Cyprus Mail

From fire fighting to coherent policy

By Theodore Panayotou

THE PREVIOUS government’s procrastination was such that many problems accumulated that needed urgent handling. With the public coffers empty, the banks insolvent, businesses closing down, unemployment rampant, and the economy in recession, there was a lot of fire fighting to do. Then there was the urgent need for consolation measures after the trauma of the Eurogroup decisions that left Cyprus without a functioning financial system. There was no grace period. No one could then criticise the new government for engaging in short term emergency measures in its first few months because it was exactly what was needed.
So we then praised the government for its fast response and its much needed message of empathy: “we feel your pain and we are doing everything we can to alleviate it with quick palliative measures”. Despite their pain and bitterness, people responded positively, communicating reciprocal empathy for a government which was given no honey moon period and was thrown into the Eurogroup den to pay for the sins and inaction of its predecessors. And, then there was the implementation of the agreed upon measures of the memorandum to pass troika’s first evaluation test, which apparently we did satisfactorily. So far, so good.
But it is disheartening to see a government entering its sixth month of rule and still engaging in what can be considered fire fighting: policies without prior articulation of an overall vision for the country. Policy measures for combating unemployment, for restarting the economy, for reforming the public sector, for privatising the public enterprises, for rationalising social policy, for reforming education, for reviving the banking sector, for attracting foreign investment among others, are being formulated in such a piecemeal fashion as to “lose sight of the forest for the trees”.
I, for one, despite my pertinent education as a development economist and 40 years of experience as a policy advisor in two dozen countries, cannot discern the vision, the strategy, and the direction we are taking. I find myself agreeing with many of the individual policies but, when I consider them as a whole, I cannot figure out what they add up to. Is there a new economic model we are pursuing or we are continuing with the old one? Are we designing and building something new which will withstand future tremors and shocks or are we doing patch work and erecting retaining walls to prop up the old structure in the hope that it can be saved for a while longer.
If we are building a new economic model, what is this model and how can we achieve it? Shouldn’t the citizens be inspired by a shared vision and policies be guided and coordinated synergistically by a focused strategy that aims to take the economy from its current disarray and failed economic model into a new era with the new economic model? Psychology and moral fortitude are critical to the success and sustainability of any economic model. We should have learned this lesson by now; it is the root of our current troubles.
Our irrational exuberance and selfish greed of yesterday has landed us in the ruins and misery of today. If, instead of articulating a new vision and a new moral code to inspire people to work towards a better common future, we cater to special interests to secure their political support and loyalty, we are not going very far. For one, there are not enough resources to go around. Second, and more important, we should be fueling collective effort, sacrifice, and hard work, not continued dependence, moral hazard and selfishness.
Ask anyone in the street if they see the light at the end of the tunnel. Their likely response is “what tunnel?” In the same way we should not confuse “activity” with “productivity”, we should not confuse “decision” with “vision”. Like activities, which can be many and varied, but with meagre and disappointing outcomes, decisions for new measures could be many and frequent but they may not add up to much if they are not part of a vision. Actually, individual policies might conflict with each other making the whole less than the sum of the parts, when the scarcity of resources dictates that we maximise synergies to achieve the maximum outcome with the minimum of resources.
Let’s take a recent example. Several policies have been announced to combat unemployment and more recently a new social policy has been announced that extends a guaranteed minimum income for unemployed university graduates, once their unemployment benefits expire. This is a clear invitation for moral hazard, that is, an incentive for unemployed graduates to continue to be unemployed. Instead of converting the “unemployment allowance” into a “work incentive” by requiring any type of engagement, even voluntarism, as a prerequisite for its payment, the new social policy, through the guaranteed minimum income, extends the unemployment benefits indefinitely, covering food and clothing, rent or mortgage, house repairs and even taxes. It doesn’t take rocket science to predict that, as a result, job searching will weaken and the unemployed status will be extended as the pressure on finding a job, or creating one’s own job is diminished by the guaranteed income policy.
As we know, from the work of Nobel Laureate Christoforos Pissarides, a world authority on unemployment and head of the president’s Council of Economic Advisors, the longer one remains unemployed, the lower his incentive to search and find a job. After a year in unemployment, he may even stop searching. Scientific research has found that those who start their career in unemployment have increased chances to remain unemployed in the future and their earnings are 20 per cent lower for the next 20 years with negative consequences on the next generation.
Shouldn’t the employment policy, the social policy, the education policy and the policy on entrepreneurship and innovation be coordinated so as to reduce the time university graduates remained unemployed and cut the cost to the government (the taxpayer more precisely) of unemployment and social benefits? Unemployment means hundreds of millions of euros in unemployment and social benefits and use of public services without contribution to public revenues, a major cause of budget deficits.
The inactivity of 75,000 unemployed people means the loss of over two billion euros annually, since the annual productivity of the average employee is about 30,000 euro a year. And, it is not only the human capital that remains idle and is been degraded. There are also many other resources, natural and man-made, like the land and water, the natural and cultural heritage, buildings and infrastructure, factories and funds which remained idle or underused, while we are begging for funds for investment and development.
Instead of providing a guaranteed minimum income we should be providing a guaranteed employment, analogous to the EU “guaranteed youth employment”, according to which the member states take measures so that young people, up to the age of 25, are offered employment, training, internships, or continuation of their studies within four months from the day they became unemployed. Organised systems of training correct the mismatch of skills between the unemployed and the available jobs and ease the transition from education to work.
The first principle in such a scheme is “nobody who can and wants to work should remain idle”. The second principle is “nobody, who is able to work and chooses not to, should be paid unemployment or social benefits”. The third principle is “if no work in one’s area of skills is found he should acquire new skills through further education, training or internship in order to find a job in another area or start his own business”. The fourth principle is that “if one still is unable to obtain a job, and unwilling to start his own business he should earn his keep (unemployment or social benefits) through voluntary work with communities and non-profit organisations”.
Such an integrated solution to the unemployment problem cannot be conceived by addressing each issue (unemployment, social policy, education, entrepreneurship, innovation) in isolation. Overly theoretical education, misguided career orientation, demonisation of entrepreneurship, neglect of innovation and the perverse incentives of unemployment and social policy have created massive unemployment at the first shock to the system. The loss of the ability in the public sector, the state monopolies, the public education system and the banks to create jobs outside the market by fiat and dictate, has revealed a huge long-term structural problem that cannot be remedied with unemployment benefits.
Effectively combating unemployment calls for turning the issue on its head: a) by converting unemployment benefits from incentives for idleness into incentives for work, b)by reversing the shift from vocational to academic education, c)by demonising idleness and fostering entrepreneurship, and d) by creating a cultural change from imitation to innovation.
I am sorry to say that, the announced new social policy, like the earlier employment policy, treats the symptoms rather than the systemic causes of the problem, and it is certain to have unintended perverse side effects (moral hazard) which may make the problem worse in the long-run, perpetuating the now defunct old economic model.
Without vision, policies put out little fires but do not prevent the next big fire. It is high time for the government to progress from fire fighting to formulating economic and social policy based on an integrated vision and long-term strategy for the country.

Dr Theodore Panayotou is Director of the Cyprus International Institute of Management (CIIM) and ex-Professor of Economics and the Environment at Harvard University. He has served as consultant to the UN and to governments in the U.S., China, Russia, Brazil, Mexico and Cyprus. He has published extensively and was recognised for his contribution to the work of the Intergovernmental Panel on Climate Change won the Nobel Peace Prize in 2007. Contact: [email protected]

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