does not seem to be an issue. Greek polyergy is used to that. These are not family businesses where the same activity is carried on over many generations. The young study new disciplines, and parents support them.
There are three major disadvantages in small scale: cost (economies of scale); coordination (transaction costs; economies of scope); and continuity (innovation, updating, succession). If the institutional environment changes in ways that will help small businesses to overcome some of these disadvantages, then we may hope to build an internationally competitive economy on the small scale. If not, we’ll see either persistent poverty or a forced concentration of capital.
The term political rent denotes various forms of income which enterprises, syntechnies and individuals derive from the state, and which do not correspond to real work or real value. It includes idle employment in the public sector, privileged pensions, subsidies without developmental impact, extraordinary profits of private providers to the state, and graft. It also refers to regulations which allow occupations to overcharge in the market (restricted professions, regulated prices, prohibitions), and, less obviously, to the windfall benefits of breaking the law when your competitors are conforming. It does not include public sector salaries for those who truly work, nor social benefits that are given on the basis of general criteria.
Some say that political rents exploded in the 1980s, as the radical populist PASOK government sought to integrate more strata and new business interests into the process of development. But clientelism and favoritism have been inherent in the modern Greek state since its inception, and the state has always been a major player in the economy. Distributing political rents was a necessary means of legitimation of politicians in the eyes of the electorate, and harvesting rents was a major egoistic reason for becoming a politician.
The state as a whole has been a rentier of inflows from abroad: international loans that were distributed to the populace and never repaid, international development plans, and lately the EU structural funds. These inflows have influenced the economy in depth. “Let the money cross the border, and we’ll figure out how to share it”, a small agribusiness contractor said as we were discussing how to apply for an investment grant.
There are also substantial non-political rents in the private sector. Tourism income includes a major rent component, since visitors pay first for location and then for service. Transfers from ships and emigrants are the fruit of real work abroad, but for the receiving local economies they act as pure rent.
Rent appropriation mechanisms are quite varied, but they have a common effect on economic culture: almost all Greeks, from large business owners to small landowners in islands and to municipal clerks in villages, believe it is natural to have some income which derives neither from work nor from risking capital. If they cannot have it, they feel wronged.
How was rentocracy reproduced over such a long period? One reason was that “the money is there”, to quote a notorious phrase from last years’ election campaign. The money was there from international transfers; and from milking local productive activities within an economy that adopted technical progress more or less adequately; and more recently from exploiting the immigrants.
The other reason was the democratic nature of the system. Rents were widely distributed. Especially after 1980, most households could get some benefits from the system. Democratic legitimacy was further strengthened by new institutions that made access to rents more impartial: the state started hiring based on standardized examinations (ASEP), and the university entrance mechanism eliminated the possibility of personal favors. If people have to work hard and to compete honestly in order to gain access to a position, nobody questions whether the position itself is parasitical. And the privileges attached are considered fair.
Like any mechanism which dominates (or co-dominates) an economy, rentocracy influences behavior and culture in many different ways. Rents may not be a result of specific cultural norms, but they are certainly a cause of such norms.
Zero-sum mentality: rent does not contribute to growth, it only shares in what is there. Therefore, it secured by militant claims, not by productive work. It breeds populism, whose fundamental strategy is to shift responsibility for the whole to the opposite pole, the enemy. In populist discourse citizens identify with the weakest groups, regardless of their actual position in society; so they feel entitled to demand more on grounds of fairness, or even on humanitarian grounds. They do not feel responsible about production of wealth, nor about setting priorities for redistribution to the truly weak. It is others who are responsible for the big picture. Populism differs radically in this from a socialist strategy which starts from the mode of production before the mode of distribution; as well as from a political program of solidarity towards the really poor and excluded.
