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© 1998 OXFORD UNIVERSITY PRESS AND THE OXFORD REVIEW OF ECONOMIC POLICY LIMITED

THE POLITICAL ECONOMY OF SOCIALDEMOCRATIC ECONOMIC POLICIES:THE PASOK EXPERIMENT IN GREECE

OXFORD REVIEW OF ECONOMIC POLICY, VOL. 14, NO. 1

EUCLID TSAKALOTOSAthens University of Economics and Business1

This article looks at the political economy of social democratic economic policies. It focuses on thosepolicies that seek to extend democracy to the social and economic spheres and examines why such experi-ments have met with limited success in the past. It compares external constraints on the viability of suchpolicies, such as the freedom of capital movements and globalization, with internal constraints. Sincesocial democratic policies rely on promoting coordination and cooperation between economic agents andgroups, it is argued that an important, but often neglected, internal constraint is the extent to which socialdemocracy can draw upon, or, if they are lacking, foster those institutions within society which promotecoordination and cooperation. The paper examines in detail the social democratic experience of PASOK inGreece and draws some conclusions for the wider relevance of the future viability of social democraticeconomic policies.

I. INTRODUCTION

In many ways, PASOK (the Panhellenic SocialistMovement) has been one of the most politicallysuccessful social democratic parties in Europe overthe recent past. By the year 2000, when PASOK’scurrent term of office is due to end, it will have beenin power for all but 4 years since 1981. And yet, in

the economic sphere, the subject of this paper, itcannot be labelled a success.

Like many other socialist experiments in govern-ment, PASOK started with a strategy of promotingtwo long-standing aspirations of social democracy.These were to promote redistribution and socialjustice and, at the same time, to extend democracy

1 Wlodimierz Brus, Nikiforos Diamandouros, Heather Gibson, Torben Iversen, Theodore Lianos, Ken Mayhew, DimitrisSotiropoulos, Panos Tsakloglou, Frank Vandenbroucke, and Juhana Vartiainen all made helpful comments on an earlier draft ofthis paper. I would like to express my gratitude to Andrew Glyn and a referee for perceptive comments which have helped to improvethe paper.

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to the social and economic realms. As we shall see,these two planks were interdependent. For PASOKsought to distinguish itself from those social demo-cratic currents that restricted themselves to socialreform and redistribution, fearing that, in Przeworski’s(1985, p. 41) words:

mitigation does not become transformation: indeed, with-out transformation, the need to mitigate becomes eternal.Social democrats find themselves in the situation whichMarx attributed to Louis Bonaparte: their policies seemcontradictory since they are forced at the same time tostrengthen the productive power of capital and counter-act its effect.

That is to say, PASOK, as we shall see in section II,sought to distinguish itself with regard not only to theends of economic policy, but also to the means. Suchpolicies, it was hoped, would help to restructure andmodernize the Greek economy, while at the sametime, by promoting institutional change and enhanc-ing social control of the economy, ensuring that thesocial gains promoted by PASOK would be secure.

However, this strategy characterized, at the rhetori-cal level at least, only PASOK’s first term ofgovernment (1981–5). As in other similar socialdemocratic episodes, there was eventually to be amove towards the right with the adoption of a lessdistinctive set of economic priorities and policies. By1993, when PASOK returned to government for itsthird main term of office, this turn to orthodoxy ineconomic policy-making was almost compete—although PASOK still sought to distinguish itselfwith regard to the ends of economic policies.

PASOK’s experiment is, however, interesting for anumber of reasons. The argument of this paper isthat PASOK’s change in policy was not primarilythe consequence of external pressures. This allowsus to examine the internal causes that underlie thegradual abandonment of a distinctive set of eco-nomic policies. In particular, we argue that theGreek context was not propitious for introducingmeasures for extending democracy to the eco-nomic sphere. This argument is developed bylooking at the political economy prerequisites forsuch social democratic strategies. Furthermore,by doing this, we can isolate a number of politicaleconomy factors which would constitute importantobstacles to be overcome, not only in the Greekcontext, but also elsewhere.

In section II, we give a brief history of PASOK’srise to power as well as discussing its aspirations andprogramme. We focus on a set of economic initia-tives—both supply-side and macroeconomic poli-cies—that PASOK felt to be central to its wholestrategy. We also briefly discuss their implementa-tion. Section III is an account of PASOK’s eco-nomic record since 1981. In particular, we point tothe growing macroeconomic imbalances and theabsence of any notable supply-side response in thereal economy throughout the 1980s. We also lookbriefly at the post-1993 economic record. In sectionIV, we look more closely at the political economyaspects which lie behind this economic record. In afinal section, we try to give an overall assessment ofPASOK’s trajectory towards the adoption of moreorthodox economic policies and we conclude withsome general remarks on the wider relevance tosocial democratic economic policy-making of thePASOK experiment.

II. EVOLUTION OF PASOK’SECONOMIC APPROACH

PASOK was formed in 1974, immediately after thefall of the military dictatorship (1967–74), and itconstituted a novel political formation within Greekpolitics. It was to become the first avowedly masssocialist party in Greece. In its first electoral con-frontation in 1974, it won 13.6 per cent of the vote,thereby staking out the ground as the main leftopposition, having overtaken the forces of the UnitedLeft (an alliance of Eurocommunist and orthodoxcommunist parties). By the second post-dictator-ship election in 1977, when it won just over 25 percent of the vote, it had become the main oppositionparty to the ruling New Democracy party. In its thirdelectoral confrontation in 1981, it won a massive 48per cent of the vote (57 per cent of the seats inParliament) and formed the first Greek socialistgovernment. Since 1981, it has won a further threemajor election victories (1985, 1993, and 1996) andhas only been out of power between 1989 and 1993.This constitutes an impressive political record byany standards, let alone those of the European leftin this period.

Not surprisingly, PASOK has undergone majorchanges in its ideology, aspirations, and policy pro-grammes since 1974 and it is clearly beyond the

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scope of this article to give anything like a fullaccount of all the twists and turns of this story.2

Although a novel political formation within Greekpolitics, PASOK had its roots in the pre-1967 CentreUnion (headed by Andreas Papandreou’s father,George Papandreou) which itself had a significantundercurrent of socialist ideology (Catephores,1983). In its first manifesto, the so-called Third ofSeptember Declaration, PASOK declared that itsthree main aspirations were national independence,popular sovereignty, and social liberation, and that itsupported a third way to socialism, lying somewherebetween traditional social democracy and Lenin-ism. Its early ideology was heavily based on the neo-Marxist and Dependency School traditions, whichhad been popular in the USA in the 1960s and whichhad been adopted by Andreas Papandreou (a Pro-fessor of Economics at Berkeley before coming toGreece in the early 1960s). This approach, andespecially the centre-periphery theoretical schema,was employed both to understand the nature ofGreek society and the economy and, at the politicallevel, to express the long-standing hostility of theGreek left to the USA, NATO, and, almost to thesame extent, the then EEC. Whatever the merits ofthis tradition, it need not detain us since it becameincreasingly less influential, although its importancein mobilizing support for PASOK in the early yearsand, in particular, in outmanoeuvring the Euro-communist and orthodox left should not be underes-timated.3

By the 1981 election, controlling for certainspecificities of Greek history and southern Europe ingeneral, PASOK was a recognizedly left-wing so-cial democratic party (Sassoon, 1996, p. 637). Onthe one hand, there was an increasingly moderatestand, not only on foreign relations issues, but also onmatters of economic policy. This was associatedwith the decision to become a mass party whichwas, to a great extent, a catch-all party or in thewords of PASOK itself, the party of ‘non-privilegedGreeks’ (Gunther et al., 1995, ch. 1). In many wayswhat united this broad coalition was not primarily acommitment to a specific set of policies, but the factthat it included many of those sections of societywhich had been marginalized and excluded from

Greek political life since the Second World War andthe ensuing civil war (Diamandouros, 1994).PASOK’s ability to keep this alliance together andmediate between the myriad of different interestswas to prove a key test to which we return later.

On the other hand, while increasingly moderate,PASOK in 1981 was still committed, at least at therhetorical level, to a programme and a set of eco-nomic policies which were quintessentially socialdemocratic. It can be located in the long-standingsocial democratic tradition of extending democracyfrom the political sphere to the social and economicspheres. Central to its manifesto and first govern-ment programme was a set of institutional andstructural reforms. In the economic sphere, theseincluded a set of supply-side initiatives which werebased on a dual rationale. By extending participationand social control, they were seen to be a good inthemselves: ‘gradual reform of the economy so thatthe basic economic choices are made by the socialwhole’ (Greek Government Programme, 1981, p.28). By transforming the institutional framework,such policies would also further the modernizationand development of the Greek economy.

