Two priorities for return to growth and prosperity

Costas Meghir argues that reforming the judiciary and the labor market should constitute priorities for structural reform in Greece.  The reform of the judiciary should focus on the time it takes to resolve commercial disputes as well as on the quality of judges and their ability to deal with complex issues. Hiring immediately from amongst the best lawyers offers an immediate way of dealing with the huge backlog of cases. In the longer term incentives structures backed with better pay should be put into place both to improve effort levels and to attract higher quality individuals in the profession.  The labor market regulations should be simplified and all workers should face the same regulations, irrespective of occupation. All mandated severance pay and restrictions on mass layoffs should be abolished.  Liberalizing the labor market also requires reforming the way unions work and making them much more accountable to the workers they represent in the workplace.  A well functioning judiciary is a key complement of such reforms because it mitigates the possibility of abuse and ensures that the few regulations are implemented. Together these reforms are key to creating a business friendly environment with suitable protection for workers and investors.

The full article of C. Meghir (a shorter version of which was published in the New Year’s edition of Kathimerini newspaper):

While we are fighting to establish fiscal sustainability and international credibility we must not lose sight of the strategy that will stimulate entrepreneurial activity, leading to growth and prosperity. Unavoidably, the path will be hard and painful with large transition costs. While reinventing Greece will require reforms in most sectors, the editor of this newspaper suggested we express specific priorities. I suggest the following.

Necessary conditions for an environment that can attract investment are the rule of law and a flexible labor market, characterized by good labor relations. The former establishes property rights and enables the enforcement of contracts. The latter allows investors to hire labor competitively, allows young people to establish careers, promotes job creation and provides incentives for investment in education and skills. So our priority has to be judicial and labor market reform.

When an entrepreneur plans a major enterprise they need to ensure that all contracts can be enforced because once they have sunk their investment they become vulnerable to hold ups by subcontractors and labor unions. The inability to ensure timely enforcement discourages major investments and job creation and leads to an economy focused on low productivity and low-tech activities.

In Greece the judiciary is monumentally inefficient to the point of complete paralysis. It takes on average 819 business days to resolve a commercial dispute compared to 518 on average in the OECD; underlying this terrible statistic are cases that take many more years to complete. According to Elias Papaioannou, Greece ranks 154th out of 183 countries in terms of legal protection for investors.[1] This is a major impediment to growth.

In reforming the judiciary we need to deal with two key issues: (a) the time it takes to resolve disputes; (b) the quality of judges and their ability to handle complex cases.  The proposed new law is a step in the right direction in some ways and we should support it.

To address the first issue the number of postponements and appeals must be curtailed and there must be strict time limits within which to issue decisions – lower than six months in the proposed law.

Addressing the quality of judges is much harder. New judges should be recruited immediately from amongst the most successful lawyers, (remunerated appropriately) improving both the quality and capacity of the system. For the longer run there is a need to link substantial pay increases and genuinely meritocratic promotions to performance so as to improve effort levels and attract better judges in the profession, equivalent to the best lawyers in the private sector. All this needs to be funded by increased legal fees paid by the losing party in the dispute. There is a need for an ombudsman/regulator who will oversee the functioning of the courts, will publish the performance of the courts and of individual judges and will deal with complaints by the public.

The next ingredient in a well functioning economy with the promise of immediate effects is a flexible and dynamic labor market. This has far reaching implications: it allows businesses to attract labor at competitive wages; it helps ensure workers are paid their productivity; it allows young people to establish productive careers; it offers the right incentives and rewards for obtaining education according to ones preferences and aspirations; it ensures labor is reallocated from declining to growing industries efficiently with the minimum of frictions; it leads to more employment – not less. Yet in Greece the labor market has been routinely overregulated. The result is high unemployment and one of the lowest productivities per person-hour in the EU. The multitude of small, low-tech businesses and the almost complete absence of large enterprises with an export orientation is due in part to the way the labor market operates in Greece.

The issue with the Greek labor market is the multitude of complex regulations, the distinctions between types of workers in relation to firing rules and the role of the unions. First, the regulations should not distinguish workers by occupation; regulations should be simplified and be the same independent of occupation. Second the regulations should allow firms to adjust the size of their labor force with ease. Indicatively, all legally mandated severance pay should be abolished to reduce firing costs. Moreover, all regulations relating to mass dismissals should be abolished so that investments in large enterprises are again encouraged. The terms of employment can and should be governed by private and enforceable agreements between employers and employees.

Substantive labor market liberalization cannot take place, however, without a repositioning of labor relations, the democratization of unions and the abolition of collective agreements. On the one hand we need to protect the right of workers to organize and be represented. On the other hand unions bust be accountable and must not be allowed to hold the economy hostage, increasing labor costs and reducing productivity. To achieve these dual aims we need to organize annual elections where workers vote on whether a union will represent them in salary and other negotiations. Moreover strikes should only take place after workplace ballots and reasonable notice. All such elections should be decided on the basis of a majority of all those employed agreeing – not just those voting. Finally, workers should always be allowed to opt for binding independent arbitration as an alternative to strike action.

The two proposals are key elements of an economy that is friendly towards entrepreneurial activity. However there is another link: deregulating a market can lead to abuse. This is why the few remaining regulations need to be enforced with vigor. No one, for example, should be able to bypass basic health and safety or anti-discrimination regulations. This is where an effective judiciary can play a crucial role for the efficient operation of markets. The implementation of these proposals would give a very strong signal to international investors about the intentions of the country and would have important implications for growth.

The problems in Greece do have solutions – however, do politicians that can implement them exist?