Business strategy: if businesses can make high profits from government contracts or from other privileges, they will invest more to gain the privileges than to become competitive in an open market. Over time this distorts their whole mode of operation: a good salesman is one who can build personal relationships with bureaucrats, a good engineer is one who can draw out a project to make it more expensive. It is rare for a state-dependent enterprise to be also competitive. This was true for the big so-called ‘national suppliers’, as well as for the small I.T. companies, in which many bright engineers wasted their youth working on useless R&D projects funded by EU Programmes.
Measurement and budgets: rentiers do not need to measure the world; producers do. Rentiers will haggle. Producers will plan inputs and outputs and will try to maximize the margin between the two. The rentocratic state behaves like the rentier. It bargains constantly with various groups (with the ‘non-hired’ for hirings; with farmers for subsidies; with businesspeople for contracts), and always gives a little more than it started out to. It is not constrained by an absolute limit for expenditure or for tax relief. It ends up invariably in deficit, which had not been planned.
Beyond fiscal numbers, society in general does not demand measurements, either for pollution, or for the quality of hospital care, or for the impact of policing on crime. There is no pressure on public services to count and to evaluate. That is how we get to ‘Greek statistics’, long before anybody intentionally tampers with the numbers.
Maybe Greeks will work as hard as westerners when given the same set of choices; but they will not collaborate as well.
In game theory an opportunist is one who grasps the chance to make a good profit today, even if that may have negative repercussions tomorrow. Usually, he will break a rule or spoil a collaboration to make the ‘grasp’ (αρπαχτή – ‘arpachti’, from the verb αρπάζω, to grasp).
A taverna owner in Plaka (the district of Athens below the Acropolis) who serves trash food to tourists does exactly that: he breaks the implicit contract between restaurateur and client, so that he can make a good profit per portion, risking that the client will not come back. He acts rationally, because tourists are transient, and they would not be coming back anyway. This spoils the reputation of Athens as a destination, but he is not swayed by that, because reputation is shaped by the acts of all the tavernas, not just his own.
The opposite of opportunism is cooperation. A business that invests in quality, a builder who takes the rubble to the designated distant dump instead of the field next door, the team member who works hard instead of free riding, the professional who declares his taxable income, in the parlance of game theory are all cooperators.
The roots of cooperation
Greeks act more opportunistically than the Swedes or even the French. This behavioral difference is due to multiple causes. There are cultural differences, and there are different incentive structures, which favor opportunism. The two levels (culture and incentives) interact through tolerance (I will not denounce the tax cheat) and distrust (I will cheat on our agreement, because I expect that you will too).
Why are local cultures of cooperation different, and how deep are the causes? Systematic research on the question has begun only recently, in the past twenty years. The most interesting narrative on Greece is that of Stelios Ramfos on ‘unsuccessful individualization’. The anthropology of the person developed differently among the Greeks than in the West. In western (high) culture “the purpose of the individual is to encapsulate in itself, if possible, the totality of social and spiritual development – a sensitive wholeness of being human”. Western man has internalized, i.e. individualized, the rules of society. In Greek society, as medieval collective structures dissolved, we were left with individualism without individualization.
A related but distinct factor is the evolution of political institutions and economic hierarchies. In the West, feudalism, monarchy and the Catholic Church interacted to create the absolutist state which was mandated to rule and guide society. The bourgeoisie inherited this state and reinforced its role of societal guidance. In parallel, during the industrial revolution large business hierarchies were developed, which assigned stable positions to workers and clerks. Such things did not happen in Greece: we overthrew the Ottoman state rather than developing it, and we resisted economic hierarchies.
In other words, advanced western economies were founded not only on free markets and individual incentives. They were founded on hierarchies (vertical rules) and on strategies of cooperation (horizontal rules). Successful and hegemonic capitalism is free markets embedded in a society of rules and responsibility. Otherwise, it is either a jungle, or a community of corner shops. We Greeks have subscribed neither to vertical nor to horizontal rules. We are neither obedient nor cooperative. If we have avoided the jungle, it is because we have kept the corner shops.