Two interesting points can be made here. First,PASOK’s approach can be termed left-wing socialdemocratic in its awareness of the fact that, withoutinstitutional and structural reforms to promote vari-ous forms of social control of the economy, distribu-tional initiatives (a better welfare state, higher wages,etc.) are always insecure. Second, its approach isalso reminiscent of left-wing social democracy be-cause PASOK sought to distinguish its approach bydifferentiating itself not just with respect to the endsof economic policy but also the means. This con-trasts with right-wing social democrats in Britainafter the Second World War, who believed thateconomics is about efficiency and socialist politicscan be reformulated on the terrain of ethics andjustice by such goals as income redistribution andthe welfare state (Durbin, 1985). As many havepointed out, the decline of the social democraticconsensus, somewhere between the late 1960s andearly 1970s was based on the rejection of thisapproach (Goldthorpe, 1987). Monetarism was an

2 On the political development of PASOK, see Lyrintzis (1987); Spourdalakis (1988); Featherstone (1987); and Morlino (1995).3 Ex post, some analysts have suggested that Papandreou’s radicalism and Third Worldism in this period was important in

consolidating democracy by providing a cathartic outlet for Greece’s historical resentments (Pridham, 1995, pp. 175–6). For detailsof PASOK’s gradual shift to a more pro-European stance, see Featherstone (1986).

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ideology which challenged both the means and endsof post-war economic policy-making. Similarly, bythe 1970s, social democratic parties (e.g. in the UKand France) were adopting a set of economicpolicies (national and local enterprise boards, plan-ning agreements, etc.)4 which transcended the tra-ditional means of economic policy. PASOK’s ap-proach to economic policy can be seen in this light.

Interestingly enough, PASOK was aware of thelimitations, in the Greek context, of both the privateand public sectors with respect to carrying out someof the major goals of its alternative economic strat-egy. Thus, in 1983, Papandreou himself pointed toorganizational limitations in the private sector andthe short-term and speculative character of Greekcapitalists, who based their activities on maximizingthe available subsidies and other forms of stateassistance, rather than seeking to modernize andrestructure their activities. He also pointed to theorganizational limitations of the public sector, itsbureaucratic nature, and its creation on the basis ofclientelistic relationships rather than as an instru-ment for rational intervention in the developmentprocess. It was for this reason that it was thoughtthat PASOK could not rely exclusively on theexisting public and private sectors, but instead mustintervene with a series of institutional and structuralreforms (Tsakalotos, 1991a, pp. 129–30).

For the private sector, PASOK’s policy relied on anumber of such reforms. Originally, its strategy ofsocialization of the private sector entailed the na-tionalization of some of the ‘commanding heights’ ofthe economy—a conception bearing considerablesimilarity to that adopted by the Labour Party inBritain in the 1970s which was influenced by thework of Stuart Holland. But by 1982, PASOKannounced that it did not intend to nationalize well-operated profitable industries (as was done in France).Eventually, socialization of the private sector en-tailed the creation of supervisory councils whichwere to act as ‘decentralized organs of socialcontrol’. Such councils would operate ‘outside’ thefirms and their role was primarily advisory and oneof supervision. They would consist of representa-tives of management, workers, local authorities, andthe state. Their goal was to harness the private

sector with the national plan and to rationalize stateincentives to industry. However, much was leftvague, perhaps, to allow them to grow into some-thing more substantial if economic planning provedsuccessful (Catephores, 1983, pp. 55–9).

Other initiatives for the private sector included:planning agreements, sectoral industrial planning,and a policy for public procurements.5 Additionally,the creation of a new state holding company was tohelp restructure a large number of so-called ‘ailing’firms—firms which were essentially bankrupt andin debt, mainly to state banks. Here, too, the policyforesaw elements of social control in the restructur-ing of these firms. For the public sector, there wasalso a policy of socialization which is discussed insection IV.

There is little point in going into greater lengthconcerning the implementation of these policies. Itis not too much of an exaggeration to say that mostof them hardly got off the ground. They werecodified into laws, and certain of the institutions andorgans of social control envisaged were set up, butin a most spasmodic and disorganized way. Thusonly one supervisory council was ever establishedand no more than two or three planning agreementswere ever signed with private-sector firms. Sectoralindustrial planning experienced a tortuous history ofbeing discussed, presented, and then forgotten, onlyto be rediscovered and the process begun again.The state holding company for ‘ailing’ firms was setup, but its experience in the 1980s was dismal, withthe result that firms were neither privatized norrestructured, with the only consequence being thatthe economic cost of their debt continued to mount.Nearly all these institutions suffered from disorgani-zation and ad hoc ministerial interventions at alllevels, and were used for PASOK’s wider socialand electoral aspirations. It is not surprising, there-fore, in this context that these initiatives led to little,or no, restructuring of the economy and, as we seein the next section, there was consequently littlesupply-side response.

The lack of a coherently implemented supply-sidepolicy in PASOK’s first term was also to be crucialfor the evolution of its macroeconomic policy. This

4 For a full discussion of such policies and the extent to which PASOK’s programme can be compared to that of the northernsocial democrats, see Tsakalotos (1991a, especially ch. 3).

5 For a full account of all these policies, see Tsakalotos (1991a, chs 6 and 7).

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was particularly disappointing because, during thisperiod, PASOK did manage to articulate a relativelysophisticated conception of how to integrate macro-economic policy with other aspects of its alternativeeconomic strategy. The strategy came to be knownas ‘stabilization through development’ (STD) and‘gradual adjustment’ (GA). As we have seen,PASOK’s basic approach was to emphasize theimportance of supply-side measures, believing thattraditional macroeconomic instruments (deflationand/or devaluation), while perhaps improving imbal-ances in the short run, would not tackle the funda-mental structural problems of the economy. At thesame time, given the existence of these macroeco-nomic imbalances, PASOK recognized that appro-priate macroeconomic policy would need to providea framework for the successful implementation ofthe supply-side measures. There was thus an aware-ness that, while the concerns of social justice (socialexpenditure, wages of public sector employees,etc.) could not be ignored, it was important thatdemand was kept tightly under control and wascompatible with the other targets.6

Following the 1985 election, the commitment to thesupply-side initiatives described above either re-mained at the level of pronouncements or they werepromoted with little conviction and a narrowerscope. Furthermore, at the ideological level, theemphasis was now more on modernization andefficiency and less on participation and transform-ing the balance of economic power within society.The new set of institutional/structural reforms in-creasingly emphasized the liberalization of the bank-ing system, flexibility in the labour market, and thepromotion of the stock market. It could be arguedthat, given the tradition of statist intervention inGreece, these new priorities did not necessarilycontradict the old. However, a lack of a coherentindustrial strategy and any further concern to extenddemocracy to the economic realm clearly signpoststhe change in direction.

On the macroeconomic front, the period immedi-ately following the 1985 election can be character-

ized as the first attempt at macroeconomic stabili-zation. The level of macroeconomic control exertedduring the first half of the 1980s was in no waycompatible with the original intention as articulatedby the STD and GA programme. As we shall see,given the virtual absence of the expected supply-side response, this was particularly serious. From1985 to 1987, a fairly traditional stabilization pro-gramme was adopted. Devaluation in 1985, whichprovided an initial boost to the economy, was ac-companied by a tight incomes policy and an attemptto control the public deficit.

In retrospect, this period can be considered a ‘test-run’ of the policies undertaken with more convictionand more systematically after the return to power in1993.7 For, by 1993, the turn to orthodox economicpolicies was more coherent and virtually complete.8

Liberalization of the domestic financial sector, whichcontinued throughout the late 1980s and into the1990s and included the dismantling of administrativecontrols on credit allocation as well as allowinginterest rates to be market determined, was to becompleted along with external liberalization (includ-ing the removal of controls on capital movements).The policy of privatization which had been begun bythe New Democracy government of the early 1990swas to be continued, especially as a means of disposingof those ‘ailing’ firms which had been taken into thepublic sector by the state holding company set up afterthe 1981 election victory. Indeed, the policy was to beextended to include the partial privatization of thetelecommunications company, OTE, something thatNew Democracy had failed to do.

The main objective of macroeconomic policy was tobe disinflation and control of the public deficit. Theformer was to be achieved through a tight ex-change-rate policy, involving a depreciation of thedrachma against the ECU by an amount less thanthe inflation differential between Greece and theother EU member states. Control of the publicdeficit was to rely on tax reform and, in particular,the introduction of the so-called ‘objective criteria’as a means of assessing income9 along with wealth

6 For a full analysis of the policy of STD and GA, see Tsakalotos (1991b).7 The intermediate period, from 1987 to the election defeat of 1989, was characterized by PASOK’s abandonment of both the

stabilization programme and any commitment to the supply-side policies. It is generally recognized as PASOK’s most ‘populist’ phase.8 On the post-1993 policies, see Bank of Greece, Annual Reports, and OECD Economic Surveys.9 The ‘objective criteria’ include, among others, the setting of lower limits for income declared by the self-employed, as well as

assessments of income based on the size and location of a firm’s offices. More generally, lower limits for income declaration havealso been set for all taxpayers, depending on their ownership of items such as cars, yachts, etc.

