THE COEXISTENCE OF

VAST ECONOMIC GROWTH

AND WEAK INSTITUTIONS
IN GREECE

Research Question
The Greek economy experienced several periods of

significant economic growth. However, the economic

growth co-existed with weak political and economic
institutions.
How do you explain this paradox?
Does it explain the current economic crisis?

Paradox
The economic prosperity of the war-torn country is

demonstrated through explicit data.

However, the more alarming research revolves
around the failure of institutions across economic,
political, and social spheres.
It is puzzling how Greeces economy underwent
profound development although there was a
systematic negligence of necessary long-term
structural institutional reforms.

Hypothesis
Economic growth, higher standards of living, and
gradual economic transformation did not
synchronize with institutional modernization.

Paradoxically, the economic boom resulted from

imprudent democratic social policies.

The rapid economic growth along side weak

political and economic intuitional persistence is a
traditional feature of the Greek political economy
and explains the deep roots of the current crisis.

Key Political and Economic Definitions

1.
2.
3.
4.
5.

6.
7.
8.

9.

Reform (reform capacity): to make changes in (something, especially an institution or practice)

in order to improve it
Westernization: spread of American values and media
Inflation: sustained rise in the general price level over time; the rate of inflation is the percentage
change in a given price index over the last twelve months
Devalue: reduce the official value of a currency in relation to other currencies
Trade liberalization: the removal or reduction of restrictions or barriers on the free exchange of
goods between nations [] including the reduction of both tariff (duties and surcharges) and nontariff obstacles (licensing rules, quotas and other requirements)
Clientelism: a social order which depends on relations of patronage
Corporatism: the control of a state or organization by large interest groups
Democratization: the pathway of democratic developments; democracies must have free
elections, free adult suffrage, broad protection of civil rights, and elected governments must have
the power to govern
Civil society: The set of institutions, organizations and behaviour situated between the state, the
business world, and the family. Specifically, this includes voluntary and non-profit organizations of
many different kinds, philanthropic institutions, social and political movements, other forms of
social participation and engagement and the values and cultural patterns associated with them.

Relative Timeline

History of Greece (Post WWII)

Greece has proven itself to be one of the most resilient nations in

Europe.
Across social, political, and economic dimensions, Greece has
sustained numerous internal turmoil and undesired foreign
influence.
The most persistent example is Greece in the reconstruction period
of war-torn Europe beginning in 1950.
Greece emerged from WWII as one of the most devastated
countries, lacking in infrastructure, suffering from food shortages
and poverty, and worrying about hyperinflation from the collapsed
banking center.
After a quasi-effective Civil War, which established capitalism and
a gradual progression towards Westernization, the Greek
economic political system still suffered from a closed rural economy.

The Greek Miracle

The Greek Miracle is a period of rapid economic growth, 7% average

growth rate from 1950-73, alongside economic and social

transformation.

Political institutions implemented both short and long term policies

to stabilize the economy.

Short term policies focused on restoring confidence in and value

of the currency, boosting investment, limiting imports and

expanding exports, and decreasing inflation.

For example, in 1953 the government devalued the Drachma by 50% to make it
cheaper than foreign currencies, consequently encouraging exports and
discouraging imports.

Long term economic goals consisted of lowering trade barriers

and tariffs, increasing production rates, and restructuring the

banking system.

Factors of Economic Growth

The rapid economic growth during the Greek Miracle

is explainable through unique and effective domestic

and international factors.

1. Catch-Up Growth Opportunity

The post-war environment provided great opportunities for growth; massive

reconstruction projects required labor and a higher demand for goods.

The EU devised policies to sustain a catch-up process for member states in order to

reach economic cohesion in the common market area.

Although Greece did not join the European Union until 1981, the state was included

in the European community established in 1958.

These policies centered around creating basic economic infrastructure and

networks, including emphasis on the labor division.

Demand for managerial and worker skills were high, and there was a reallocation of

capital and resources from the agricultural sector to the commerce sector.
The catch-up policies did not guarantee social inclusivity or better living conditions,

but the regional emphasis on investment and GDP growth triggered economic
progress and stability.

2. Political Transitioning
Political transitioning, although unstable, allowed for

the overlooking of economic risks.

Recovering from the world war and then civil war,
Greeces government was constantly changing.
Transitioning from a right winged government to a
military regime to eventual a pro-Westernization
system, gradually democratic ideals were being
spread.
Democratic ideals factored into state macroeconomic
policies such as exchange rates, capital mobility
control, and monetary policy.

3. Favorable External Environment

=Golden Age of Capitalism
The success of the global economy derived from European

reconstruction, increased trade, elevated investments, and the baby

boom.
These profitable economic and social conditions, corresponding
with strong American leadership, allowed for global economic
development.
The United States provided financial stability through structural
policies such as the Bretton Woods system, which governed
monetary relations among states, and aid policies such as the
Marshall Plan, which donated $13 billion to Western European
economic reconstruction.

$700,000,000 directly to Greece

Additionally, American aid and influence allowed for the

development of new technologies and living standards.