Institutions of opportunism
The culture of opportunism explains why cooperatives fail and syntechnies succeed. A cooperative manages a collective good – for example a packing plant for the farm produce of its members, or a government grant for building such a packhouse. Without mutual trust, members will try to gain individually while offloading loses onto the collective. They will send inferior produce to the packhouse, while keeping the best to sell privately; or, they will divide and pocket the grant without investing, because they do not trust each other as business partners.
A syntechnia has no collective assets, it has common demands. Members easily recognize similar interests in their common occupational designation, and will demand privileges that will be common to all, but of a private nature. As collaboration it carries low risk and requires limited personal investment, as befits members of a group with no cooperative ethos.
Within this context, we have developed some admirable economic institutions, which western-educated technocrats find peculiar. Post-dated cheques, with the legal framework that supports them, reinforce trust among transacting parties because they carry immediate sanctions for an issuer who cannot cover the cheque, without involving the bureaucracy of banks as intermediaries. Each party is responsible for the counterparties it chooses. Name and reputation count. It is remarkable that no recipient of post-dated cheques will try to cash them before their designated dates, even though legally he could do so. If he does, he will be effectively expelled from the market. This is an institution of peer-to-peer credit, which developed spontaneously from below and is based on personal responsibility. We should be fostering such institutions, not be thinking how to banish them. Hierarchical credit from banks degrades individual responsibility and encourages opportunism.
The future of cooperation
Opportunists are not inherently crooks. They are ‘rational egoists’. They will conform to rules if they think it is in their interest. In an environment where most people are cooperators and where opportunism is punished, opportunists turn into cooperators. The issue here is vicious versus virtuous circles. If opportunists are a majority, it is very difficult for the group to converge towards cooperative behavior. This is why history matters.
In the West, history bequeathed cooperative norms and practices. Some fear that recently cooperative institutions are being corroded and individualism is on the rise. This is attributed to different causes, such as the corrosion of families, consumerism, social and/or economic liberalism, inequality, rent-seeking. Could it be that Greece is already there, where the West is now going? Could Greece be an image from the West’s dystopic future?
A countervailing tendency derives from technology. Platforms of information exchange and of collaboration render each person’s contribution transparent, and can make much of hierarchy redundant. For the first time in history, goods can be produced collectively and responsibility apportioned individually. These are tools of cooperation for opportunists; e.g. they enable a lone programmer to sell her services all over the world. Further, they can leverage small amounts of voluntary work into major contributions to collective welfare (Wikipedia), and can allow the maintenance of some collective goods without asking for big personal sacrifices. Could it be that Greek individualism can now find a creative role in the world economy?
To conclude, a brief prologue to a very large discussion.
Development policy can succeed only by focusing on family strategies, on small business, on rentocracy and on opportunism – to build on some elements and to reform others.
A new model of development for Greece should not imitate the ones that have been most successful globally. We start from different initial conditions, and will follow a different route. Let us accept our peculiarity.
Society has developed informal institutions that are widely respected. Private tutorial schools, for example, to which students keep going even when they are shutting down the official schools in protest. Or, post-dated cheques. Let us debate how to make the most of these.
Most of our organized, corporate economy is in non-tradable activities, while tradable industries are for the most part very fragmented. This leads to a paradoxical situation: any improvement in the balance of payments must come from the small units that many politicians and technocrats look down upon, as tax evaders, opportunists and inefficient. Should we encourage concentration of capital in the tradable economy, and by which policy? This is a thorny question, for right and left wing politicians alike, which they have preferred not to address. If yes, how will we avoid rent-seeking and opportunism which plague all large scale efforts in our society?
Small units will always be critical for us. They must become more export-oriented, more competitive and innovative, they must coordinate and collaborate, and they must be free of inordinate regulatory burden. All public sector systems should support these objectives: taxation, social insurance, education, research, infrastructure. Our development discourse must be restated for the small-scale.
‘To each his own weapons’.