Permit Raj, redux: threats to the MoU in Cyprus and other PIGS

Much of the criticism against austerity is that it doesn’t work. GDP growth moves to negative area because of falling government spending, it is said. It is also said that the strategic aims of austerity policies don’t work. Unemployment is increasing despite lower wages and unit labor costs; better productivity and increased competitiveness (courtesy of lower wages and higher unemployment) don’t boost exports even though they translate to better terms of trade; gini coefficients worsen and inequality increases.

All of this is, on its face, true, although there is still (to my knowledge) no actual proof that these are results particular to the European South’s MoUs. Most of these outcomes may be “natural” outcomes of the crisis: Debt levels and the credit crunch lower demand, the crisis (and bursting bubbles) are creating misplacements in the economy with slow adjustment – hence the persistent recession and unemployment; governments don’t spend simply because they have no money to spend (something that the MoU actually cushions).

This is not to say that the MoUs are perfect- far from it. One particular danger that is increasingly troubling many of us, is the requirement for structural reform, both in the real economy and in the public service itself.

In the Cyprus MoU, in particular, fiscal and public sector reform, if anything, don’t go far enough. That notwithstanding, talking to senior officials from “key” Eurogroup countries, as well as IMF, ECB and Commission cadre, one thing is becoming clear. They don’t’ seem to be thinking in terms of their own countries.

Receipts at the Organization Service for the Provision of Health Services (ΕΟΠΥΥ) From www.ethnos.gr

Receipts at the Organization Service for the Provision of Health Services (ΕΟΠΥΥ). Not a rare sight…
From http://www.ethnos.gr

Implementing the Services Directive, opening up the so-called “closed professions”, adopting a meaningful public employee review mechanisms or legislating pay cuts, are one thing. Much of the actual on-the-ground reform, however, will be much more complex. And, most importantly for a country that is strapped for cash, they entail frontloaded spending. Lot’s of it.

Take the National Health System to be implemented in Cyprus over the next two years, as per MoU obligations. Managing  procurement of consumables alone, will be a monumental task. After much effort in the last two years, the Ministry of Health managed to find a way to keep track of “what we are buying”, although still nobody has the faintest idea of what is being taken out of government health warehouses. Computerization alone will run a tab that will be in the millions. And, that’s procurement – we haven’t talked about referral systems, pricing management, public hospital reform or any of the long, pricey next steps that will be required.

And, this is just one example. At the national “Citizen Services Center”, one gets a clearer picture of how far these needs will go. Public servants spending a large part of their day stapling, sorting, boxing, filing and storing papers, forms and applications that will likely be misplaced, lost, or simply delayed in processing, don’t make up for the “radical innovation” of things like computerized photos for ids.

The MoU reform obligations may not go far enough, but they have significant upfront costs that seem to be grossly underestimated by officials who imagine that things like “unifying tax collection services” can happen without first computerizing the services fully. And then, there’s the supervision authorities: Competition, Telecoms, Energy, Securities Exchange and consumer protection all need radical improvement to be carried beyond their Potemkin phase. While legislation is in place, these are understaffed and underpowered, lacking the necessary logistics (from software to expertise) to do an adequate job. And these regulatory bodies will be crucial for the privatization drive to succeed.

Or, take the new rule that foreclosures should not take longer than 18 months. A rational demand, for which (hopefully) legislation will be in place soon. But, again, the catch is in administrative capacity, with no court system in place that can handle suits, counter suits and appeals in anything resembling 18 months. Today, it is mainly delays in the legal system –not absence of relevant law- that pushes the time it takes for a foreclosure to be completed into eleven years (literally). That’s another tab in the millions. The land registry department is another monument to pushing, misplacing, and mismanaging paper. If one is surprised that the new land tax is based on land value estimates in prices as of 1980, they should visit a Land Registry office.

These are not reforms that depend mostly on legislative decisions, but on administrative capacity. And, the existing system is not simply outdated. It is obsolete, medieval, byzantine in its setup, in its technology and in its administration. “Reform” will not mainly happen in Parliament, but in government offices where computers and software, to the extend that they exist, date back into digital antiquity. Everywhere in the civil service, there are files, on the floors, in window ledges, on unused chairs, under dripping ceilings, filled to the brim by hard copies of forms stamped, re-stamped, with a half dozen approvals and signatures, with ticked boxes and dirty edges. India, post-colonization. The Permit Raj.

In the midst of austerity, the greatest danger today is not so much that the government isn’t spending as much as it used to- that’s an upside. The danger, is rather that the frontloaded costs of this business is not appreciated fully. With more than a little embarrassment, we should admit- this is not the Netherlands, where reform is, in fact, fine tuning. This is a system built in 1959 and never seriously reformed. And, the actual, real spending required for reform today is probably the most important threat to fiscal figures.

As Cyprus is preparing to pass a 2014 budget with a brave 10% cut in spending, the question is how the Finance Ministry will handle the dilemma: Stick with the fiscal targets, or carry out reform? An impossible, lose-lose dilemma, which will threaten everything unless the upfront costs of reform are better appreciated and acknowledged. And the same, by the way, goes for the other PIGS.

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