Tuesday, October 30, 2012

The National Interest: Austerity Has Yet To Come To Greece

The idea that deep cuts are pushing Greece to the brink makes for great punditry. But it is a woefully incomplete description of what is really happening. Austerity is not killing Greece. Instead, austerity has yet to come to Greece.

Read the full version of my article on the National Interest website.

Wednesday, October 10, 2012

The Parallel Universe of Alexis Tsipras

In an article for the Guardian, Alexis Tsipras articulated his message for Angela Merkel. It is no surprise that I disagree with almost everything that comes out of Mr. Tsipras’ mouth. But there are three claims, in particular, that caught my eye. Together, they show an inability to grasp reality in a way that has deep consequences for Greece.

Claim #1: “Austerity policies have led to cuts in benefits, the deregulation of the labour market and the further deterioration of the limited welfare state that had survived a neoliberal onslaught.”

Austerity policies have led to a cut in benefits and the deregulation of the labor market – no arguments there. But is Greece’s welfare state truly limited? Let’s look at a few numbers. In 2010, the Greek state spent 13.2% of GDP on pensions (data from here). Of the 23 EU countries that have data, Greece ranked second! In fact, between 2009 and 2010, amid the “austerity,” its ranking rose from 4th place to 2nd (after Italy). Health expenditures are, at least, less egregious. In 2010, the Greek state spent 7.5% of GDP on health, which is right on the EU and Eurozone average. Greece’s share is just below Italy’s (7.6%) and slightly higher than either Germany’s 7.2% or Sweden’s 7.1%. Is spending more on pensions than almost all EU states and more on health than Germany and Sweden really having a “limited” welfare state? Some perspective, please. Besides, only 10% of the €20 bn reduction in the budget deficit from 2009 to 2011 came by limiting the welfare state. So where exactly is that “neoliberal onslaught?” There is much that can be said about Greece’s “welfare state” but that it is “limited” is not one of them.

Claim #2: “The European citizens should know, however, that loans to Greece are paid into an ‘escrow’ account and are used exclusively to repay past loans and to re-capitalise near bankrupt private banks. The money cannot be used to pay salaries and pensions, or to buy basic medicine for hospitals and milk for schools.”

To be fair, much money that came into Greece flowed straight out again (see here). But to say that the money cannot be used to pay for expenses is an odd claim. Money is fungible and for two years, Greece had a primary deficit meaning that its revenues could not cover its expenditures even without paying interest (the budget is almost balanced now, again excluding interest). The idea that all this money has gone exclusively to “repay past loans and to re-capitalise near bankrupt private banks” is untrue. It is misleading too because debt repayments went also to Greek institutions and individuals, including institutions that form part of the welfare state. Mr. Tsipras is right to point out that much money went to repay debt holders; but he is not right to claim that those payments have nothing to do with state spending; nor can he really say that having a banking system bears no relationship to social welfare and social peace.

Claim #3: "We believe that their [elites] aim is not to solve the debt crisis but to create a new regulatory framework throughout Europe that is based on cheap labour, deregulation of the labour market, low public spending and tax exemptions for capital … Europe needs a new plan to deepen European integration. Such a plan must challenge neoliberalism and lead European economies back to recovery. It should prioritise the needs of workers, pensioners and the unemployed, not the interests of multinational companies and bankrupt bankers."

Neoliberalism is a big, bad word, although despite having graduate degrees in political science and economics, I have no idea what it means (or how it differs from liberalism). But from what Mr. Tsipras writes, two points merit a response. The first is the cheapness of labor. It is true that Greece’s austerity package is focused on making labor cheaper. But the reason is not a neoliberal conspiracy. Rather, it is that the average Greek produced almost half as much per hour of work than the average employee in the Eurozone (see here). Only Portugal, among the EU-15, produced less for each working hour than Greece. Greek labor ought to get cheaper not so that companies can make more profits, but so that work and reward can be better balanced. This is a profound philosophical point because Mr. Tsipras is obsessed about wages but does not seem to care about productivity. He should.

The second point is the idea that the austerity package favors the interests of multinational companies. Big companies are easy scapegoats of course. But consider these two data points. First, Greece is dead last in the Eurozone in terms of how much foreign direct investment it has attracted, and it has been dead last since 2002 (see here). Greece has 40% less FDI than second-from-last Italy and it has one-fourth the FDI of the Eurozone on average. Second, by far the biggest driver of the recession in Greece is the complete collapse in investment, which has halved since 2007. This is mostly domestic investment and it has collapsed across the board. The reason, most recently, is deep uncertainty. But beyond uncertainty is the difficulty of doing business in Greece, including because of the worker protections that Mr. Tsipras wants to enhance. If you told the CEO of a multinational company that the austerity package in Greece is favoring the interest of multinational companies, they would laugh above all because it is a silly claim. Making Greece a haven for capital would be great, but Mr. Tsipras understands neither what it takes to get that nor what it would do to Greek living standards thereafter.

