Thinking About Corruption in Greece1 by Costas Azariadis2 and Yannis M

Thinking about Corruption in Greece1 by Costas Azariadis2 and Yannis M. Ioannides3 February 20, 2015 1 Abstract Thinking about Corruption in Greece Costas Azariadis and Yannis M. Ioannides The paper addresses the issue of corruption, which appears to be endemic in Greece. It reviews the facts about corruption as a multifaceted phenomenon and its relationship to tax evasion, by comparing Greece to its EU partners as well as internationally. It looks at corruption as an example of anti-social behavior through the prism of modern theories of social interactions and property rights. Our research offers both bad and good news. The bad news is that corruption is rampant in Greece, and with a much higher incidence than in other EU countries. One way to deal with it is by means of zero tolerance and relentless vigilance. A second way to deal with corruption is to design institutions that encourage honest behavior and facilitate reporting of abuses. The good news from the paper is that an outcome thoroughly permeated by corrupt practices is not the only possible social and economic outcome. Taste for proper social behavior can be taught and learned, and adverse practices discussed in this paper may be altered by suitable reforms and retraining of public servants. 2 The EU Task Force for Greece is a very good case in point, and so is the Greek Annex of the EU Anti-Corruption Report.4 The latter details a specific legislative agenda to combat anti-social practices in Greece. We conclude that decisive enforcement of anti-corruption statutes is needed if Greece desires to reduce anti-social behavior. The paper reviews EU proposals regarding enforcement mechanisms and proposes three key constitutional amendments that will help long-delayed reforms to take hold in Greece. Keywords: Bribery, compliance, constitutional amendments, corruption, corruption perception index, economic growth, fiscal deficits, games, multiple equilibria, public goods, tax evasion, trust, whistleblowing. 3 Table of Contents 1. Introduction 2. Facts 3. Social Equilibria with Antisocial Behavior 4. Corruption and Growth 5. Policy Recommendations and Conclusions References Figures, Tables Endnotes Appendix: “Modeling the Role of Social Interactions in Antisocial Behavior.” 4 1. Introduction The Great Recession along with the onset of the Greek crisis spotlighted a number of facts showing that corruption is an endemic problem in Greece. To start with, we note that the Transparency International Corruption Perception Index5 places Greece at the very bottom of the EU 28 countries; and 99% of the Greek respondents in a recent European Commission Eurobarometer survey (European Commission, Anti-Corruption Report, 2014) think that corruption is widespread in their country. Data on corruption and other forms of anti- social behavior, collected from extensive surveys and other sources, are summed up in Section 2. The key questions are: Why does Greek society tolerate so much corruption? What can be done to control it? To deal with the first question we propose to look at ideas from economic theory and political science which explain why and how individuals choose to seek bribes and engage in various forms of expropriating income from others. The second question takes us into a review of the policy recommendations made by the European Commission and others seeking to discourage corruption in Greece. 5 Greek citizens who may experience corruption as an everyday event may naturally think that “corruption is tolerated” and that “corruption pays.” Why is corruption so widespread? Is there a link between perceptions of corruption and actual corruption? We look at these questions in two different ways. One [Benhabib and Rustichini (1996)] is to think of corruption as a tax on legitimate economic activity, that is, on the wages and capital income earned by productive members of society. Perceptions of widespread corruption are equivalent to a high corruption tax which steers many citizens away from legitimate work, is informal and unpredictable, and generates “tax revenue” that is privately appropriated. Closely related to corruption is the phenomenon of tax evasion because of two reasons: one, it reportedly involves large-scale bribery of public officials; two, it is another and conceptually related instance of antisocial behavior. Another way to approach this problem is through the prism of the social interactions literature [ Brock and Durlauf (2001); Durlauf and Ioannides (2010); Ioannides (2013), Ch. 2] This helps to conceptualize how corrupt practices and widespread tax evasion can emerge when individuals interact within common social settings. If different occupational groups have exposure to corrupt practices in varying degrees, then the incidence of corruption will vary across the population. As we discuss in detail below, 6 in all such analyses, requiring that individuals’ propensity to engage in corrupt practices is consistent with what the typical individual expects to prevail, in other words, what individuals expect to prevail actually does