by Mike Kimel
I haven’t written anything about Greece, largely because I’ve never been there, haven’t looked at Greek data, and otherwise until now have had no reason to think I have something useful to say about it. But reading this Tyler Cowen post, I realized that perhaps I have an insight to share because Greece seems to bear a curious resemblance to Argentina and Brazil, two countries with which I do have a fair amount of familiarity. Tyler’s post quotes Megan Greene who shares this anecdote:
A friend and I met up at a new bookstore and café in the centre of town, which has only been open for a month. The establishment is in the center of an area filled with bars, and the owner decided the neighborhood could use a place for people to convene and talk without having to drink alcohol and listen to loud music. After we sat down, we asked the waitress for a coffee. She thanked us for our order and immediately turned and walked out the front door. My friend explained that the owner of the bookstore/café couldn’t get a license to provide coffee. She had tried to just buy a coffee machine and give the coffee away for free, thinking that lingering patrons would boost book sales. However, giving away coffee was illegal as well. Instead, the owner had to strike a deal with a bar across the street, whereby they make the coffee and the waitress spends all day shuttling between the bar and the bookstore/café. My friend also explained to me that books could not be purchased at the bookstore, as it was after 18h and it is illegal to sell books in Greece beyond that hour. I was in a bookstore/café that could neither sell books nor make coffee.
Ms. Greene starts her post with this line:
I travel to Athens about once every six months and speak with as many contacts as I can, including top policymakers, bankers, journalists, economists and academics.
Now, with all due respect to Ms. Greene, who I don’t from Adam, I suspect she may be making an error similar to one that I used to see Americans and Europeans who flew into Buenos Aires or Sao Paulo. That error is to confuse laws on the books and complaints by the locals with reality. This is the view that a foreign consultant based in New York or London or Paris gets:
A number of contacts described their experiences trying to open a business or buy property, which involved high fees, several trips to different tax offices and months of navigating bureaucracy. This gets at the very heart of how Greece landed up in its current condition and why rapid change is unlikely. Entire professions such as notaries, lawyers, tax men, architects and inspectors have for years had automatic income in that they have formed the layers of bureaucracy involved in doing business in Greece. At least half of the MPs in Greek parliament hail from these industries, and consequently are incentivized to perpetuate the bureaucracy that impedes opening up, running or finding investment for businesses.
Now, you could change the word Greece for Argentina or Brazil and you could have been telling this same story at any time since, I would imagine, the 1920s. You could tell the story about Brazil right now, despite the fact that its one of the hot economies these days. (If you don’t believe that, find yourself a Brazilian and ask them to explain the concept of a “despachante” to you, assuming they are able.) Which is to say that, yes, you do need to jump through a fair number of hoops at various stages of running a business. But that is far the whole story. Before I get to the mistake, let me provide one more bit of information, something that these days we all know about Greece even if a lot of people were surprised to learn it about a year ago, namely, this:
According to a remarkable presentation that a member of Greece’s central bank gave last fall, the gap between what Greek taxpayers owed last year and what they paid was about a third of total tax revenue, roughly the size of the country’s budget deficit. The “shadow economy”—business that’s legal but off the books—is larger in Greece than in almost any other European country, accounting for an estimated 27.5 per cent of its G.D.P. (In the United States, by contrast, that number is closer to nine per cent.)
I can tell you this, again from my experience in South America: if the Greek central bank is admitting to foreigners that the shadow economy is 27.5% of its GDP, the real number is actually quite a bit higher. Now, think about it. If the Greek government can’t even collect taxes, an act high on the priority list of just about every government that was ever created, exactly how is it stopping a bookstore owner from selling books and/or coffee? But if you think that’s overly simplistic, let’s consider Ms. Greene’s anecdote again. Boiled down to the basics, it comes to this:
While the bookstore can’t sell its own coffee, nor is it allowed to sell books after 6 PM, the bookstore (and its coffee shop) is open for business in the evenings.
Now, from that one can only conclude that either the owner of the bookstore is an imbecile or there is a way that the bookstore can make money despite the laws on the books. (It is, of course, possible for both things to be true.) Now, here’s how things would work in Argentina or Brazil. There are indeed a bunch of hoops to be jumped through to start and run a business, legally at least. Many of them are ignored by everyone, the authorities included. Which of those rules a new business owner safely ignores depends on a number of factors, including the extent to which they have to deal with banks, whether they need to import or export anything, and the amount of real estate they need to operate. So yeah, it takes a lot longer to legally set up shop in Argentina than Singapore or Denmark, say, and the laws in Argentina, as written at least, are more draconian. But even so, it is often easier to get into and stay in business in Argentina than in Singapore or Denmark. After all, if you don’t have your paperwork in order in Singapore, if you don’t follow all the rules and regulations, someone will be there to shut you down. In Argentina, on the other hand, its hard to name the branch of law enforcement that is funded well enough to care. My guess is the same thing is true in Greece. I wouldn’t be surprised if the bookstore owner in Ms. Greene’s anecdote drives a new BMW and hasn’t paid taxes in years.