Greece Under PASOK
New Lessons for Development Policy?

Both the successes and the failures of Greek economic policy during the period 1981-85 provide valuable lessons for development policy, argued Research Fellow Louka Katseli at a lunchtime meeting on 13 November. The Greek experience offers insights into two fundamental questions that face developing countries: the nature of a 'socialist approach to development' and the constraints imposed on this approach by political and economic factors; and the potential for the simultaneous pursuit of economic stabilization and development.

Louka Katseli is a Research Fellow in the Centre's International Macroeconomics and International Trade research programmes. She spoke at a lunchtime meeting organized by the Centre, one of a regular series of meetings at which Research Fellows discuss policy-relevant research. They may also advance specific views on policy, but these views are their own and not those of CEPR, which takes no institutional policy positions. Katseli based her discussion of economic policy in Greece not only on her published analyses of the Greek economy, but also on her experience, both as Director of the Centre of Planning and Economic Research (KEPE) in Athens and as a member of the Greek Council of Economic Advisors since 1982.

In the first part of her talk, Katseli drew a sharp distinction between the socialist model of development that is relevant under current conditions and the development model associated with socialist experiments in the past, involving nationalization of the means of production, expansionary demand management and improvements in social welfare. The traditional model has now proven not to be feasible, Katseli argued. There have been important changes in the international environment, including rapid rates of technological advance, the growth of new industrial exporters, and monetary uncertainty. This new environment imposed new requirements on both socialist and conservative governments in their pursuit of economic development.

Katseli identified six requirements which she argued must be satisfied by any sustainable development policy, socialist or otherwise. The first was the promotion of international competitiveness through investment expansion, technological upgrading and industrial restructuring. There need also to be improvements in living standards, through increases in the social wage and implementation of a medium-term full employment strategy. The public sector must be modernized in order to increase its efficiency and to allow it to influence the production process more effectively. The development strategy should also encourage the growth of effective management and entrepreneurship. Economic stabilization and development policy must be pursued in harmony. Finally, it is essential to maintain a social consensus both on the development programme and the timetable for its implementation.

The difference between the socialist and the neo-conservative approaches to development, Katseli argued, is the priority assigned to these requirements and the choice of social groups which will support the development programme. In the socialist model the establishment of priorities, the timing of policy implementation, and adjustments to policies are not expected to occur through the workings of the 'invisible hand of market forces' alone. Instead, an emerging social consensus should be promoted through 'Democratic Planning', described by Katseli as a participatory and iterative planning process that encompasses both the public and the private sectors and goes beyond indicative planning to include specific interventions in the structure of production.

Katseli assessed the Greek experience in the 1981-85 period in terms of these six requirements, and discussed the government's efforts to promote Democratic Planning, to decentralize administrative and economic activities, to 'socialize' the public sector and to encourage industrial restructuring.

'Modernization, participation and social justice' had been the triptych of objectives that had characterized the economic and social programme of the Greek Socialist Party (PASOK) after 1981, argued Katseli. These objectives provided the framework for economic policy during PASOK's first term in office, which had as its main targets the pursuit of economic adjustment and the promotion of development and growth. Despite problems, it was on the basis of the credibility of its economic programme and the lack of a viable alternative that PASOK won its second term in office in June 1985, Katseli claimed.

In the second part of her talk Dr Katseli elaborated on the policies set forth in the 1983-87 Five Year Plan and pursued between 1983 and 1985. These policies were aimed at redressing the external and internal imbalances in the Greek economy, which are due to long-term structural problems, external shocks and pre-1983 policies.

The government's main macroeconomic policy goals were a gradual reduction in the rate of inflation to the OECD average by 1990 and a reduction of the external deficit to a sustainable level without increasing unemployment sharply in the short-run. The government had attempted to achieve these objectives by encouraging investment, initially through an expansion of public sector investment activity financed largely out of domestic saving, and by means of an active industrial policy including extensive restructuring of viable but over-indebted private firms. In addition, the government had attempted to shift the composition of public spending from current to capital expenditures and to reform the administration and the structure of taxation. A policy of selective import substitution as well as active export promotion had been instituted, in order to diversify foreign exchange earnings away from traditional sources. The government had tried to maintain the competitiveness of the economy through use of a 'crawling peg' exchange rate. Credit policy had been rationalized by eliminating direct subsidies and negative real interest rates. Attempts had also been made to modernize the financial system. Finally, policy had been designed to protect the purchasing power of low-income wage earners, through a partial indexation scheme and the gradual liberalization of price controls.
During its first term in office, the Government had chosen to pursue a policy of 'gradual adjustment', Dr Katseli argued. Inflation fell, from an annual average of 25% in 1981 to a rate of 17% by July 1985, while unemployment increased from 5.8% in 1982 to an estimated 8.3% in 1985. Real GDP growth increased, from negative levels in 1981 and 1982, to 2.6% in 1984 and to an estimated level of between 1.8 and 2.0% in 1985. The current account deficit fell from $2.5 billion in 1981 to $2.1 billion in 1984. In 1985, however, the current account deteriorated relative to the government's target, largely due to the effects of uncertainty regarding the election outcome and the future stance of economic policy. This obliged the government to undertake additional stabilization measures in October 1985.

Katseli described economic policy during PASOK's first term in office as one of gradualism and the pursuit of economic stabilization through the expansion of production and productivity rather than through lopsided demand management. The PASOK programme, although successful, had experienced setbacks, she noted. These included attempts to tackle too many problems simultaneously, the slow pace of 'supply-side structural adjustment', the sluggish adjustment of the banking system to development requirements and delays in the restructuring of the public sector.

Nevertheless, Katseli argued, the most important elements of recent economic policy in Greece - gradualism, adjustment through growth, and Democratic Planning - could serve as the basis for an alternative development paradigm.