by Jayant Bhandari (originally published in The Casey Report of July 2010)
During a just-concluded fact-finding mission to Greece, everyone I spoke with in the tourism industry complained about a serious drop in business. The Greek government, which had come close to a default on its debt payments, is now surviving on the alms of other nations. The possibility of austerity measures, as demanded by the lenders, brought Athenians to the streets, and three people died in the riots. Riots and demonstrations are no strangers to Athens, but on this occasion even the cynics were watching with dismay and disbelief.
Riots made Greece look unsafe, and other countries competing in the sun-and-sand business — Turkey, Croatia, Egypt — gained more visibility and increased recognition for being cheaper. German tourists I met said that many of their fellow countrymen had decided not to visit Greece this summer because they were angry about having to subsidize the country forever. Having long funded East Germany and then having done much of the heavy lifting in what became the EU, they no longer want to carry other people’s burden.
Sales Tax Hike Won’t Help
Greece has increased its sales tax from 19% to 21%.
While this might help address short-term deficits, more money in the hands of the government will, as usual, only crowd out private investment, depressing future growth. But a better question is: will this tax increase work? During my time in Greece, I was mostly given “informal” receipts.
When I received a formal-looking one and wanted to take it, they took it back and brought out a receipt from a different cash register, meaning they maintain a different cash register for the taxman. I wouldn’t be surprised if the increase in tax remains a pipe dream. If it does work, it means those who pay higher taxes will be competing against those who evade them, making the former uncompetitive. This is always a recipe to marginalize hardworking, law-abiding entrepreneurs.
Crystal Ball to the Future
Greece’s predicament shows what many Western countries — almost inevitably — will go through, as they increasingly live beyond their means and have instituted regulations and social mechanisms that destroy value and creativity, increase costs and wastage, misdirect the flow of investments, and, most importantly, destroy the ethics of the individual and corrupt the social structure, creating a vicious cycle.
Greece also shows the risks that the developing world is taking in the current phase of fast-paced growth — by failing to address corruption, bureaucracy, restrictive regulations, and inflexible economic structures. The governments in these developing countries, living off the fresh blood of their youthful economies, are learning bad and expensive habits and growing obese. It will be very hard for them to let go when the growth falters.
And in the globalized economy, in a phase of rapid expansion, there is a risk that a developing country might end up specializing in a very limited set of industries. There is nothing wrong with that, as long as there is a labor market and enough regulatory flexibility to allow readjustment when the situation changes. Otherwise, as Greece’s predicament shows, pain can crystallize rather rapidly.
Zeitgeist with its Positive Feedback
Is the euro doomed? Can Greece really pay off its debt? These are shallow questions, for they merely discuss the symptoms. Moreover, the zeitgeist these days is such that it attempts to relieve the symptoms using an antidote that ironically worsens the disease.
At the most fundamental level, it is a visceral belief that theft and dependency are honorable and that something can be created out of nothing. Add to this an utter lack of gratitude, something one should not expect from those in a society that was rather poor merely a few decades back. It’s a quality that’s been destroyed by the welfare system and indicates a mindset that is not easy to change.
On an individual level, Greeks utterly mistrust their government, although as a collective, they like big, overbearing government.
“Much of the growth over the past decade reflected the windfall of cheap euro interest rates, which stoked an exuberant consumer market, complete with smart cars, foreign travel and personal trainers. All this will contract sharply now.” — The Economist.
While sitting in a coffee shop in Athens, I struck up a conversation with a very smart-looking, confident girl while we sipped our rather expensive Euro 4 coffee. She was proud of spending time lying on the beaches and buying expensive clothes. By not taking on too much, she was contributing to the world’s peace and happiness.
She claimed to be doing a good deed by spending money, thereby keeping the economy going through increased circulation. Saving money, she said, was bad, something only a selfish person would resort to.
“Fewer working hours mean work for other people and hence less unemployment,” she said. While I was thinking that she was likely a spoiled child of rich parents, she added, with bright, clear eyes, that the rich should be heavily taxed.
Realizing something was missing, I couldn’t help but ask if she was on public assistance. Without blinking, with supreme confidence and a complete absence of guilt, she said, “Yes.”
Were I in her situation, embarrassed of living on someone else’s expense, I would have been tempted to lie. As a result, my first reaction to her confirmation was an extreme respect for her honesty. But really, the reason she didn’t lie was that she didn’t feel an iota of guilt about being on the dole. Those memes have been systematically annihilated.
“Although at first glance the situation Greece faces may seem as simply the result of gross incompetence on behalf of the government, a closer assessment of the country’s social structure and people’s deep-rooted political beliefs will show that this outcome could not have been avoided even if more skill was involved in the country’s economic and financial management… The population has a deep-rooted suspicion of and disrespect for business and private initiative, and there is a widespread belief that ‘big money’ is earned by exploitation of the poor or underhand dealings and reflects no display of virtue or merit.” — Anita Acavalos
This is a life in complete contradiction to the natural principles. Not only does the educational system teach falsehoods, but its machinations also mean there seem to be no consequences for misguided living.
The minds of those brought up in today’s zeitgeist perceive the very thing that created the disease in the first place as an antidote. This is a positive feedback system, a Tacoma-Narrows-Bridge syndrome. The bridge must collapse so that a system with a sounder design can emerge. While this is indeed largely the predicament of those brought up in rich, modern societies, the state of economic illiteracy in Greece is perhaps worse than in other countries.