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taxes. The adoption of these policies occurredwithin the context of increasing integration betweenGreece and the EU, and the desire by Greece tomeet the Maastricht criteria and to be adjudgedeligible for monetary union membership.10 How-ever, irrespective of Maastricht, the extent of eco-nomic imbalances created in the 1980s, as we shallsee, meant that when PASOK returned to power inthe 1990s, it had little choice but to implement amore or less orthodox stabilization plan and therewas little scope for experimenting with ‘alterna-tive’ economic policies. Thus, if there was someattempt by PASOK to distinguish itself withrespect to the ends of economic policy (in so faras they sought to avoid the adverse social conse-quences of stabilization), this did not extend to themeans of economic policy, and the transforma-tion of PASOK to a centrist social democraticparty was complete.

III. ECONOMIC PERFORMANCEUNDER PASOK

Table 1 presents some macroeconomic aggregateswhich provide an overview of the performance ofthe Greek economy. Annual data are presentedafter 1981 along with averages for the periods1960–73, 1974–80, and 1981–9.

There is very little evidence of stabilization or GA,either in PASOK’s first or second terms (with theexception of the 1986–7 period). Rather, the pictureis one of growing macroeconomic imbalances. In-flation remained in double figures throughout the1980s and into the 1990s, the government deficitwas well over 10 per cent by the end of the 1980s,and debt had risen sharply. With the adoption of thestabilization measures since 1993, however, theeconomy has experienced notable disinflation (inthe last few months of 1997, inflation was around 5per cent) and a reduction in the general governmentdeficit.

The picture for the real economy is little better,reflecting the fact that few, if any, of the supply-sidereforms were enacted. Growth was irregular

throughout the decade and there is no evidence of animprovement into the late 1980s, when some of thesupply-side measures might have been expected tostart bearing fruit. The same is true of employmentand productivity growth. Investment as a percent-age of GDP has been declining fairly steadily,accompanied by significant periods of negativegrowth in gross fixed capital formation. Once again,the pattern shows some signs of altering post-1993.Growth has been positive and increasing since 1994and investment has picked up. However, overall, thedisappointing performance over the whole periodand the failure of PASOK to place the economy ona new path of higher growth at an early stage isreflected in the index of per capita GDP relative tothe EU12 average, which has stagnated since 1973and now lies at just over 51 per cent, having beenalmost 58 per cent in 1981.

A further consequence of the poor real perform-ance has been a rise in unemployment to around 10per cent. The initial rise from around 4–8 per cent inthe early 1980s can be attributed, first, to an in-creased labour-force participation rate at a timewhen employment creation was limited (with theexception of 1981; see Lianos and Lazari, 1994)and, second, to large wage increases followingdemocratization in 1974—both before and afterPASOK came to power (OECD, 1996). The morerecent rise in unemployment stems from high levelsof immigration from former communist countries(OECD, 1996) and the effects of the variousstabilization programmes of the 1990s.

At least some of the explanation for the particularlydisappointing performance of the 1980s lies withexogenous factors. The two oil shocks and thedeflationary policy implemented by many countriesafter the second oil shock were accompanied by EUentry and the required reduction in protection ratesthroughout the 1980s. At the same time, the economyexperienced rapid structural change (including adecline in the importance of agriculture and a rise inservice production), and the traditional safety valveof emigration was lost as net immigration turnedpositive in the wake of persons of Greek originreturning from eastern European countries (OECD,

10 By 1993, PASOK’s conversion to a pro-European party was complete and the Maastricht criteria were one of the centralarguments used in defending its new strategy of stabilization and modernization.

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. 1Table 1

Selected Economic Aggregates

1960–1974 1981 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 199673 –80 –9

Real growth (GDP) 7.7 3.5 1.8 0.1 0.4 0.4 2.8 3.1 1.6 –0.5 4.5 3.8 0.0 3.1 0.7 –1.6 1.7 1.8 2.6Catch-up vis-à-vis

the EU12c 46.9 57.4 56.1 57.9 57.4 56.5 56.6 56.9 56.2 54.3 54.4 54.5 52.9 52.5 52.1 52.5 52.4 51.6 —Productivity growth* .. 1.8 1.1–2.7 1.3 –0.7 2.5 2.4 1.4 –0.4 3.1 3.4 –1.3 5.5 –1.0 –2.0 –0.4 1.1 1.2Employment growth –0.5 0.7 1.0 5.2 –0.8 1.1 0.4 1.0 0.4 –0.1 1.6 0.4 1.3 –2.3 1.5 0.9 1.9 0.9 1.3Investment/GDPd 24.6 25.3 21.1 27.4 24.6 25.0 22.8 23.5 22.7 21.1 21.4 22.5 23.0 22.5 21.6 20.7 19.9 20.2 21.3Unemployment 4.6 1.9 7.1 4.0 5.8 7.9 8.1 7.8 7.4 7.4 7.7 7.5 7.0 7.7 8.7 9.7 9.6 10.0 10.5Current account

(% of GDP) –2.9 –3.3 –4.3 –5.4 –4.1 –4.4 –5.2 –8.1 –3.5 –2.2 –1.5 –3.8 –4.3 –1.7 –2.2 –0.8 –0.2 –2.5 –3.7General government

deficit (% of GDP) — –2.2a –9.7 –8.3 –6.5 –7.1 –8.4 –11.5 –10.3 –9.5 –11.5 –14.4 –16.1 –11.5 –12.8 –13.8 –10.3 –9.8 –7.6Gross government debt

(% of GDP) — 23.5a 45.7 27.1 29.8 34.0 40.9 47.8 48.4 53.3 63.5 66.6 90.1 92.4 98.8 111.6 109.6 111.3 112.6Consumer price

inflation 3.3 17.5 18.9 24.5 21.0 20.2 18.5 19.3 23.0 16.4 13.5 13.7 20.4 19.5 15.9 14.4 10.9 8.9 8.2Election yearb — — — P P C ND P P

Notes: a 1978–80. b P indicates that PASOK won the election of that year; ND indicates that New Democracy won; C denotes the formation of a coalitiongovernment following the elections. c Per capita GDP relative to the average of the EU12=100 in each period. Own calculations using OECD national accountsdata. Purchasing power parity exchange rates from OECD are used. We use the old GDP series for Greece. The new series (which better incorporates theblack economy) produces figures for the 1990s of around 65. However, the movements in the two series are qualitatively similar. d These figures are basedon the new National Accounts series from 1981 (OECD and Greek National Statistical Service for 1996). Adjustments have been made for the averages forthe 1960s and 1970s figures. Averages for 1960–73, 1974–80 and 1981–9 under the former system are 22.4, 23.0, and 19.1 respectively.Source: OECD Economic Outlook, Paris. * Bank of Greece and Greek National Statistical Service.

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1996). However, the poor performance of theeconomy cannot be attributed mainly to exogenousfactors and, in order to examine the role of internaland external economic pressures on policy, wefocus on three specific areas. This allows us todevelop the themes of stagnation of the real economy,the worsening of macroeconomic imbalances of the1980s, and the failure of the STD and GA strategyin greater depth, before making some remarks aboutthe more recent experience.

(i) Budget Deficits and Debt

One of the key features of the PASOK periodduring the 1980s has been the large accumulation ofpublic debt (Table 1), with the result that it is nowamong the highest in the EU, exceeded only byBelgium and Italy. To examine the causes of theincrease in the debt/GDP ratio in more detail, we usethe familiar debt dynamics equation:

db/dt = –s + (r – y)b + d (1)

where: b is the debt/income ratio and db/dt itsrate of change; s is seigniorage; r is the realinterest rate; y is real growth; and d is the primarydeficit.

The key variables in equation (1) are shown inFigure 1 including the change in the debt/incomeratio itself.11 A number of interesting points can begleaned. First, the basic cause of the rising debt/GDP ratio is the large primary deficit which per-sisted throughout the 1980s. It is notable that thedeficit increased in all election years (1981, 1985,1989, 1993), suggesting the existence of politicalcycles.12 Increased spending in election years (forexample, on public works and the hiring of newemployees in the public sector) is a significantfeature of the political system in Greece, whereclientelistic politics are prevalent (section IV). Ta-ble 2 supports this view, providing figures on publicsector employment for selected years.13

For a government such as PASOK, one mightexpect rising deficits associated with its supply-sidepolicies which implied increases in governmentcapital expenditure. Indeed, it is often argued thatincreased deficits which result from increased in-vestment expenditure should be treated differentlyfrom those that are a consequence of currentconsumption. However, there is little evidence thatthe increased deficits were associated with aninvestment drive. Throughout the 1980s, the deficitwas over twice as large as government investment

Table 2Public-sector Employment

1981 1985 1995 1995 % p.a. % p.a.(thousands) (thousands) (thousands) %a change change

1981–91 1991–5

Public sector 477.1 567.9 566.1 14.6 1.7 –0.8of which:general government 283.3 373.7 385.1 2.8 2.8 0.0

Dependent private sector1,221.9 1,362.6 1,494.0 39.8 1.1 3.4

Note: a Percentage of civilian employment.Source: OECD (1996).

