Success in economic reform requires a hands-on approach
Faced with a number of immediate challenges in foreign policy, the Olympics and new elections for the European Parliament in the months ahead, the newly elected center-right government has given the impression it wants to postpone tough economic policy decisions for the post-Olympics era. The new government has the opportunity to prove many pundits wrong this week when it announces its economic program by demonstrating its commitment to increasing efficiency by tackling long-term structural problems and making economic growth more supply- than demand-driven. Undoubtedly, the new government does not have the luxury to take its time and relax given the difficult task of organizing a successful summer Olympics, resolving the Cyprus issue ahead of the island’s entry into the European Union (EU) on May 1 and passing the test of elections for the European Parliament in June. The tragic events in Madrid last week highlighted the difficulties by reminding everyone that besides catching up with delays in key construction projects, the new government has to deal even with security at the Games even more urgently and forcefully. Economy top priority Nevertheless, the new government should not assume the majority of the citizens will excuse it if it succeeds in all of the above and fails to deliver on the economic front. As a senior conservative banker, whose name appears in the list of candidates for top posts at state-controlled banks, puts it: «I do not remember another government having so much political capital and the good will of the people in the last 20 years or so. It will be a big mistake, though, if the government focuses all its energy and time on the Olympics and Cyprus and takes a wait-and-see stance on economics. It will end up wasting most of this capital, this good will in a few months’ time and find itself pounded by many in the fall.» Foot-dragging is risky The banker echoes the views of others who think the new government should press ahead with economic reforms regardless of the challenges posed in politics, foreign affairs and the organization of the Olympics. They partially attribute the Socialists’ failure in the recent elections to foot-dragging over important structural reforms in the public sector in previous years, which alienated many citizens who felt no change in their everyday dealings with the public sector. He, like others, says the government has to tell the markets and the public in general what it intends to do with loss-making companies of the broader public sector, namely, whether to close them down or restructure them, pointing out that its is not yet clear what it wants to do with them. They say Olympic Airlines, the successor of Olympic Airways, represents both a test and an example of what the new government wants to do given the fact that the European Commission is looking into allegations of illegal state aid. Not surprisingly, they agree that the model of selling off small equity stakes in state-controlled enterprises to raise money, pursued by the Socialists, does not produce the kind of efficiency gains required to sustain GDP growth rates in excess of 5 percent per annum in the years ahead. This is more so given the lack of a boost by spending on projects related to Olympic Games from the second half of 2004 onward. Of course, structural reforms extend to other areas, such as reforming the tax system by introducing lower marginal tax rates and making it more transparent and simpler. The new finance minister has pledged to do just that and introduce pertinent legislation in September. A move in the right direction would be to make good on the government’s pre-electoral promise and cut corporate tax rates on retained earnings to 25 percent from 35 percent at present. This move should help the valuations of listed companies since it raises their after-tax profits, providing some support to their shares. In addition, it will give more incentives to corporations to invest in expanding their capacity and modernizing their plants and equipment. This should create more jobs in the medium term, boosting incomes and growth. Cutting bureaucracy by streamlining the civil service and the public sector is also important because it will help the country attract more direct foreign investment than it does now. The new government should announce specific measures to enable this – these are necessary if Greece wants to maintain its above-average growth rates in the next few years so that per capita income converges faster with the EU average. This is all the more urgent as Greece can count on EU funds, amounting to about 3.0 percent of GDP per year, till 2008, but faces the prospect of much lower inflows thereafter. Taking new stock Greece has another potential source of savings it can turn to in order to fund investment: reducing the huge public debt amounting to more than 100 percent of GDP. The government has already announced its intention to recount the fiscal accounts, expecting the audited figures to produce a much bigger deficit in 2003 than initially estimated. Although welcome on transparency grounds, some think this should have already been done. «It is difficult for me to believe that most of these figures were not available beforehand,» says the banker, who interestingly enough, takes a more critical look at some of the new government’s most publicized initiatives, adding that precious time has been lost. There is no question that the new government, with a fresh, strong mandate, has the potential to live up to the expectations of the Greek citizens. To do so, it is important that it comes out this week as a hands-on manager who will tackle structural economic problems heads-on rather than a hands-off manager who takes a wait-and-see attitude because of other priorities.
