Greece Needs Some Post-Soviet Medicine

11 MAY 7, 2015 10:12 AM EDT

By Leonid Bershidsky

Bloomberg

The Greek government just pushed a law through parliament to rehire some of the public sector employees dismissed as part of previous creditor-dictated reforms. That's a strange move for a government already struggling to meet the existing public payroll, but to anyone familiar with post-Soviet economies, it's just a flashback.

Greece's Pain

The new law restores jobs to 3,900 civil servants the government thinks were fired illegally, and opens a path to state employment for at least 4,000 people who passed civil service exams, but haven't yet been taken on. It also removes the risk of dismissal for thousands more, who had been told to find jobs in different parts of the public sector or leave.

This is all happening despite growing government arrears. According to a recent analysis of the country's fiscal performance by Silvia Merler at the Bruegel think tank, the 1.5 billion euros in savings compared with budget targets that Greece achieved in the first quarter of this year were met primarily by delaying payments to third parties. Public servants' salaries are still being paid, but the government has been putting off things like doctors' payments for on-call time.

I read about such seemingly contradictory practices in "Goodbye Empire," a book of interviews with Kakha Bendukidze, the architect of Georgia's sweeping economic reforms in the mid 2000s. Bendukidze, a former multimillionaire industrialist, recalled how his company once bought a factory in Northern Russia:

It had lost orders and revenues, but it kept its workers. So what the manager did was gather the workers, announce a salary raise, then say he didn't have the money to pay them. This went on for several years. The salaries increased to some monstrous level. It was much higher than the regional average. The workers weren't getting paid but the manager looked like a compassionate man.

When Bendukidze joined the Georgian government in 2004, the country was barely collecting any taxes. As well as introducing a flat tax to address that, Bendukidze slashed regulatory functions and drastically cut the number of public servants. The agriculture ministry, for example, endured an 80 percent staff cut, after which the survivors were cut by a further 50 percent. Famously, the entirety of the corrupt traffic police were fired and half were then hired back. The reformist team even got legislators to reduce the number of seats in parliament from 235 to 150.

All of this trimming helped to reduce public expenditure, corruption and the regulatory burden on business. According to the World Bank, Georgia's gross domestic product in current U.S. dollars increased by 150 percent between 2004 and 2009.

The Greek parliament that passed the bill on rehiring public servants has 300 members, one more than the legislature of South Korea, which has a population almost five times as large as Greece. The official responsible for the bill, Alternate Administrative Reform Minister Giorgos Katrougalos, was a lawyer before he joined the government, busily signing clients among laid-off government workers. He promised to get them rehired through the courts for 12 percent of eventual compensation (by Greek law, that's the public servant's whole salary for the time of forced unemployment). Katrougalos has angrily denied that his efforts to reinstate the public servants have anything to do with the commissions he stands to receive, but accusations of a conflict of interest have never really gone away. Many of the public servants to be rehired are still getting paid, anyway, because they appealed their dismissals.

But this is Greece, not Georgia. Although the number of Greek public sector workers shrank by almost 30 percent between 2009 and 2013, economic growth remained elusive. Greek economists have published studies showing that public sector downsizing shrinks the economy, because of the high social cost of increasing unemployment and the loss of those government workers' spending power. That logic would have been impossible for Bendukidze, who died last year, to comprehend. He would have asked: Why don't all these people find something else to do?

In Greece, though, the government structure and regulatory burden have not changed as drastically as they did in Georgia. In the World Bank's ease of doing business rankings, Georgia is 15th this year (up from 137th in 2004), while Greece ranks 61st, below most European Union nations.

A responsible Greek government wouldn't play populist games in the style of Bendukidze's kindly (or deceptive) Russian factory manager. It would abandon the illusion that Greece is a highly developed European country and look to ex-Soviet states for emergency management experience. After all, they, too, endured decades of mismanagement that resulted in bloated, corrupt public sectors stifling business activity. And some of them have managed to improve their positions since.

Georgia is, perhaps, the most striking example, which is why Ukraine has been hiring Georgian reformers to help its own belated post-Soviet transition. Bendukidze is no longer available, but how about shipping a few Georgian, or for that matter Estonian advisers to Greece?

