Why institutions matter: How China’s experience may benefit Greece


Ma Junjie

By Ma Junjie

A deal has been struck between Brussels and Athens, but the crisis and its repercussions have yet come to an end. More bleak economic prospect, painful structural reforms, and tough austerity measures will have to be implemented by the Greek government, which may be an inevitable way out of the crisis. Though some argue, including the Nobel laureate Paul Krugman and Joseph Stiglitz, that austerity may do more harm than good, the EU has ruled that such measures are necessary and crucial.

However, this is neither the 1950s when the debt-burdened Germany embraced debt cancellation and got back to its feet, nor the 1980s when there was no alternative to the recovery of the economy and the society but certain ideology that had to prevail. There is a sentiment of catastrophe in Europe and the world today, that needs to be treated carefully so that options, instead of fatalism, are sought after. The great Greek people inherited from its ancestors the heroism and the wisdom of a good tragedy where fate might reveal inevitable destruction but it is the courage and action to fight against fate that showcases the glory and dignity of man. That is what’s in short supply today, in the street of Athens, and in the conference rooms of Brussels.

The Chinese wisdom states “stones from other hills may serve to polish jade”(他山之石,可以攻玉). Amidst the pandemic in Europe, the experience of a 37-year-old emerging economic supernova may come in handy.

Tons of paper has been wasted on explaining China’s economic rise in such a short time span. However, theories are intrinsically flawed but generalizations thrive, especially when they suffice the need to carry out hard decisions with uncertain outcomes. (or as Goethe wrote, “All theory, dear friend, is gray, but the golden tree of life springs ever green.”) China’s success can be attributed to the change of institutions. And that’s quite enough.

When a set of policies were “imposed on” Greece, the small economy the size of Tianjin, a city 126km to the South of Beijing, did not have much leverage to refuse. The terms of the deal are simply categorized into institutional reforms and short-term debt relief measures. The former casts a spell on the Greek people, while the latter is severely dependent on the good faith of the creditors. And yet, the resolve and action of the Greek people also have a decisive influence on the confidence of the creditors. The fate of the nations now lies in the hand of Greece.

When annual working hours is mistaken for measurement of diligence, the productivity of an economy is overlooked. Greek people may have been working the longest hours in Europe, but the efficiency is low, bureaucracy is rampant, and competence is way from satisfying. To reflect on the years before China’s reform and opening-up, the symptoms are incredibly similar: a much too big public sector with a much too small economy, a pretentiously busy civil service with an appallingly low operation efficiency, too much room for rent-seeking and too little room for innovation. China built up the empire of state capitalism with “trial and error” style institutional reforms, Greece, on the other hand, is a developed country with mature market economic orders. Mr. Tsipras’s leadership needs to be rooted in the resolve of the Greek people to endure the fear of uncertainty while implementing reforms measures on an institutional level.

When your creditor tells you to cut spending, you know you are too extravagant in life style; when your creditor tells you to extend your shop opening hours, you know you have an attitude issue. What Greece needs to learn from China’s experience is that human nature may be hard to resist, but institutions ensure it is not left at large. A framework of specifically stipulated institutions that reward cost effectiveness, innovation, and contribution to the community, therefore, to people themselves, should be put into practice instead of left in paper. An awareness of responsibility, self-help, and a sense of service instead of leisure, should be widely recognized as necessary in the country. “Ask not what your country can do for you, ask what you can do for your country.” Well, the time for that may have past. Now it’s time to ask “what you can do with the country as an instrument or a means”.

wprHere is where the 1980s China differs from the 2010s Greece. Institutions form and work in two levels, the primary level that features formal contract between the government and the people, and the sub-primary level that features formal and informal contract between individuals. The visible primary institutions constitute the framework where governments govern. And the sub-primary institutions form the vitality and potential for the economy to grow, sustain, and prosper. What China did right was to let loose the primary institutions and uphold the rules that encouraged sub-primary institutions to flourish. Now for Greece, the logic needs to be reversed: the primary institutions need to be strengthened and enhanced to avoid tax evasions and redundancy of the bureaucracy so that sub-primary institutions may kick in to alter the reliance on social safety net, lack of economic innovation, oversight of rent-seeking, and incompetence of the industry structure.

Path dependence is also adding to the limited choices on the table. The intertwining disadvantage of industry structure and high transaction cost caused by bureaucracy have to be dissolved by a pragmatic leadership in the government. The two-level game in Greece where Mr. Tsipras is facing backlash of the July 13th deal at home, and international pressure is still mounting to see the deal implemented, should be tilted until the domestic pressure is resolved and translated into concrete actions towards growth.

China has a stake on Greece, especially as Greece fits in the “One Road, One Belt” initiative as an important port to Europe and Africa. With insignificant foreign direct investment in Greece, China’s political support holds little weight in any tangible terms. But China’s experience in getting a tumbling economy back to track is relevant. However, it is the receiving end of the message that determines the quality of the outcome.