11 Seigniorage is not shown, but on its declining importance in stabilizing the debt/GDP ratio, see Gros and Vandille (1995).12 Existing research tends to support the existence of political cycles rather than partisan cycles in Greece (Andrikopoulos et

al., 1997). It should be noted that the 1996 election is the first, since 1977, where an electoral cycle was largely absent.13 It should be noted that PASOK’s social programme, including the creation of a national health service, required increases in

public sector employees. However, it is unlikely that this alone accounts for the expansion of government employment post-1981.It can also be argued that the figures underestimate recruitment because of the existence of generous early retirement conditionspre-1990. These are reflected in the fact that the ratio of civil service pensioners to civil servants in 1995 was 1 compared witha ratio of 0.5 in the private sector (OECD, 1996).

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expenditure and there is no evidence of a substantialincrease in government investment in the period1981–4.

Of course, some increase in current expenditurewas inevitable, given PASOK’s commitment tosocial justice. Between 1974 and 1982, there was asignificant reduction in inequality, of which roughlyhalf can be attributed to measures taken by PASOK(Tsakloglou, 1993, 1997). The most significant meas-ures here were the increase in minimum pensions, awidening of their coverage, and an increase inminimum wages, as well as a number of socialinitiatives (e.g. the creation of a national healthservice and day-care centres for the elderly). ThusPASOK’s record in the social sphere is a relativelypositive one.14 However, to a great extent, thisentailed an implicit inter-generational transfer ofresources, since the programme was largely fi-nanced by borrowing.

It might be argued that the deficit problem stemmedfrom poor tax receipts, a consequence of wide-spread tax evasion and a narrow tax base (agricul-

ture was significantly under-taxed and the self-employed were difficult to tax), rather than exces-sively high levels of expenditure (Stournaras, 1990).Indeed, government spending in Greece has longbeen lower than the EU average. Given thatPASOK’s programme involved increased socialspending along with an increased public-sector wagebill, measures to increase revenues were of para-mount importance. However, although recognizedby PASOK, concrete policies to widen the tax baseand reduce tax evasion were not forthcoming in theearly 1980s, and control was soon lost over thebudget deficit (Tsakalotos, 1991b).

The second point which can be made from Figure 1relates to real interest rates. Up until 1987, theywere significantly negative.15 Since then, a combi-nation of lower inflation and rising nominal interestrates has contributed to rising and high real interestrates, which have only recently begun to fall. Therise in real interest rates can, at least in part, beattributed to the reform of the financial systemwhich began in the mid-1980s. While this reformwas much-needed, it is clear that the subsequent

Figure 1Debt Dynamics

Source: OECD, Economic Outlook.

14 However, the level of inequality is still high by EU standards (Tsakloglou, 1997).15 This was helped by an accommodating monetary policy for most of this period (Tsakalotos, 1991b).

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rise in real interest rates was associated with aworsening debt/income ratio.16

Finally, real growth of GDP has been patchy, reflect-ing the lack of a supply-side response, and hascontributed little to moderating the growth of thedebt/income ratio. Moreover, growth has alwaysbeen below real interest rates since they turned posi-tive. As equation (1) shows, even in the presence of abalanced budget, a necessary condition for the debt/income ratio to be stabilized is that growth be higherthan real interest rates. If the latter is not true, thencontinuous primary surpluses are required.

The consequences of the large debt are severe.Interest payments have increased enormously toover 40 per cent of total revenue by 1994. This hasseverely reduced the government’s flexibility. It isdifficult, therefore, in this context not to talk about alack of macroeconomic control. Moreover, giventhe absence of a supply-side response and earlymeasures to increase tax revenues, governmentimbalances worsened throughout the 1980s. Thesustainability of the STD and GA strategy wasquickly brought into question and it was not untilPASOK’s return to power in 1993 that sustainedefforts at deficit reduction have been under-taken.

(ii) The Balance of Payments and the CurrentAccount

The 1985 turnaround in macroeconomic policy re-sembles similar U-turns by other socialist govern-ments (most notably the French in 1983). Indeed, ithas been argued that the deterioration of economicaggregates was precisely the reason behind the 15per cent devaluation and the subsequent adoption of

a tight incomes policy and stabilization programme(Simitis, 1989).17 While the similarities are there, itwould be difficult to argue that external pressureswere the overwhelming cause of PASOK’s U-turn.Moreover, a careful examination of the figuressuggests that PASOK had a unique opportunity toconduct policy in an environment not overly con-strained by external pressures.

With respect to capital flows, controls were onlyfinally removed in 1994, following successive liber-alization from 1989 onwards. It is certainly true thatin 1981, when PASOK was elected, and in the lastquarter of 1985, when the devaluation occurred,capital outflows increased. However, in the inter-vening period, the capital account was fairly calmand the 16 per cent devaluation of 1983 did notappear to cause any capital flight (Gibson andTsakalotos, 1993).

Figure 2 illustrates the current account position ofGreece since 1975. The main characteristic hasbeen a large trade account deficit (represented bythe height of each column)18 covered to a greatextent by the invisible surplus (net tourist receipts,remittances, and, latterly, EU funds). Based in parton the information presented in Figure 2, two pointscan be made with respect to the external position ofGreece. First, the large trade account deficit isindicative of the structural problems facing Greekindustry that had been identified by PASOK beforethey came to power in 1981 and which the supply-side policies were designed to go some way tosolving.19 What is apparent from developments inthe trade account throughout the 1980s is that thesupply-side reforms did little to improve the tradeaccount, in spite of real depreciation over the wholeperiod (Leventakis, 1994).

16 Between 1979 and 1987, the debt/income ratio grew at around an average of 4 per cent per annum; between 1987 and 1995,the average was 7.3 per cent. The experience of Greece with financial liberalization provides further evidence that macroeconomicstabilization should precede liberalization (McKinnon, 1989; Gibson and Tsakalotos, 1995).

17 There was some disagreement in the government about the underlying economic situation with Arsenis (1987) and Katseli(1985) claiming that the deterioration in the balance of payments was mainly the result of speculative activities. For a critique ofthis view, see Tsakalotos (1991a, ch. 5).

18 For 1975, for example, 7.1 percentage points (pp) of the trade deficit were covered by remittances; 2.6pp by tourism; 0.2ppby other invisibles; the current account deficit was 4.6pp. For the years 1981–7, when other invisibles were in deficit, the heightof each column above the x-axis represents the combination of the trade and other invisibles accounts.

19 Of course, it can always be argued that the trade deficit is a consequence of the comparative advantage that Greece has in shipping,tourism, and other services, which keeps the exchange rate more appreciated than it would otherwise be. However, much analysisof Greece exports and imports pointed to the lack of non-price competitiveness of Greek goods, concentrated as they were intraditional areas, mainly agriculture and low value-added industrial sectors such as food, textiles, shoes, and clothing (Katseli, 1989;Leventakis, 1994).

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Moreover, a further conclusion can be drawn froma careful examination of the breakdown of thecurrent account. Throughout the period, Greece hasbeen fortunate to have benefited from large in-flowsin the form of remittances from Greeks living abroad(including Greek seamen), as well as, more recently,EU funds. On average, during the 1980s, theseamounted to around 8 per cent of GDP. These in-flows offered PASOK a window of opportunitysince they severely loosened the external constraintwhich social democratic governments often faceand provided them with the room to implementpolicies which could have facilitated restructuring.But this required a conscious decision to boostinvestment rather than to bolster consumption. Inthe event, PASOK followed the latter strategy (asthe figures on investment in Table 1 indicate) and thein-flows can be said to have provided them with afairly soft external constraint which allowed them topostpone rather than promote structural adjust-ment.20 Indeed, all too much of the EU fundsavailable for structural change, necessary forGreece’s integration with the EU, were used to

shore up existing economic structures and to sup-port the least competitive strata in society(Diamandouros, 1994; Lyberaki, 1996).

(iii) Wages, Profits, and Productivity

Finally, we want to examine those factors whichshed light on the relationship between wages, pro-ductivity, and profits. This also enables us to saysomething about investment and competitiveness.One of the traditional concerns of social democraticgovernments is a commitment to a redistribution ofincome from profits to wages. Figure 3 graphs thelabour share in business-sector value-added since1964.21 The main feature in the post-dictatorshipperiod is the rising wage share up until 1982, fol-lowed by a marked fall. In Figure 4, we illustraterecent trends in real wages and productivity. Theseallow us to interpret the changing wage share moresystematically.