To contact the author on this story:

Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:

Marc Champion at mchampion7@bloomberg.net

The Greek government just pushed a law through parliament to rehire some of the public sector employees dismissed as part of previous creditor-dictated reforms. That's a strange move for a government already struggling to meet the existing public payroll, but to anyone familiar with post-Soviet economies, it's just a flashback.

Greece's Pain

The new law restores jobs to 3,900 civil servants the government thinks were fired illegally, and opens a path to state employment for at least 4,000 people who passed civil service exams, but haven't yet been taken on. It also removes the risk of dismissal for thousands more, who had been told to find jobs in different parts of the public sector or leave.

This is all happening despite growing government arrears. According to a recent analysis of the country's fiscal performance by Silvia Merler at the Bruegel think tank, the 1.5 billion euros in savings compared with budget targets that Greece achieved in the first quarter of this year were met primarily by delaying payments to third parties. Public servants' salaries are still being paid, but the government has been putting off things like doctors' payments for on-call time.

I read about such seemingly contradictory practices in "Goodbye Empire," a book of interviews with Kakha Bendukidze, the architect of Georgia's sweeping economic reforms in the mid 2000s. Bendukidze, a former multimillionaire industrialist, recalled how his company once bought a factory in Northern Russia:

It had lost orders and revenues, but it kept its workers. So what the manager did was gather the workers, announce a salary raise, then say he didn't have the money to pay them. This went on for several years. The salaries increased to some monstrous level. It was much higher than the regional average. The workers weren't getting paid but the manager looked like a compassionate man.

When Bendukidze joined the Georgian government in 2004, the country was barely collecting any taxes. As well as introducing a flat tax to address that, Bendukidze slashed regulatory functions and drastically cut the number of public servants. The agriculture ministry, for example, endured an 80 percent staff cut, after which the survivors were cut by a further 50 percent. Famously, the entirety of the corrupt traffic police were fired and half were then hired back. The reformist team even got legislators to reduce the number of seats in parliament from 235 to 150.

All of this trimming helped to reduce public expenditure, corruption and the regulatory burden on business. According to the World Bank, Georgia's gross domestic product in current U.S. dollars increased by 150 percent between 2004 and 2009.

The Greek parliament that passed the bill on rehiring public servants has 300 members, one more than the legislature of South Korea, which has a population almost five times as large as Greece. The official responsible for the bill, Alternate Administrative Reform Minister Giorgos Katrougalos, was a lawyer before he joined the government, busily signing clients among laid-off government workers. He promised to get them rehired through the courts for 12 percent of eventual compensation (by Greek law, that's the public servant's whole salary for the time of forced unemployment). Katrougalos has angrily denied that his efforts to reinstate the public servants have anything to do with the commissions he stands to receive, but accusations of a conflict of interest have never really gone away. Many of the public servants to be rehired are still getting paid, anyway, because they appealed their dismissals.

But this is Greece, not Georgia. Although the number of Greek public sector workers shrank by almost 30 percent between 2009 and 2013, economic growth remained elusive. Greek economists have published studies showing that public sector downsizing shrinks the economy, because of the high social cost of increasing unemployment and the loss of those government workers' spending power. That logic would have been impossible for Bendukidze, who died last year, to comprehend. He would have asked: Why don't all these people find something else to do?

In Greece, though, the government structure and regulatory burden have not changed as drastically as they did in Georgia. In the World Bank's ease of doing business rankings, Georgia is 15th this year (up from 137th in 2004), while Greece ranks 61st, below most European Union nations.

A responsible Greek government wouldn't play populist games in the style of Bendukidze's kindly (or deceptive) Russian factory manager. It would abandon the illusion that Greece is a highly developed European country and look to ex-Soviet states for emergency management experience. After all, they, too, endured decades of mismanagement that resulted in bloated, corrupt public sectors stifling business activity. And some of them have managed to improve their positions since.

Georgia is, perhaps, the most striking example, which is why Ukraine has been hiring Georgian reformers to help its own belated post-Soviet transition. Bendukidze is no longer available, but how about shipping a few Georgian, or for that matter Estonian advisers to Greece?

To contact the author on this story:

Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:

Marc Champion at mchampion7@bloomberg.net