[1] See Papaioannou (2011)

About C_Meghir

Yale University and University College London

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7 Responses to Two priorities for return to growth and prosperity

  1. Keeping Them Honest says:

    Excellent article! I would to see a more substantial coverage of this subject in the mass media instead of the focus on whether Greece will get the next round of financial assistance.

  2. Keeping Them Honest says:

    Really? “… transformed into tireless, industry soldiers – and let those that cannot adapt starve!” Is that the reason for the productivity of northern European countries?

  3. Prof John Kontos (Athens University) says:

    Dear economists (almost) colleagues

    I read in your comments many tautologies.
    E.g. corruption, lazyness , burocracy etc are bad and development is good.

    I saw however no concrete proposals for economically promising fields of activity for Greece to concentrate on. If you give me room I can propose a few new technology fields further than the “rising stars” proposed in the McKinsey report and you may comment using your economics expertise.

    Ioannis Kontos

    Emeritus professor of Artificial Intelligence
    Athens University

  4. Syed says:

    You are ttlaloy right.The pampered, overpaidl, secure workers are to blame.They must be transformed into tireless, industry soldiers – and let those that cannot adapt starve!Let us do away with the commie values of guaranteed pay, leaves and 8-hours a day and protections of childhood and motherhood.The worker should devote all his or her waking hours for fulfilling the vision of the creative employer. The worker must be expendable, a living sacrifice to the vision and creativity of the employer. Let him or her be the living, breathing tool of the employer, let him suffice himself or herself to the bare necessities of life and even less.Let the Greek miracle happen, crush the looting classes into a disciplined workforce, let us do away with the commie ideal of society in 2012.Greed is good! Altruism is bad!

  5. George Dakos says:

    I fully agree with most comments made by Mr Megir. The two prerequisites he mentions, rule of law and liberalisation of the employment market are without question in my mind absolutely needed. However, even before them, we-Greece needs measures similar to an electroshock, to bring to life again the economy. Mr Megir argues about the situation ” when an entrepreneur plans…. ” . In my view this does not happen at all in Greece now. Entrepreneurs and the private sector in general are frozen. Plans for investment opportunities are not being made. Hirings are not taking place. Companies- mainly small- are closing down. Liquidity, which will enable all the above to begin functioning-slowly is totally absent. This is the key question in my mind, to which I would kindly ask Mr Megir to give his view. How does one practically throw liquidity into the system? The answer as far as I can understand comes – if and when they decide so- only through the European Cental Bank. Together with the measures proposed by Mr Megi, at the local levelr. But we need the electoshock first, otherwise the line in the monitor is straight.

  6. Νεοφιλελεύθερος says:

    You are totally right.
    The pampered, overpaidl, secure workers are to blame.
    They must be transformed into tireless, industry soldiers – and let those that cannot adapt starve!
    Let us do away with the commie values of guaranteed pay, leaves and 8-hours a day and protections of childhood and motherhood.
    The worker should devote all his or her waking hours for fulfilling the vision of the creative employer. The worker must be expendable, a living sacrifice to the vision and creativity of the employer. Let him or her be the living, breathing tool of the employer, let him suffice himself or herself to the bare necessities of life and even less.
    Let the Greek miracle happen, crush the looting classes into a disciplined workforce, let us do away with the commie ideal of society in 2012.
    Greed is good! Altruism is bad!

  7. Thanasis Stengos says:

    I agree entirely with the point raised by Costas. Among the two priorities raised it is the first one that needs the most urgent attention, that of refroming the judiciary. Without an efficiewnt court system all other reforms will become ineffective. The need for growth as a vehicle that would take Greece out of the current crisis is tautological. The debate about whether to remain or not in the euro zone is important, but it will remain academic unless there is a concerted effort (with the help of the EU in this case) to fight corruption. To do that most of the energy and effort has to be spent on reforming the judiciary. The rules of the game are such that whoever “screams the loudest” has better access to the media and the benefit of the judiciary system that is inherently incapable of ensuring a framework on which economic reforms can take place. Without contracts that are enforceable for all the parties involved, it will be futile to introduce reforms. The latter will be unravelled by the inability of the courts to enforce these contracts.

    For the new reality to become understood as something that requires new bold reforms to open up highly regulated markets and allow for productivity convergence between the public and private sectors, people need to be convinced that the rules of the game apply to all concerned. Until now as we speak, any attempt to bring individuals to justice who have either stolen public funds by not returning huge sums of collected VAT to the government, let alone the known income tax evaders, only results cases that are pushed into the future as these individuals are allowed to walk. The excuse here is that the judiciary is too overburdened to deal with these cases effectively and promptly. I am afraid that unless this government or any government deals with that aspect of the broken system, any reforms will never be implemented. To have any chance of success, let alone any chance to reach a climate for economic growth, there has to be a framework for enforcing contracts that is recognized and respected by all by imposing stiff penalties to all those who violate their side of the contract, whether public officials involved in corruption cases or entrepreneurs not returning the sums of VAT that they have collected on behalf of the government.

    One may counter, that Greece was growing until 2008 at reasonably healthy rates with the same judiciary and the same lack of contract enforceability system. Yet, even though we all recognize the reasons behind this consumption led growth engineered by easy credit, which led to the current crisis, it is the asymmetry between the upturn and downturn that obscured any need for reform. An expanding economic pie conferred benefits to all, even though these benefits also created “built in” destabilizers that now confront us all. I think, given the state of corruption as the result of lack of contract enforceability, the main reform that at this point that needs to take place, is the reform of the judiciary, for anything else to have any chance of success.

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