The world economic and political landscapes are changing fast. The Second World War set into motion some big changes in the world: the cold war, communist isolation in China, European integration and United States dominance in world economic affairs. But before the twentieth century was over many of these were overturned: the Soviet Union collapsed, China virtually adopted the market economy and opened up to international trade and the then European Economic Community got closer together, only to start moving apart again.
The political and economic world is in a state of flux and unless countries reform to stay abreast of developments they will stagnate economically and run the risk of political extremism. There is no better example than Greece, once a fast growing small economy that reasserted itself after the collapse of dictatorship in 1974, now a stagnating dependent economy ruled by unholy political alliances.
Reform is essential to a country. In the 1970s Britain brought in the IMF to rescue it from bankruptcy; in the Thatcher and Blair years that followed a New Britain was born, to flourish for three decades until political extremism in the shape of Brexit is threatening its new age. Germany at the turn of the millennium was the “sick man of Europe”, to be revived and become the dominant European economic power after Gerhard Schroeder’s extensive reforms.
Why do some countries succeed to reform and others fail? I believe that the answer to this question is in the politics and not the economics. Economists have a good idea of the reforms that can improve economic performance. There are of course disagreements but there are more agreements than disagreements.
Flexible and adaptable economies bring more prosperity than rigidly regulated economies. Digital technologies, especially in the public sector, improve performance. Inevitably, flexibility and new technologies displace some workers – how much governments help these workers in their transition to the new economy is a political decision. In my view government can and should help a lot. Promising to bring back jobs that vanished because they became uncompetitive, as Donald Trump did in his presidential campaign, is not feasible. A European-style flexicurity system, with democratic choice of the degree of government-funded security, is a much better way to deal with the uncertainties of flexible markets.
The main reason for a failure of reform is that instead of influential groups in the population taking on the role of reform “owners”, influential groups become status quo “owners”. In other words, when the need for reform becomes patently obvious to the outsider, the insiders form coalitions to stop reform instead of pushing it for everyone’s benefit. The famous (or infamous) statement by the Prime Minister of Greece in July 2015, saying that although he does not agree with the reforms proposed by the international lenders he will take them on, is a good example of the refusal to own the reforms.
It is not surprising that investor confidence is not returning to Greece, despite following the Memorandum of Understanding since then. It is inevitable that some groups in the population are hurt by reform; as for example, when unskilled workers in advanced countries lose their jobs to reforms that bring new technology or new trade deals. But the response to such developments is not to turn the clock back to “protect” such groups but to persuade workers that the reforms can benefit society as a whole, with generous compensation and help in the transition to new jobs for the disadvantaged groups. This “ownership” of the reform process in Greece is what has been lacking and it is the main reason that reforms are either not passed or not implemented.
Ownership of reform is needed across nations too, as in the European Union. In the last few years we have witnessed the ascent of Donald Trump to the Presidency of the United States on an anti-globalization platform, the Brexit vote on an anti-immigration and anti-integration platform, and the shift of emphasis of President Xi of China towards more globalization. Europe needs to stand united if it is to recover its position in the world economic order.
Yet, it has no clear democratic mechanism for collaboration and reform, relying instead on ad hoc solutions. Money given to Greece and the other debt-burdened countries to help them avoid bankruptcy is regarded by many, especially the electorate in the donor countries, as wasted. I recall a cartoon in the now defunct German Financial Times showing a gutter in the colours of the Greek flag and euro coins rolling down it.
Yet, in today’s changing world, with the centre of gravity shifting fast to Asia, Europe has no choice but to reform, from the Mediterranean and the Atlantic to the North Pole and the Russian border. Germany and the other donor countries will be better off if investment funds begin to flow to Greece, whoever the owner, because they will bring productivity gains, growth and less need of transfers for debt repayments in the future. Yet, no foreign donors are prepared to own up to this process and lend Greece money for investment outside the strict austerity budget. The failings from such policies are both Greece’s and Europe’s.
*Regius Professor of Economics at the London School of Economics and Professor of European Studies at the University of Cyprus. He was born in Cyprus and spent the bulk of his career at the LSE. He was awarded the Nobel Prize in Economic Sciences (jointly with Peter Diamond and Dale Mortensen) and several other international awards for his contributions to market frictions, unemployment, structural change and macroeconomic policy.