Greece's New Political Economy
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Greece’s New Political Economy State, Finance, and Growth from Postwar to EMU George Pagoulatos 0333_752775_01_preiv.qxd 1/27/03 2:37 PM Page i Greece’s New Political Economy This page intentionally left blank 0333_752775_01_preiv.qxd 1/27/03 2:37 PM Page iii Greece’s New Political Economy State, Finance, and Growth from Postwar to EMU George Pagoulatos in association with St Antony’s College, Oxford 0333_752775_01_preiv.qxd 1/27/03 2:37 PM Page iv © George Pagoulatos 2003 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2003 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RC21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 0–333–75277–5 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Pagoulatos, George, 1967– Greece’s new political economy : state, finance, and growth from postwar to EMU / George Pagoulatos. p. cm. – (St. Antony’s series) Includes bibliographical references and index. ISBN 0–333–75277–5 1. Greece – Economic conditions – 1918–1974. 2. Greece – Economic conditions – 1974– 3. Greece – Economic policy. 4. European Union – Greece. I. Title. II. St. Antony’s series (Palgrave Macmillan (Firm)) HC295 .P29 2003 330.9495Ј07 – dc21 2002035531 10987654321 12 11 10 09 08 07 06 05 04 03 Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne 0333_752775_02_prevxvi.qxd 1/27/03 2:38 PM Page v So, too, our problem is not a human problem of muscles and endurance. It is not an engineering problem or an agricultural problem. It is not even a busi- ness problem, if we mean by business those calculations and dispositions and organising acts by which individual entrepreneurs can better themselves. Nor is it a banking problem, if we mean by banking those principles and methods of shrewd judgement by which lasting connections are fostered and unfortu- nate commitments avoided. On the contrary, it is, in the strictest sense, an economic problem or, to express it better, as suggesting a blend of economic theory with the art of statesmanship, a problem of political economy. J.M. Keynes, ‘The Means to Prosperity’, The Collected Writings of John Maynard Keynes, vol. IX, London, Macmillan – now Palgrave Macmillan, 1933/1972, pp. 335–6. This page intentionally left blank 0333_752775_02_prevxvi.qxd 1/27/03 2:38 PM Page vii Contents List of Figures and Tables xi List of Abbreviations xiii Acknowledgements xv 1 Introduction: the Importance of Finance and the Origins of Developmentalism 1 The case of Greece 4 Banks and the political economy of finance 6 Economic development and the importance of finance 10 Origins of postwar developmentalism and the ‘developmental state’ 13 An overview of the book chapters 18 2 Regime Dependencies and the Political Economy of Postwar Economic Policies 20 Postwar growth and the cold war regime: external sources of domestic policy choices 20 The interwar legacy and the antecedent circumstances of postwar growth 22 Devaluation, restoration of monetary stability, and the outward-looking developmental strategy 25 The ‘Greek economic model’: ideology, strategy, and practice 29 The political economy of developmental policies: a state-driven pattern 38 Winners and losers of the post-1953 political economy 42 The political uses of administered credit 44 Administered credit as substitute for redistribution 45 In conclusion 47 3 Policy Paradigms, Financial Intervention, and the Limits of Developmentalism 48 Developmental finance and the Currency Committee 48 Industrial banking, policy paradigms, and lesson-drawing 51 vii 0333_752775_02_prevxvi.qxd 1/27/03 2:38 PM Page viii viii Contents Credit interventionism and the planning model: developmental policies without a developmental state 56 Plenty of savings, not enough investment: the perverse effects of developmental finance 62 Large-size ‘infant industries’ cohabiting with the small enterprise sector 67 Overleveraged: the capital structure of industry 69 Oligopoly structures and selective state protectionism 70 Banking power: high spreads and oligopoly profits 74 In conclusion 77 4 Crisis and Transition: Regime Change, Democratization, and the Decline of Developmentalism 