Missed Opportunities
With a per-capita GDP of $29,882, Greece is not far behind Japan ($32,608) and Germany ($34,619). However, unlike the exporting superpowers of the latter two, with their sophisticated, diverse economies, Greece has a simpler one. 75.8% of its GDP comes from the service industry, tourism and shipping being the biggest sectors.
Cheap foreign credit, a result of the common currency, fueled the boom in domestic demand. The result was an acceleration of wage costs relative to the rest of the eurozone. Productivity gains lagged. The Greek manufacturing industry declined due to a loss of cost competitiveness.
Greece could have used cheap credit to its enormous advantage had its regulatory mechanisms allowed free competition in the domestic economy and its labor and regulatory structure been flexible, enabling elements of production to switch to other industries as times changed. A free-market approach would have kept costs down, increased the growth rate, and made the economy more naturally diverse. Greece, of course, did none of this and instead went on a spending binge.
According to the Heritage Foundation’s Index of Economic Freedom, Greece ranks 73rd, behind Poland, South Africa, and Thailand.
Joining the EC allowed the Greek government to launch expansionary fiscal policies, almost tripling the debt-to-GDP ratio from 34.5% in 1981. Greek politicians found it easy to buy social peace by offering tax breaks, generous pensions, and jobs for life. The government’s populist policies and increasing salaries without productivity gains have institutionalized a belief, more than elsewhere in the world, that growth is a given and that salaries must keep rising, and that graft, bureaucracy, abuse of public office, hiring of cronies, and corruption don’t matter.
In 2009, Greek exports amounted to $18.64 billion and imports to $61.47 billion. The difference was made up by tourism (15% of the economy), shipping (4.5%), and loans from EU nations and their banks. By 2010, not only was Greece losing its capacity to take on more foreign loans, but the changing shape of the world economy was also leading to a fall in receipts from both tourism and shipping.
The debt-to-GDP ratio currently stands at 125% and, according to The Economist, could rise to 149% by 2014, even if the country’s deficit-reduction efforts go well. Greece is laboring under a 13.6% budget deficit and has a hard time getting out of trouble due to a lack of export prowess. It cannot devalue, because it is in the eurozone. And of course Greeks are resolutely unwilling to accept much-needed salary cuts to make the Greek economy competitive in the more liquid world economy, where better and cheaper tourist destinations are emerging.
On May 2, 2010, loans totaling $144 billion from the IMF and the EU and an austerity plan were announced. It is unlikely that Greece will get more. But where is the spirit to change what brought Greece to where it is now?
The Way Forward
Greece = India?
Greece reminds me of India. Over the last decade, the Indian government has developed a very bad habit of running large fiscal deficits, printing more money as a share of GDP than most other countries. This is workable as long as the growth rate nullifies it. But when the growth is saturated, India will be left with a big government and bad habits. And again, corruption, graft, and regulatory inflexibility are not only being ignored but getting worse.
Culturally, Greece suffers from the problem of a developing economy. Individualism is suppressed. Those with contrarian views are forced to stay quiet. The only voice that is acceptable is one that supports the socialist status quo. The free-thinking people have been marginalized. They prefer to keep quiet and, if possible, move their money out of the country. Exceptional growth enjoyed by Greece in the recent past helped to disguise extreme leftism, xenophobia, and extreme nationalism.
Ironically, Greece’s need for cheap labor and the lack of local interest in certain jobs, coupled with a large informal economy, make it an attractive destination for immigrants from Albania, Hungary, Romania, and elsewhere. But in a xenophobic environment, this is a dangerous cocktail.
But what about the anarchists Athens is known for? Aren’t they those who effected the change from a military junta in 1974? Yes, they are. Unfortunately, their fight for liberty is not the kind of thing a typical reader of this publication would associate with. They are against the government and the current establishment for the wrong reasons. In a system that encourages a lack of self-responsibility, these so-called anarchists want none, forever staying in university or on welfare, and using violence to make the government steal money from wealth creators.
What’s currently needed is an increase in manufacturing in Greece, to generate employment and to make up for the loss of business from tourism and shipping. Greek productivity must rise significantly, through the dismantling of value-destroying bureaucracies and regulations, and people must accept a decline in the standard of living as well as much greater self-responsibility. There must be a paradigm shift in social mindsets and economic structures.
Alas, the zeitgeist is such that society is asking for an expansion of the government and social welfare programs. And they expect foreigners, particularly Germany, to keep providing them with more money. In short, Greece is bust, there is no escape, and the market now recognizes this: the Greek 10-year bond spread is currently 11.57% vs. the Bund.
A Lesson for Everyone
On the one hand, Greece suffers from the problems of a developing country. It faces a lack of an export industry, a non-diverse industrial base, excessive corruption, graft, and bureaucracy, and a lack of individualism and a culture in which contrarian positions are aggressively opposed
On the other hand, it suffers from the diseases of a developed country. Prosperity is taken for granted and is expected as a right. A culture of something-for-nothing is well-entrenched, seen as completely moral, expressed with shining eyes, and shows no signs of going away. Those without jobs would not do what they see as low-level labor. Indeed, concepts to comprehend anything else are missing. Greece is truly a lesson in where today’s developed economies are headed and the problems the developing world will likely face.
Jayant Bhandari