Why the Greek Bailout Failed

CAMBRIDGE – As the Greek crisis evolves, it is important to understand that a successful structural-adjustment program requires strong country ownership. Even if negotiators overcome the most recent sticking points, it will be difficult to trust in their implementation if the Greek people remain unconvinced. That has certainly been the experience so far. And without structural reform, there is little chance that the Greek economy will see sustained stability and growth – not least because official lenders are unwilling to continue extending an unreformed Greece significantly more money than it is asked to pay. (This has been the case through most of the crisis, even if one would never know it from the world press coverage.)

Greece’s membership in the European Union gives its creditors significant leverage, but evidently not enough to change the fundamental calculus. Greece remains very much a sovereign country, not a sub-sovereign state. The “troika” of creditors – the International Monetary Fund, the European Central Bank, and the European Commission – simply do not enjoy the kind of leverage over Greece that, say, the Municipal Assistance Corporation wielded over New York City when it teetered on the edge of bankruptcy in the mid-1970s.

The best structural-adjustment programs are those in which the debtor country’s government proposes the policy changes, and the IMF helps design a bespoke program and provides the political cover for its implementation. Imposing them from the outside is simply not an effective option. So, for reforms to take hold, the Greek government and its electorate must believe in them.

That a country must take ownership of its reform program is not a new lesson. The IMF’s rocky relationship with Ukraine began long before the latest round of negotiations. Back in 2013, IMF staff wrote a sobering report on the organization’s experience in the country. Their conclusion, in essence, was that the government’s failure to embrace the reform process fully all but guaranteed that its program would not work.

If a government is incapable of or uninterested in making the needed adjustments, the report argued, the best option is to drip money out as reforms are implemented, as is now being done in Greece. Unfortunately, that approach has not proved adequate to overcome the challenges there. Structural-reform conditions often tilt the balance between competing domestic factions, for better or for worse. If there is no will inside the country to maintain the reforms, they will quickly be undermined.

Left-wing ideologues have long viewed structural-reform programs with deep suspicion, accusing international lenders like the IMF and the World Bank of being captured by neoliberal market fundamentalists. This critique has some truth in it, but is overblown.

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