The rising wage share after 1974 reflects real wageincreases of around 10 per cent per annum between

Figure 2Current, Trade, and Invisibles Accounts (as percentage of GDP)

Source: Bank of Greece.

20 See Rodrik (1989) for a simple model which shows how EU subsidies can have a negative impact on an economy by looseningsuch constraints.

21 We have chosen to use this OECD measure rather than the raw National Accounts figures. The large and changing number ofself-employed persons in Greece makes the use of the national accounts data rather unreliable. The OECD has made some correctionfor self-employment and imputed to the self-employed a wage equal to the average compensation per employee.

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Figure 4Wages and Productivity

Source: Bank of Greece.

70

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Figure 3Labour Share in Business-sector Value-added

Source: OECD Economic Survey, Greece (1997, p. 83).

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1975 and 1978. Following the election of PASOK in1981, real wages were given a further boost in 1982and again in 1983–4. Since 1983, the falling wageshare can be attributed to real wage increasesbelow productivity growth. The fall has not beencontinuous, with the pre-1989 election cycle clearly

evident. It also appears that the wage share hasfallen more sharply during New Democracy’sstabilization attempts between 1990 and 1993 thanit has during PASOK’s (indeed, during the presentprogramme, the wage share has actually beenrising).

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It seems appropriate, in view of the general rise inunemployment and the poor trade performance, toask whether PASOK had too loose a wages policy.A number of observations can be made from Figure4. First, since 1975, whereas productivity has in-creased by around 25 per cent in total, real wageshave increased by around 48 per cent. However,most of the cumulative differential between realwages and productivity increases is the result of thepre-PASOK period. Since 1981, both productivityand real wages have risen by around 15 per cent.

Second, following increases in PASOK’s first term,real wages have not risen further, fluctuating aroundthe same level, with the large dips in 1987 and in theearly 1990s reflecting PASOK’s first stabilizationattempt and that of New Democracy, respectively.Real wage gains above productivity growth wererealized only in the first years following PASOK’selection in 1981. The rest of the 1980s, it seems,were spent paying for this initial real wage boost.

These observations raise the question of the optimaltiming of wage increases for social democraticgovernments. Pressures on these governments of-ten take the form of demands for real wage in-creases immediately following their election. How-ever, resisting such demands, while perhaps politicallycostly in the short run, may prove the best strategyover the longer term. For a strategy which allows forsmaller increases initially, to allow space for thesupply-side policies to work, may be more sustain-able and, indeed, more favourable for the level ofreal wages and income distribution in the long run.

Indeed, such a conclusion is supported by the effectof the wage increases on both competitiveness andinvestment in the early 1980s. The rises in real unitlabour costs were not offset through depreciation ofthe exchange rate, with negative consequences forcompetitiveness. The real exchange rate appreci-ated from 1982 until the devaluation of October1985 (Tsakalotos, 1991b; Leventakis, 1994). Thisimplied that any supply-side policies, which hadbeen implemented, were not being supported byPASOK’s macroeconomic strategy as had beenenvisaged in the STD programme.

Furthermore, private-sector investment was alsobadly affected by the initial wage increases of theearly 1980s and the falling profit share up until 1983.Thus, the rate of growth of investment in manufac-turing was negative in each of the years from 1981to 1985 (Tsakalotos, 1991b). This was hardly anencouraging development, since it implied a lack ofsupport from the private sector for the supply-sidepolicies. However, it may not have been too seriousif the planned expansion of public investment hadgone ahead. As we have already seen, however,this did not occur, with the consequence that totalinvestment as a share of national income fell through-out the period (Table 1).

(iv) Post-1993 Developments

The results of the orthodox stabilization plan, whichhas been implemented by PASOK since returningto power in 1993, are shown in Table 1 and Figures1–4. Inflation has fallen mainly as a result of the‘hard drachma’ policy, with the rate of depreciationof the drachma against the ECU being less than theinflation differential between Greece and its EUtrading partners in every year since 1994. In thisrespect, the government has been following a policysimilar to that followed by other EU countries in the1980s, with the only difference being that Greeceremains outside the exchange-rate mechanism (ERM).

In May 1994, this policy came under pressure asexpectations gathered momentum that the govern-ment would devalue at the same time as it was dueto remove capital controls. High short-term interestrates, however, successfully maintained the ex-change-rate policy with little cost to the real economyfor two reasons. First, the household sector inGreece was, and indeed still is, a net creditor, sinceaccess to mortgage and consumer credit remainsunderdeveloped. Thus interest-rate rises do notaffect households adversely. Second, the majorcommercial banks were able to maintain loan rateslargely unchanged, because they do not rely enor-mously on the inter-bank market for raising funds,but rather fund their loans from non-bank deposits.This insulated the business sector from the effect ofthe crisis.22

22 See Flood and Kramer (1996) for an account of the May 1994 crisis. Following the removal of capital controls, the problemwas one of capital in-flows associated with the credibility of the exchange-rate target and high domestic interest rates (Brissimisand Gibson, 1997). Recent turbulence in stock markets in South-east Asia, however, has caused out-flows from Greece, bringingthe exchange-rate policy under renewed pressure.

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At the same time as inflation has fallen, the generalgovernment budget deficit has also been broughtunder control, falling from 13.8 per cent of GDP toan estimated 4.2 per cent for 1997 (Ministry ofNational Economy estimates in the budget for 1998).A significant part of this reduction has come fromthe benefits of falling interest rates. However, it isalso true that the government has been running aprimary surplus of around 4 per cent since 1994(OECD, Economic Outlook, December 1997).This is mainly a consequence of further tax reforms,along the lines discussed in section II.

What is interesting about these stabilization at-tempts is that they do not appear to have adverselyaffected the performance of the real economy. Realgross domestic capital formation increased by around7 and 9 per cent in 1995 and 1996 respectively, whilegrowth has been positive since 1994. The increasein investment comes both from the public sector(major infrastructural projects co-funded with theEU) and the private sector. Underlying the private-sector increase is the reduction in domestic interestrates which has accompanied the fall in inflation andbudgetary consolidation. This has led to a significantreduction in firms’ financing costs (OECD, 1997).Additionally, the policy of using the exchange rate asa nominal anchor has allowed firms to borrowabroad at even lower interest rates. Finally, theexchange rate has also helped to stabilize raw materialprices (in drachmas), leading to a reduction in costs,since raw materials are an important input for Greekfirms (Branson, 1986; Moschos and Stournaras, forth-coming). In total, this reduction in non-labour costshas significantly increased firm profitability and hencemade funds available for investment.

Our concern in this paper is, of course, the extent towhich the stabilization programme still containselements which can be characterized as socialdemocratic. As we noted in section II, PASOK,even if it no longer sought to use different policies,was still committed, at least at the rhetorical level, toincreased social justice and a reduction in inequality.We can point to several characteristics of thestabilization programme which provide some sup-port for this view.

First, stabilization has not been associated with alarge increase in unemployment, suggesting a fairlysteep Phillips curve. Positive real growth which hasbeen accompanied by positive employment growthhas helped here (Table 1). Additionally, privatizationhas not involved large job losses. The governmenthas been willing to accept a lower price for compa-nies sold off, provided some commitment to retain-ing employees is given.23

Second, real wages have increased in each yearsince 1993 (Figure 4). As we saw earlier, thisimplied a reversing of the downward trend in labourshare in value-added (Figure 4). Moreover, thepolicy of allowing real wage increases has beenconcentrated more on the lower paid and has beenaccompanied by real pension increases. Both meas-ures should help reduce inequality, since a largenumber of pensioners are among the lowest incomegroups in Greece.

Finally, tax reforms have been aimed at increasingthe contribution of the business and self-employedsectors and reducing that of wage earners andpensioners. Table 3 provides some figures whichsuggest some success in meeting that goal.

Thus developments in the economy since 1993 pointto some success at stabilization, with some attemptto minimize the cost to the real economy. Thepolicies followed, however, have been fairly ortho-dox and show that PASOK has moved very farfrom the kind of social democratic policies which itwas advocating in the early 1980s. The only distin-guishing feature of the current policy is some at-tempt to share the burden of adjustment more fairlyand to shelter, to some extent, the most vulnerablesections of society.

IV. THE POLITICAL ECONOMY OFEXTENDING DEMOCRACY TO THEECONOMIC SPHERE

The social democratic argument has always beenthat economic performance relies as much on coor-dination of economic activity and cooperation be-

23 On some occasions, responsibility for social security payments of employees of the privatized companies has been assumedby the government, or employees have been transferred to other areas in the public sector.

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tween economic actors as it does on competition.Indeed, such a conceptualization has been givenmuch support in recent economic thinking. Whilethis cannot be anything but encouraging for thesocial democratic project of extending democracyto the economic sphere, implementing strategieswhich promote such coordination and cooperationremains, as we shall see in this section, problematic.

