Greece's Reforms Have Only Cracked the Surface

Powerful vested interests thrive on the levies, fees, subsidies and barriers to entry that Greece needs to eliminate.

The Wall Street Journal

By ARISTIDES N. HATZIS

Dec. 5, 2013 3:15 p.m. ET

Last week Ángel Gurría, the secretary-general of the Organization for Economic Co-operation and Development, visited Athens to present the OECD's latest economic survey of Greece. Since 2010, the report said, Greece "has made impressive headway in cutting its fiscal and external imbalances and implementing structural reforms to raise labor market flexibility and improve labor competitiveness."

But the OECD also emphasized that "more needs to be done." The organization's assessment of competition in four key sectors in Greece, also released last week, identified 555 problematic regulations and 329 provisions.

Is this merely the case of a glass half-full versus glass half-empty? The last three Greek governments have introduced numerous economic reforms, especially in the labor market. These initiatives have translated into significant improvement in Greece's placement in the World Bank's Doing Business ranking: from 109th place out of 183 countries in the 2010 report to 72nd place in the 2014 report.

Yet the improvement in Greece's business climate is largely nominal, as reflected in other global surveys. In the World Economic Forum's latest Global Competitiveness Report, Greece ranks awfully for wastefulness of government spending (140th out of 148 countries), burden of government regulation (144th), efficiency of the judicial system (138th), and the effects of taxation on incentives to invest (142th) and on incentives to work (137th).

The effects on the ground are easy to spot. It's impossible, for instance, to find a profession in Greece that isn't sheltered from competition, despite numerous attempts to liberalize services. Why? The answer was given by Poul Thomsen, the head of the International Monetary Fund's mission in Greece, in an interview last month with Kathimerini: "Many professions have not yet been touched, and even where legal restrictions have been lifted, new administrative or other barriers often crop up."

Another example of the superficiality of Greece's recent reforms are the persistent barriers to entry in several key sectors. These restrictions essentially protect cartels, hindering competition and "keeping consumer prices in Greece much higher than in most other EU countries for many goods," as the OECD puts it.

The OECD's competitiveness assessment cites the markets for fresh milk, pharmaceuticals and books as examples. Recent attempts by two determined ministers to liberalize these markets met with fierce opposition from cartels and their defenders in politics and the press. This kind of reaction is indicative of the power of these vested interests.

Public-sector unions are also enemies of reform and strongholds of waste and corruption. To take two examples: Greece's partially state-controlled power company is dominated by its hardline workers' union, which has resisted efforts to make the company more competitive, including the government's ongoing plans to sell some of its stakes. The result has been revoltingly inefficient operations and high energy prices: Greek industrial firms pay 160% more than French firms on average, according to an article published in July on the economic-news website Capital.gr.

Greek universities, meanwhile, are unable or unwilling to evaluate the performance of their administrative personnel. The government's knee-jerk reaction has been unreasonable across-the-board salary cuts and a destined-to-fail "mobility scheme" for finding new work for laid-off people.

The reaction to liberalizing reforms on behalf of vested interests is usually wrapped in nationalistic slogans, pseudoscientific arguments, old-fashioned loathing of markets and competition, and a strong dose of economic illiteracy. Most Greeks today do not realize how wealth is created. They still believe that it is the result of government spending, loans and subsidies, and that it can be safeguarded by protectionism and regulation.

That wealth is created, instead, through cooperation, exchange and transaction in a free, competitive market is an alien notion in a society where prospective students choose university departments based on their degree of access to government jobs. It is no coincidence that in The Wall Street Journal and Heritage Foundation's 2013 Index of Economic Freedom, Greece has the lowest ranking of any European Union country. At 117th out of 177 countries, Greece falls in the "mostly unfree" category.

What is the cost of rent-seeking behavior draped in anti-market ideology? According to the OECD report, "Greek businesses, consumers and citizens and society pay a very heavy price for this situation, a total of €5.2 billion in lost efficiency and higher prices for goods and services." This is the equivalent of 2.5% of Greece's GDP.

And who benefits? Economists Theodore Pelagidis and Michael Mitsopoulos call them "the vikings": the pressure groups that thrive on levies, fees, subsidies and barriers to entry. These vikings have transformed Greece into a model of corporatism, statism and cronyism. How much longer can a system like this, both inefficient and unfair, survive?

Mr. Hatzis is an associate professor of law and economics at the University of Athens.