80 Regime change: the 1970s crisis, end of stability, and the era of financial internationalization 80 The domestic response: monetary expansion, stop–go, and the inflationary spiral 85 The political economy of democratization and its impact on developmentalism 87 The stagflationary 1980s 95 The distortion of credit interventionism 100 The shift to economic stabilization and disinflation 103 In conclusion 110 5 Central Bank, Government, and the Politics of Financial Liberalization 112 Institutional independence: a framework of analysis 114 Exploiting windows of opportunity: policy strength beyond institutional independence 119 Internal central bank resources and organization 120 Agenda identification, policy determination, and exclusiveness: policymaking under government constraint 122 The decade of adjustment (1990–2000) and the national consensus over EMU 127 The momentous monetary policy shift and the role of financial liberalization 130 Central bank and government: the stakes of liberalization 133 0333_752775_02_prevxvi.qxd 1/27/03 2:38 PM Page ix Contents ix 6 Banks and Socioeconomic Interests: Winners and Losers of Financial Reform 138 Exhibiting policy strength: central bank and the banking sector 138 Financial and banking sector gains and losses from liberalization 142 High spreads: the politics of banking oligopoly 148 Facing the arena of socioeconomic interests 150 Central bank strength and the bankers’ rise 159 A comment on interest organization: from state corporatism to parentela to concertation? 160 7 The New Political Economy of Financial Integration, Globalization, and the EMU 168 A new framework: the mixed effects of financial liberalization and the EMU 168 Implications for banking: bank-based systems persisting despite growing disintermediation 176 Redistributive and political implications of globalization, and the business–labor balance 178 The results of capital mobility on labor restraint: shift to neocorporatism? 184 Left and right under a disinflationary regime 192 Summarizing the argument 197 8 State, Finance, and Growth: Beyond the New Political Economy 199 The manifold importance of the state–finance connection 199 From developmental to stabilization state 201 State, power, and finance 210 The politics of economic reform 213 Development, equity, redistribution 214 Ideas, institutions, and interests in economic policy 216 On a final note: some comparative and normative considerations 220 Appendix 1: Governments and Prime Ministers in Greece, 1950–2000 224 0333_752775_02_prevxvi.qxd 1/27/03 2:38 PM Page x x Contents Appendix 2: Clientelistic Policies of the Currency Committee 226 Appendix 3: Financial Liberalization in Greece: Selected Measures 227 Notes 229 References 241 Index 261 0333_752775_02_prevxvi.qxd 1/27/03 2:38 PM Page xi List of Figures and Tables Figures 2.1 Exports as percentage of GDP: Greece and other European countries 26 2.2 Imports as percentage of GDP: Greece and other European countries 27 2.3 Openness (exports ϩ imports as percentage of GDP) of European economies 27 2.4 Greek exports of manufactured goods as percentage of total exports, 1952–98 36 3.1 Inflation, interest rates, and short-term bank lending-deposit rate spread, 1950–2000 49 3.2 Credit to import and export trade as percentage of total bank credit,and exports as percentage of GDP, 1950–98 50 3.3 Bank credit and gross capital formation by economic activity as percentage of GDP, 1950–90 63 3.4 Bank credit to private sector by maturity, 1950–2000 65 3.5 Sectoral share as percentage of GDP, 1950–99 77 3.6 Industry as percentage of GDP, 1950–99 78 4.1 Bank lending, real interest rates, 1950–2000 87 4.2 Greece and Europe GDP per capita, 1960–2000 91 4.3 Acts of the Currency Committee, 1951–81 93 4.4 GDP growth, unemployment, and inflation in Greece, 1950–2000 94 4.5 Economic growth: Greece and EU, 1961–2000 98 4.6 Inflation: Greece and EU, 1961–2000 98 4.7 Average gross fixed capital formation by sector, 1950–98 99 4.8 The electoral cycle: fiscal and monetary expansion, 1975–99 102 5.1 Total bank credit and credit by sector as percentage of GDP 128 5.2 Sources of financing the public sector borrowing requirement 128 5.3