The ‘ideal’ world of market liberals—or their meta-phor for understanding the real world—is one ofasocial atomistic individuals whose only relationshipwith each other is through exchange in the market.This is thought to be efficient in the sense that allmutually beneficial exchanges are made. Here,preferences of individuals are given, and achievingequilibrium is relatively straightforward, with theresult that trade unions and other community groupsor associations, the welfare state, and politics it-self—not least if it results in state intervention in theeconomy—merely operate to inhibit the actions ofmarket actors and distort the process of equilibriumformation. Recent economic thinking has exploredthe extent to which, in real economies, a lack ofinformation and the potential for conflict can lead touncertainty and insecurity in deregulated markets.As a result, it is difficult in market economies toachieve the necessary coordination and coopera-tion, with the consequence that many mutuallybeneficial agreements are costly or simply do nottake place (Bowles and Gintis, 1993; Stiglitz, 1994;and Roemer, 1995).

Recognizing these problems, social scientists haverecently been paying increasing attention to the ideathat economic performance is not best understoodmerely by the role of markets and the state, or evenby the appropriate balance between the two. Rather,they emphasize, albeit from different perspectives,that both the state and markets are socially embed-ded in a whole host of institutions, both formal, suchas trade unions and production networks, and infor-mal, such as social norms and wider cultural char-acteristics (Granovetter, 1985; Hodgson, 1988;Putnam, 1993). These factors, which for conven-ience can collectively be seen as a form of socialregulation, need to be added to state and marketregulation if the economic performance of particu-lar economies over time is to be understood. Fur-thermore, such an approach also sheds considerablelight on the continuing, and significant, differencebetween advanced capitalist economies, despite theimpact of globalization.24

Two themes of this literature on social regulation areof particular significance for our purposes. First,forms of social regulation such as trust, norms(including reciprocity), and long-term strategies—collectively termed by Putnam (1993, p. 172) associal capital—are often best suited to confront theproblems of information and conflict that character-ize deregulated markets. Thus, for instance, trust—that is ‘the belief that another party will continue toadhere to rules of reciprocity or “fairness” even incircumstances in which it might be advantageous to

Table 3Contribution of Different Groups to Tax Revenues

(% of total direct tax revenues)

Wage-earners Pensioners Rentiers Commercial/ Self-employed Farmers andindustrial agricultural

workers

1993 45.2 17.0 5.4 20.1 11.3 0.91994 44.1 16.3 5.9 20.5 12.2 0.91995 41.6 16.1 5.3 24.1 11.9 1.11996 40.1 14.9 5.2 25.4 13.2 1.01997 41.2 15.6 5.2 24.0 12.8 1.1

Source: Ministry of National Economy.

24 For a range of valuable articles on these themes, see Hollingsworth and Boyer (1997). See also Henley and Tsakalotos (1993).

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defect’ (Streeck, 1997, p. 202)—is important inconfronting the type of opportunistic behaviour high-lighted by game-theoretic approaches to social in-teraction.25 The second theme is that social capitalexists in, and is preserved by, communities, associa-tions, networks, families, and clans (Polanyi, 1957;North, 1990; Putnam, 1993). While it cannot beassumed that the economic impact of the above isalways, and everywhere, positive, it is equally truethat they do not automatically constitute examplesof market distortions and, indeed, it may often be thecase that they actually improve the operation of themarket. In this light, traditional social democraticconcerns, such as social control and participation,can be seen once more in a favourable light, combin-ing, potentially, both the concerns of social justiceand economic efficiency.

However, this sanguine conclusion for the pros-pects of social democracy is tempered by the factthat it seems to be a testable hypothesis of thisliterature that social democratic strategies will bemore successful to the extent that they rely onexisting social formations, rich in the type of com-munities and networks that are associated withplentiful reserves of social capital. In the absence ofsuch plentiful reserves, the success of social demo-cratic strategies will depend on their ability to con-front this absence.

What kind of social formation tends to be rich insocial capital? Putnam (1993) has argued that it ishorizontal networks of civil engagement (in hori-zontally ordered groups such as cooperatives, mu-tual aid societies, and sports clubs) that are impor-tant in solving the dilemmas of collective action.26

Such horizontal networks—bringing together agentsof equivalent power and status—are prevalent innorth Italy, whereas the south is dominated byvertical networks. It is this difference, Putnamargues, that is crucial to understanding the divergingeconomic performance of north and south. Vertical

networks, such as patron–client relations commonin clientelistic politics, have long been recognized asasymmetric involving significant inequality of power(Gellner, 1975). In this context, they are unlikely tobe able to sustain trust and cooperation, sinceopportunism is more likely to characterize the pa-tron’s behaviour (exploitation) and the client’s (shirk-ing) (Putnam, 1993, pp. 174–5). Kinship ties, on theother hand, while horizontal, are also inimicable tofostering wider ties and merely sustain cooperationwithin a group (the extended family) and not be-tween groups.

Putnam’s conception that a social formation rich inhorizontal networks is likely to be associated withbetter economic performance has not gone unchal-lenged.27 However, this approach is instructive forour purposes for two reasons: first, because ofcertain similarities between Greece and southernItaly; and, second, because the prevalence of verti-cal networks and kinship relations may constituteproblems not just for good economic performance ingeneral, but for strategies which rely on promotingsocial control and forms of democracy in economicactivity.

The existence of a strong state, and clientelisticrelationships between politicians/political parties andthe electorate, has been a dominant feature ofGreek politics since the nineteenth century (Mouzelis,1978; Mavrogordatos, 1983):

Political life became characterized by strongly personal-ized links between patron-politician and client-voter, andby the exchange of rousfeti (political favours). Politicswas a necessary evil, a self-defence mechanism used touphold a traditional way of life, not an instrument ofemancipation (Sassoon, 1996, p. 628).

The other side of the coin is the weakness of civilsociety in the Greek social formation.28 This affectsall aspects of society. The state has, for instance,traditionally been involved in every part of economic

25 On trust, see also Arrow (1972) and Fukuyama (1995).26 Putnam has a range of arguments which explain why horizontal linkages help cooperative behaviour. The basic point is that

people who cooperate in one field are more likely to cooperate in others and the more people cooperate, the easier and more beneficialit becomes (Putnam, 1993, ch. 6).

27 Putnam’s work has been challenged on a number of fronts: that it misunderstands Italian history; that it is over-deterministicand relies too strongly on a path dependency in Italy since the Middle Ages, without specifying the mechanics of such pathdependency; and that it under-theorizes and romanticizes horizontal linkages such as community groups. For a constructiveengagement with Putnam’s work, see Levi (1996); Goldberg (1996); and Sabetti (1996); in a special issue of Politics and Society.

28 On the weakness of civil society and, in particular, the roots of the lack of intermediary institutions and structures, seeDiamandouros (1994, especially, pp. 14, 15, 28).

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activity. This has had important consequences forthe nature of the private sector which has concen-trated its activities on expanding the degree ofprotection or level of subsidy rather than relying onits own dynamism to improve its competitiveness orrestructure its production.29 It is not, however, onlythe private sector that seeks such a relationship withthe state. Rather, it extends to a wide range of socialgroups and classes, whose activities are centredupon upholding a traditional way of life, and we haveseen above examples of how this is, in part, respon-sible for the deficits of the PASOK era. The resultis that the financial system and state subsidies havebeen used more as instruments for controlling in-come distribution than as development instruments.And, as we saw in the previous section, public-sector employment is central to clientelistic poli-tics.30 The well-known bureaucratic features of theGreek public administration, with its bewilderingmyriad of laws and regulations, are actually quitefunctional to the operation of the system—forclientelistic politics and relationships can ease ac-cess to state subsidies, licences, and other forms ofprotection.31

Of particular concern, given the interests of socialdemocracy, is the lack of an independent labourmovement. Schmitter (1995), in a comparison oforganized interests and their capacity for classgovernance and convergence in southern Europe,shows how far the Greek context is from that ofnorthern Europe. He argues that, while class inter-ests are represented by monopolistic institutions,such as the GSEE (Greek Trade Union Federation),this is the result of deliberate state policy and thatthis organizational unity ‘is a political illusion. Par-ties, especially PASOK after it took over in 1981,have made concerted efforts to penetrate and cap-ture leadership positions in GSEE’ (Schmitter, 1995,p. 293). Moreover, Greece is further away from thenorthern/central European neo-corporatist model

than are Italy, Spain, and Portugal, and it still sharessome characteristics of the ‘older, predemocraticsystems of state corporatism and has yet to be fullyaffected by the usual norms of associational free-dom, voluntary contracts and collective bargaining’.This state of affairs has only begun to changegradually in the 1990s. The leaderships of both thetrade unions and employers’ organizations haveshown an increasing willingness to discuss reformsin the economic and political system. Indeed, in1990, there was a significant move with the signingof a 2-year collective bargaining agreement whichincluded a reduction in the role played by the statein the administration of union funds (Diamandouros,1994).