prevail because of individuals’ actions that lead to multiple alternative social outcomes. That is, it is, in general, possible that prevailing corruption may alternatively be either widespread, moderate, or rare. For example, in a society where peer pressure is operative, an individual’s perception that others engage in corrupt practices may provide an incentive for him or her to also do so. Yet, such a belief is one of many factors determining individual decisions. Because these decisions are made in an uncoordinated setting, it is possible to have alternative intensities of corruption which are self-confirming. Corruption is rare, where because others are not corrupt, one is also induced to be not corrupt. Corruption is widespread, at the other extreme. There is also an intermediate possibility, which is suggested by specific models used by the social interactions where corruption is moderate. As we further below, the two extreme outcomes are stable and the intermediate one unstable. Corruption is defined by Transparency International as the “abuse of entrusted power for private gain.”6 We define corruption more broadly to include tax evasion, especially when evasion is aided and abetted by tax officials, reportedly a rampant practice in Greece.7 7 The next section reviews some facts about corruption and tax evasion in Greece as background for the remainder of the exposition. From a pragmatic point of view, the key issue is what can be done about corruption. Growth theory, an established branch of macroeconomics, finds it helpful to think of corruption as a tax on income and wealth. Such a tax is born by all the members of a society, perhaps in varying degrees and given different individuals’ exposure to actual corrupt practices. Corrupt individuals benefit from it, but all suffer the consequences of the tax. For example, licensing ineligible individuals to perform professional services in exchange for bribes impacts the entire society via its consumption of substandard services. Society can reduce the burden of this tax by pouring resources into enforcement and deterrence. Hiring more policemen and prosecutors helps and so does the removal of laws that shield embezzlers of public funds through statutes of limitations or other means. In the case of tax evasion as an instance of corruption, the resulting burden as a tax on those who comply with the tax laws is literal. They are asked to pay more to make up for the shortfall of tax revenue, a burden that also feeds social bitterness. This has been felt with particular acuteness since the onset of the Greek crisis through huge tax increases on compliant taxpayers, especially those with incomes that are hard to misreport. 8 The theory of social interactions gives an alternative: we may fight corruption by changing social perceptions of it. A society is made up of individuals who enter into myriads of formal and informal interactions every day. Some of these interactions are exchanges of goods, services or favor, and their social counterparts serve as a conduits for exchanges of opinions and information, and for observation of personal values and related practices. Social life provides the setting for uncoordinated actions that are self-confirming. For example, some activities have a dress code, but others do not. Individuals are expected to anticipate what is appropriate because of a desire to conform. In the area of corruption, how do we persuade the public not to expect or tolerate the worst? Interactions between individual and collective decisions provide the basis for a large possible variety of prevailing practices. Some of them corresponding to higher levels of social welfare, and less corruption, than others. To switch from a bad behavioral pattern to a good one requires a small ‘revolution in expectations’ or jolt to social norms, which may happen in several ways. Inducements against corruption include a variety of measures, some of them suggested by the European Union, others by Christopher Pissarides and ourselves in op-ed writings. For example, can social media and the web be used constructively in changing attitudes? One example is 9 social media as tools that can “shame” anti-social individuals and public officials.8 Another is whistleblowing, and independent authorities like the Office of the Ombudsman in Greece.9 Above all, expectations may depend on how society deals with embezzlement and conflicts of interest by members of the political and labor elites. 2. Facts Information about corruption and, to a lesser extent, about tax evasion comes from recent surveys conducted on behalf of the European Commission, and from regular annual reports by Transparency International. One of these surveys, taken in 2013, measures business attitudes towards corruption, published by the Eurobarometer. Another is a series of Europe-wide anti-corruption reports with annexes for each EU member country.10 These are particularly helpful because the data, collected from answers to common questionnaires for the years 2005, 2007, 2009, 2011, and 2013, are of uniform quality.

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