Elena Panariti is a Greek economist with extensive experience in the World Bank. She is specializing in institutional economics and on the role of institutions guaranteeing property rights for the economic prosperity of a nation in particular. Her book Prosperity Unbound published in the USA and Greece with a foreword by Francis Fukoyama examines the impact of the informal economy on the economic maturity of states. How to deal with illegal construction, why the Greeks hiding their income and do not pay taxes, why are laws more often suppressed in the Balkans than in Western Europe, is there a solution to illegal immigration – about all these issues Maria S. Topalova talked with Elena Panariti.
Prosperity unbound. How could we secure it?
By being honest and look long-term and not short-termm. You see, politicians are very short-sighted. Short sighting is not taking to unbound prosperity. Long sightedness and the building of trust is the pentacle of getting to prosperity. And I will explain why. In economics, in mathematics we have something called game theory. And in game theory we have different sets of games. That means that we basically have agreements between individuals. And there is one type of a game, one type of an agreement between two players. And the agreement goes like this: “I am never going to see you ever again but just right now. So, I am going to take the opportunity to grab every single right I can. And because I am never going to see you ever again my reputation is not destroyed, you do not care, and I am going to grab everything I can.” This is usually what happens when you go into a taxi in a country that you do not know very well. And it is usually those Middle Eastern countries where you go in and they take you around the city. Taxi drivers never think they are going to see you ever again. Their personal reputation is not even touched because you do not even know them. You are going to say: “Well, the taxi drivers in this country are bad” but that’s it. You destroy the reputation of taxi drivers but they do not care. This is a fight of who is going to have more. That is very, very short-term thinking.
But then you want to move to other thing. You want to move to something which a little more involved which is continuous games. “I am going to see you tomorrow.” You would like to keep a good relationship. So, you would like to get into an agreement that will allow us to both of us have benefit, because if you have a benefit then I will have a benefit and if I have a benefit then you have a benefit. And if we continue working in those types of agreements we are going to have a better community, a better life. That is the difference between modern countries or developed democracies or developed markets and less developed democracies and less developed markets. That is the difference between politicians with vision and politicians that are grabbers. They are very, very short-sighted. So, that is how we would get to prosperity. We need to start building this concept of trust that will be engaging the people again, and again, and again.
Would you explain to us what does informality in economy mean and what is the difference between formal economy and informal economy?
Informality is behaviour among players in the market that does not get recorded, that does not get also recognized by the formal bureaucratic structures of the regulated market. It is not necessarily an illegal activity. In other words, people decide to be informal. On the other hand, it is an activity that occurs, and I will explain to you why and how it occurs. And then once you are in the informal world it becomes rather difficult to become part of the formal world. So, how does informality emerge? Informality emerges out of the willingness of individuals to trade, to engage in a market, to buy, to sell, to inherit people’s properties, to sell somebody’s property, to rent a piece of property. Informality emerges when the formal structure that regulates the market, when the formal structure that regulates an economy is very complicated and becomes every year even more complicated and it’s because either it gets overregulated, or it gets regulated on top of all regulations. In other words, all regulations don’t eliminate themselves and yet we have new ones coming. So, an individual who wishes to do, for example, a transfer of his or her home it takes more time to do the transfer in the formal sector than in the informal sector. And informality becomes even more a problem when the formal structure in a way becomes obsolete. By that I mean usually the reason why we want to exchange something in the formal environment is because the formal processes, the bureaucratic processes are the ones that provide the person with security of the final transaction. No one will doubt the transaction. However, when you have such huge level of unpredictability of processes, huge level of what we in economics call transaction costs, in other words, too many steps in the process, too many steps that you know from the beginning and many more that you don’t know but you find once you start the transaction, too many back and forth, too many payments, formal payments, that in the end of the day the formal transactions are very difficult to finalize. We noticed it in many countries.
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