Such a context is not propitious for social demo-cratic initiatives, either at the macroeconomic orsupply-side levels. For instance, the failure of PASOKto institutionalize an incomes policy can be seen inthis light. Throughout the 1980s, there was hardlyany attempt to reach a ‘social contract’ with theunions. For all PASOK’s repeated declarations ofthe need for consensus and dialogue as prerequi-sites for the success of its strategy, this neverextended to discussion or negotiation over its macro-economic strategy. In the context of a low trusteconomy with few autonomous partners, there waslittle scope for forms of ‘political exchange’(Pizzorno, 1978) which rely on both sides being ableto make binding commitments. This allowed a moreredistributive incomes policy than might otherwisehave been the case—at least initially—and led, aswe have seen, to short-term negative consequencesfor the supply side of the economy. But it did allowPASOK a freer hand, more autonomy, to adjustincomes according to specific considerations of themoment. The existence of electoral business cycles,discussed above, is hardly evidence of a consistentapplication of GA. Since 1993, PASOK has oncemore tried to renew ‘social dialogue’, in an attempt

29 Katseli (1989) has used the notion of the soft budget constraint where certain groups in society have easy access to governmentresources and hence do not face the traditional ‘hard’ budget constraint.

30 The link to Putnam is strong here. For example, those who get a job in the public sector (in return for their vote) do not findit easy to engage in constructive dialogue with their employer which might involve criticism of, or disagreement with, the partyto which they owe their job. But neither are they likely to abstain from shirking. The politician, to whom they owe their job, isless interested in how efficiently the particular office in which they are employed is working. And employees know their positionsare safe because it is their ‘contact’ which matters, rather than their supervisors. Furthermore, employees are less likely to cooperatewith each other since they are rivals for their patron’s favour.

31 Indeed, clientelistic politics often extends beyond simply getting access to state funds or protection. Relationships can alsofacilitate customers’ access to services to which they are entitled (e.g. telephone line repair). The point is that, in societies suchas Greece, all citizens are drawn into clientelistic behaviour, and not just selected groups.

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to broaden support for its stabilization policies, withsome limited success.

The context was equally unpropitious for the supply-side measures. Consider, as an example, PASOK’sapproach towards existing nationalized industries,most evident in its policy of socialization (eventuallycodified in Law 1365/83). This constituted a rela-tively sophisticated approach which went beyondMorrisonian nationalization and self-managementmodels (Tsakalotos, 1991a, ch. 6.3). Again, therationale of the policy was twofold. On the one hand,it was part of PASOK’s ideological commitment topromote institutional and structural reforms in orderto expand participation in economic decision-mak-ing and introduce elements of social control withinthe public sector. On the other hand, PASOKrealized that for its new institutional measures tosucceed, and thus achieve a greater legitimacy,they must work in favour of reconstructing theexisting nationalized industries.32

It is beyond our scope to give a full account of thenew framework. In essence, though, there was aManagement Council, and a General Manager,responsible for day-to-day management. This wasto be supported by a body named ASKE (Repre-sentative Assembly of Social Control)33 consistingof 27 representatives from the Greek state, employ-ees, local government, consumer interests, etc. Thisbody was responsible for medium- and long-termplanning of the enterprise. The ASKE was also toprovide an input to national planning with, for exam-ple, the ASKE of DEH (National Electricity Com-pany) influencing the plan in the area of energy(Tsakalotos, 1991a, pp. 215–16). The state was stillin a dominant position given the importance of thesefirms to the national economy, but the idea was thatthe ASKE could provide a form of social control thatwent far beyond the rather formal control of respon-sibility to Parliament through the relevant ministerthat characterizes Morrisonian nationalization. As

we saw in section II, this initiative, like so many, wasnever really fully implemented. Indeed, the numer-ous delays in implementation meant that the variousinstitutions could not be fully working until PASOK’ssecond administration. By then, though not withouta certain amount of conflict, the PASOK govern-ment promoted the policy with little conviction anda narrower scope (Tsakalotos, 1991a, p. 267). As inall other areas, PASOK’s initiatives were cruciallyweakened by the role of clientelistic practices in theappointment of officials, the use of the new institu-tions for social policy and its desire to build itselectoral and social base, and ad hoc ministerialintervention at all levels. Instead of these newinstitutions developing new initiatives and adminis-trative practices, they merely reproduced the prac-tices and modes of operation of the existing publicadministration.

But the central point is that the responsibility forthis state of affairs does not lie exclusively atPASOK’s door. For the lack of autonomoustrade unions,34 local authorities, and consumer groups(all represented on the ASKE) meant that they werein no position to exploit the new legislation. Givensociety’s organization with strong vertical linkages,the above lacked the knowledge, the resources, andthe stock of ‘social capital’ to be able to enter intothe type of long-term trust relations and cooperationentailed by the new legislation. Rather, mutualsuspicions between groups, and between suchgroups and the government—whose ability toenter into long-term credible commitments wasjustifiably in severe doubt—made a focus on short-term gain the dominant strategy and meant thatthe initiative was a dead-letter before it started.35

A final consideration is worth discussing with re-spect to the failure of PASOK’s economic strategyin the 1980s. This has to do with the nature ofPASOK as a political organization. As we saw insection II, as PASOK came closer to power it

32 That is, especially OTE (telecommunications), DEH (electricity), and OSE (railways).33 This conception can be usefully compared to modern discussions about the importance of stakeholders—that is, it is inefficient

for a firm’s policy to be determined solely by its shareholders and management (Block, 1990; Hutton, 1995; Roemer, 1995).34 For an account of the extent to which PASOK union policies were identified with those of the government and also the extent

to which PASOK union officials were dependent on the political wing of PASOK for their careers, see the article by T. Lianos,‘Telos kai afertiria gia ta syndicata’, To Bima, 7 September 1997. Lianos also argues that these two effects had dire consequencesfor successive PASOK governments.

35 We have concentrated here on PASOK’s initiative with respect to the socialization of nationalized industries because it wasan area where the policy initiative was most developed and the policy persevered with for longer. But similar considerations playeda similar role with most other supply-side initiatives discussed in section II.

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became more of a coalition of disparate interests.There is nothing unusual in that, and one can envis-age that any conceivable social democratic govern-ment would constitute a similar coalition. The issueis rather that PASOK, as a political party, wassingularly ill-placed to deal with these conflictinginterests (including intra-party factions, politicalnetworks supporting particular ministers, conflictingbusiness circles influencing Papandreou himself,trade unions, and other organized interests) once ithad achieved power. For a start, it lacked the basicdemocratic procedures of other social democraticparties. Although it had a similar organizationalstructure to other parties, such as congress andcentral committees, ‘nevertheless, the control exer-cised by the party organization has been almostexclusively bureaucratic and personal, rather thandemocratic, and the most eloquent testimony to thisis the fact that the Party Congress met for the firsttime only in 1984, no less than a decade after theparty was first formed’ (Hine, 1986, pp. 285–6).

The role of Andreas Papandreou in the first twoadministrations was paramount, with party officialsdrawing their legitimacy from the party leader ratherthan from party members and sympathizers(Spourdalakis, 1988). Furthermore, any oppositionto the PASOK government was usually met withco-option into the state apparatus, further weaken-ing the autonomy of local party organizations(Morlino, 1995). Rather than a democratization ofthe state, what happened was a ‘statization of theparty’ with almost all members of PASOK’s centralcommittee being co-opted into either the govern-ment administration or parallel advisory organiza-tions (see Spourdalakis, 1988; Sotiropoulos,1991,1993). This further strengthened the state andweakened civil society, since clientelism could nowbe mediated through a strong party machine(Mouzelis, 1987).

This was hardly a solid foundation on which tomediate conflicting interests in government. Forinstance, in opposition, PASOK had argued that itwas important to get right the speed of introductionof the institutional/structural reforms—a very slowrate would risk their incorporation into the existingsocioeconomic system, while a too high rate would

entail dislocation or disorganization of economicactivities. However, in government, PASOK seemsto have interpreted this sensible conception in apeculiarly populist36 manner, which gave little op-erational guidance about what could and should beachieved. The conception was reinterpreted to meanthat PASOK should not go further than the ‘people’were willing to accept. The question arose of howthe ‘will’ of the people could be ascertained. Theresolution to this dilemma was that PASOK, be-cause it lacked a framework for resolving differ-ences and coordinating policy either at the level ofparty or government, responded, usually ‘behindclosed doors’, depending on the strength of theorganized expression of opinion hostile to individualmeasures. This also explains the delays and uncer-tainties regarding the nature and scope of variousinstitutional interventions. The failure to presentnew and credible initiatives on tax evasion and thetaxation of farmers, which may have limited theexplosive fiscal situation, was the result of pressureson PASOK from elements within its political ma-chine and its natural electoral constituency. For anew party in power does not act on a tabula rasa—lacking a clear global strategy to mediate interests,or even a forum in which to develop such a strategy,to set priorities and to provide ministries with opera-tional plans, various social, economic, and politicalinterests represented by PASOK had to find alter-native means of expression.