Lack of Structural Reform

This reliance on foreign capital, however, in combination with the

neglecting of internal structural reform, bred corporatism, clientelism,

and corruption.
The active role of the parentela state proved to be an effective
mediator of Westernization trade liberation, but hindered the emergence of
true democratic social ideals.
Neo-corporatism theory explains the complex relationship among the
government, unions, and employees.
The exchange between the parental state and prevailing firms controlled
the political economy.
Employer organizations were generally comprised of a few large-sale
firms, mostly ex-state monopolies, and directly received state incentives.
It was in these firms best interest to prevent the state from developing an
open, competitive market.
Under statism, the business-backed government controlled the trade
unions and heavily regulated productivity.

Lack of Structural Reform Long-Term Effect

With this unilateral decision, economic favoritism was

obvious through the state selection of winner and

losers.
The overwhelming influence of the few winners sustained
the socioeconomic inefficiencies; for example, the
pension system was only temporary and healthcare
funding would soon run out.
A system based on favoritism is an underdeveloped
form of capitalism and highlights the unequal
distribution of resources.
Job protection is strong, but wages are low and
competition is virtually nonexistent.

Current Economic Crisis Build-Up: What went

wrong from the Greek Miracle to today?
On the international scale,

Greece fully entered the

European Community and
became a member of the
European Union.
Domestically, the PASOK
party modernized social
institutions and paved way
for state expansion.

Current Economic Crisis Build-Up: What went

wrong from the Greek Miracle to today?
The entry of Greece into the European Economic

Community, despite the social benefits, had great

economic repercussionsthe gap between Greece
and other European economies expanded, Greeces
profitability for state monopolies decreased, the twin
deficit problem emerged, and persistent inflation
eliminated possible currency devaluation.

Current Economic Crisis Build-Up: What went

wrong from the Greek Miracle to today?
Despite the positive attempt at international

collaboration, there were other external factors

depleting the Greek economy.
The abandonment of independent trade
policies, the collapse of the Bretton Woods
system, and the sudden and drastic increase in
oil prices effected the macroeconomic performance
of the state.
Additionally, Greece suffered from inflation and
payment crises.

Current Economic Crisis Build-Up: What went

wrong from the Greek Miracle to today?
The fiscal expansionism of this period, which focused

on redistributing the wealth and resources, was

predicted to increase public spending and promote
the welfare.
However, persistent high inflation and weak
institutions under statism created economic
slowdown and eventual stagnation.

Paradoxes existing within each considered period

In the following
metapolitefsi
period, the
immense social
progression
disguised the
deepening fiscal
crisis.

During the Greek

Miracle, soaring
economic prosperity
overshadowed the
weak institutions
and developing
social problems. .

These factors est. the Greek

Fiscal Crisis, which soon
turned into the Debt Crisis,
which all set up the stage
too perfectly for the
current economic crisis.

Finally, during the divergence

period, the progressive and
modernization decision to join
the European community
consequentially blinded the
international market from
acknowledging Greeces internal
turmoil of fiscal and account
deficits and high and persistent
inflation.

Greece, a success story?

Despite the paradoxical existence of a strong economy and weak institutions,

Greece is a success story according to the European growth and social model.
Politically, Greece was temporarily stabilized under democratic reforms and was

able to form alliances with other European governments.

Allowed for social reforms, such as education reforms, healthcare packages, and
unemployment benefits.

There was vast support of the unemployed, including social protection programs

and training availabilities.

There was also a good relationship between those employed and the employersstrong
cooperation on individual issues such wages and hours allowed for overall maximum
productivity.

These factors allowed for industrial peace in the European economies and a strong

welfare state (even if only temporary).

Then where did we go wrong?

Nonetheless, the prioritizing of short-term economic

growth oppose to long-term created an unstable

political economy.
The negative consequences of over developing the
non-tradable sector oppose to the tradable sector
have become apparent in the recent economic crisis,
but were predicable when analyzing previous
decades.
The Greek crisis was not preventable, but its
magnitude could have been significantly reduced.

What do the people believe?

Do you think the Greek economic crisis was inevitable or
preventable?
2009 Not preventable, too late
But ten years ago, in 2004, yes, the crisis was
preventable. The previous Conservative government
should have taken preventative measures.
The problems started with the Socialist government in
1981

Yes, previous decades also factored in, but the decision point of the
economic future was in the 1980s

Disagrees with the public opinion that turmoil started in

2010 with the signing of the 1st Memorandum (this crisis

is not the fault of European integration)
Romolo Gandolfo, Professor at CYA, Yale University

What do the people believe?

How do you feel about Greek politicians? Do you
think the economy will recover?
Unjust political monopoly over politics by a small
elite (all liars); impossible for new candidate to rise
Greek economy will not improve for a while
This generation must leave the country and find
work elsewhere. Greece does not utilize the
educated, skilled work force and cannot employ with
deserved wages.
We need to increase the tradable sector!
, Hiking Guide, National and Kapodistrian University of Athens