In this context, it was difficult for PASOK topromote social capital within society, somethingwhich we have argued would greatly have helped itsoverall strategy, when the reserves of such capitalwere so meagre within PASOK itself.

V. CONCLUDING REMARKS

As we have seen, the PASOK social democraticexperiment in economic policy-making was not asuccess. In particular, its distinctive supply-sideeconomic initiatives hardly got off the ground through-out the 1980s. By 1985, the slow process of adap-tation to a more orthodox set of economic policieshad begun with the adoption of a stabilization planunder the chief economics minister, Kostas Simitis.

36 There is in fact a large body of opinion that believes that PASOK is in any case better understood as a populist party ratherthan a social democratic one. On PASOK and populism, see Featherstone (1986); Mouzelis et al. (1989); Sotiropoulos (1991,1993);and Diamandouros (1994);.

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This was brought to an abrupt halt in 1987, mainlybecause Papandreou took the decision that withouta more ‘populist’ turn PASOK was unlikely to keepits hold on power. This was to prove a fatefuldecision that led to PASOK’s least creditable periodof government, associated with a lack of macroeco-nomic control, populist politics, a series of financialscandals, and a general loss of direction. It was alsounsuccessful in its own terms since PASOK lostpower in 1989. By 1993, when PASOK returned topower, the shift in policy to a more orthodox stancewas clear and was confirmed with the election ofSimitis to succeed Papandreou as leader in 1996.

On the other hand, with respect to promoting socialjustice, PASOK has been a little more successful. Inthe 1980s, we have seen, it took important steps withrespect to pensions, minimum wages, the healthservice, and so on, which had a significant effect onreducing inequality and the level of poverty(Tsakloglou, 1990, 1993). To a certain extent thisconcern has survived the stabilization plans since1993 with an attempt to preserve real wages, re-structure the tax system, and minimize the employ-ment costs of the strategy (see section III). How-ever, these initiatives were not bolstered, as wasenvisaged in PASOK’s original programme, byinstitutional change (for instance to promote socialcontrol and thereby shift power relationships withinsociety) or by significant restructuring of theeconomy. Whether this entails that the social gainsare therefore insecure, as many social democratsand, in the past, PASOK itself have argued, remainsto be seen.

How can we account for PASOK’s trajectory asoutlined above? A popular argument is that radicalstrategies—such as PASOK’s original concep-tion—are no longer viable as a result of the increas-ing internationalization of production and financialliberalization. The ‘globalization’ thesis would sug-gest that PASOK’s trajectory was in some sense aninevitable accommodation to reality which had to

come sooner or later.37 We have argued that PASOKdid not in fact face an overwhelming externalconstraint in the 1980s. True there was the currentaccount crisis of 1985, but, on the whole, PASOKfaced a window of opportunity and a rather softcurrent account constraint, as a result of the largeinflows in the form of remittances and EU funds.However, it is certainly true that, by the 1990s,influential policy-makers within PASOK did per-ceive, whether rightly or wrongly, the externalconstraint as binding.38 This was strengthened bythe process of European integration which entailedfor Greece the liberalization of the financial systemand the gradual removal of capital controls. TheMaastricht criteria for participation in monetaryunion have also played a significant role, especiallygiven Greece’s reliance on EU funds and the per-ceived political benefits of membership (not leaststrengthening Greece’s position with respect toTurkey). With respect to the above, the success ofthe government in staving off devaluation in thespeculative crisis of May 1994, discussed above,was a decisive political landmark. It strengthenedthe position of the government with respect tointernational capital markets, and expandedPASOK’s popularity to centrist political forcesimpressed with its handling of the crisis. This politi-cal success was underlined by PASOK’s 1996election victory—this time under Kostas Simitis—which reinforced the appeal of the more orthodoxpolicy, since it was shown that such a policy was notdoomed at the polls.

However for the 1980s, rather than the operation ofan external constraint, we have emphasizedPASOK’s problems more in terms of its failure tocontrol inflation and the budget deficits.39 In part,this was a result of PASOK’s inability, or unwilling-ness, to confront opposition to its strategy. As wehave seen, the 1980s were characterized by whatamounts to an investment strike on the part ofcapital—the rate of growth of gross fixed capitalformation was negative in most of these years.40

37 Strictly speaking, there are two issues here. First, how new and how significant is the process of globalization? For a scepticalaccount of globalization see, for instance, Hirst and Thompson (1996). Second, to what extent does globalization severely restricteconomic strategies that are in some sense ‘alternative’? For different perspectives on the latter issue see Notermans (1993, 1994);Moses (1994); and Glyn (1995).

38 See Wickham-Jones (1997) for how such a perception influenced the evolution of economic policy-making in the British Labourparty before 1997.

39 For a similar argument with respect to Sweden and Norway and France see Notermans (1994) and Glyn (1995).40 It is true that this lack of investment pre-dates the accession of PASOK to power in 1981, but on the other hand the hostility

of capital to PASOK in its first period should not be underestimated.

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Furthermore, most of PASOK’s supply-side meas-ures, such as the supervisory councils and planningagreements, were bitterly opposed. That is to say,PASOK faced the problem of ‘structural depend-ency’ on capital that confronts all radical govern-ments.41 It cannot be said that PASOK developedany innovative response to this problem. Moreimportant still was the conflict that existed within theranks of its own political constituency. We haveargued implicitly in section III that, for the 1980s,both the budget deficits and inflation reflect the factthat PASOK did not exercise the necessary controlover competing claims (see Tsakalotos, 1991b).

PASOK had won its first election victory as a broadcoalition. This coalition had been brought togetheron a radical platform which promised both measuresto promote social justice and institutional change.Thus measures to promote social control and demo-cratic participation were not just economic policyproposals but constituted central tenets of PASOK’spolitical platform to outflank the Left. But, in power,PASOK would need not only to adjudicate betweencompeting claims but also to ensure support for itsinstitutional interventions and structural economicpolicies. However, PASOK was unable to managea process of structural change in the economy inwhich there would have been clear winners andlosers, especially since many of the losers were partof PASOK’s natural political constituency. In thisrespect, many of PASOK’s original measures evencame to be seen as obstacles; for democraticplanning and, in general, the strategy of extendingdemocracy to the economic sphere, almost by defi-nition imply an increase in the transparency ofeconomic decision-making in which clear winnersand losers are indicated. Thus, in Diamandouros’s(1994) conception, there was a movement from the‘moment of incorporation’—where previously ex-cluded groups in society were incorporated, in partat least, into the political system—to the ‘moment ofconsolidation’—where these new groups, and oth-ers, acted as an obstacle to structural change byseeking to preserve their traditional rights and newlyfound access to economic resources.

On the one hand, this course may have been, in thewords of Diamandouros (1994, p. 54), a

necessary price Greek society has had to pay for the long-overdue incorporation of these marginalized strata intothe political system, for the dismantling of a post-civil warorder based on the institutionalized inequality of citizens,in short, for the normalization of its politics following longand systematic derailment during the preceding quartercentury.

It might be argued that it is partly the wider recog-nition of PASOK’s role in this process which liesbehind its political success, despite so many eco-nomic failures. On the other hand, these failures, thelack of structural change and continuing consump-tion, led to such macroeconomic imbalances thatPASOK in the 1990s felt that it had little choicebut to turn to orthodox stabilization measures toconfront the mounting crisis and in order to keepalive the hope of continuing integration with theEU.

However, rather than the above considerations,PASOK’s inability to promote its radical supply-side and institutional policies may reflect the factthat its original conception of such policies was insome way defective. That is to say that PASOKnever had a clear conception of a coherent andimplementable alternative. On the one hand, it iscertainly the case that while PASOK at the pro-grammatic level had a conception of institutingvarious planning and interventionist mechanismsand institutions, this did not, except perhaps in theexample of the ASKE discussed in section IV,extend to fully worked out operational plans of howthese would function in practice. How comprehen-sive should planning be? In which areas, and onwhat rationale, should social ownership or planningagreements be promoted? What is the appropriaterelationship between the state and the planners orbetween the planners and individual firms or sectorsof industry? What role should workers’ participationplay? Of the answers to such questions, PASOKhad, at best, a very hazy idea before coming topower, with the result that its initiatives once inpower tended to be spasmodic and uncoordinated.On the other hand, PASOK’s conception involvednot only many of the elements that were commoncurrency in social democratic political circles in the1970s and early 1980s (planning agreements, na-tional and local enterprise boards, and so on) but also

41 On the theory of structural dependency see Offe and Ronge (1984) and Przeworski and Wallerstein (1988). For more empiricalapproaches which discuss how structural dependency affects social democratic parties in and out of power see Przeworski (1985);Hay (1997); and Wickham-Jones (1997).

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