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These points underscore two bigger problems with Greece’s attitude towards the crisis which Mr. Tsipras first typified and now propounds. The first is an inability to do some serious introspection and thus get a sense of perspective. Without it, questions such as “what is fair” or “what is just” are impossible to answer. It is all well and good to bemoan the welfare state, but why isn’t Mr. Tsipras outraged that the Greek state spends so much and delivers so little? Why is his only answer to just spend more, along with the necessary (and empty) nod that he would do it better and fairly (without telling us how)? Why is he not outraged that investment has halved and that there is less foreign investment into Greece than anywhere else in the Eurozone? Crisis demand introspection, not just scapegoats.

The second problem is deeper and it speaks to the inability to think beyond zero-sum politics. There is a reason that people of Mr. Tsipras’ persuasion have gone out of fashion in advanced countries. At some point, even politicians understood that trying to split the pie without growing it was self-defeating. Better to create more wealth and fight for a different allocation rather than focus solely on the allocation. When he rails against multinational companies or bankers or capital, he is saying “one wins, the other loses.” This is a great philosophy. It’s simple, compelling and massively appealing. It’s also wrong and outdated. I titled this post “The Parallel Universe of Alexis Tsipras.” Perhaps it is best to say that he lives in a time capsule. Of a time long, long ago.

Saturday, October 06, 2012

Ten Surprising Facts About Greek Economic History

A year ago, I wrote a post about the ten most surprising things that I had learned about Greece in the course of writing my blog. As I dug deeper into the country’s recent economic history while conducting research for my book on the Greek crisis, I came across a few more. Here are the things that most surprised me during that research (relying heavily on the OECD’s Economic Surveys of Greece dating to 1962).

Fact #1: Employment in the public sector grew ~40% in the 1980s. The Greek state admitted at some point that it was not quite sure how many people it employed. Getting a full picture on this subject has been tough, but the 2001 OECD report was instructive: “Between 1981 and 1990 public sector employment increased at an average annual rate of about 4 per cent – around four times as fast as in the private sector.” The graph in the report shows that employment went from just over 500 thousand in 1981 to just under 700 thousand in 1989. Through 1999, employment declined some periods (1989-1992 and 1996-1999) and it rose in others (1993-1996). The data then stops. In 2009, the earliest year for which I have seen numbers, employment was ~715 thousand. That is higher than the 1989 peak or the 1999 point of ~640 thousand. Judging from state spending patterns, this final growth likely came in 2006-2009.

Fact #2: Remittances beat tourism and shipping as a source of foreign exchange. The OECD notes that 1.25 million Greeks emigrated from 1950 to 1974. The money they sent back trumped tourism or shipping receipts as a source of foreign exchange through the late 1970s. For every dollar earned by remittances in 1960, shipping provided 74 cents and tourism 33 cents. In 1970, the gap was narrower for tourism (40 cents) but larger for shipping (68 cents). From 1970 to 1978 tourism and shipping grew faster than remittances, and so, by 1978, tourism brought in $1.12 and shipping $1.02 for every dollar of remittances.

Fact #3: Minimal foreign direct investment. From 1954 to 1976, foreign direct investment was ~$620 million in total – which was equal to the amount of remittances received by the country on an *annual* basis at that time. Modest FDI did not really start until 1976, and even since then, it averaged less than 1% of GDP a year (with a peak of 2% in 2% in 2006).

Fact #4: Liabilities linked to public enterprises accounted for 50% of GDP by the late 1990s. From the 1998 OECD report: “The cost [of public enterprises] to the economy consists not only of an annual drain on the budget of about 3 ½ per cent of GDP … if accumulated over the past decade and half, and added to other government liabilities due to public enterprises, they represent a burden equivalent to about 50 per cent of GDP.” Enough said.

Fact #5: The importance of industry peaked in 1973. Greece is a service-based economy – in fact, services provide a greater fraction of GDP than in almost every other EU country. But this wasn’t always the case. Of course, services have always been important. But in the 1960s and 1970s, the relative decline of agriculture came together with a growth in industry. Then, industry peaked in 1973, and after some fluctuation, its share of GDP reached a second peak in 1979, at 31%. It then started to decline with few interruptions down to 18% in 2011. Since agriculture also fell, this meant that services, which made up ~56% in the 1960s and early 1970s progressively edged up to 78% in 2011.


Fact #6: Tax evasion became a read headache towards the late 1970s. I was interested to see the point at which tax evasion shows up as a major problem in Greece. This graph is both imperfect and instructive: it shows the word count for “evasion” in each OECD survey of Greece since 1962. Until 1978, the word shows up sporadically. Then the 1979 survey mentions evasion as many times as all the previous 12 surveys combined. After a few quiet years (6 mentions per survey), its presence spikes to a new plateau of ~13 per survey from 1986 to 1996. At that point evasion shows up either a lot (~27 times) or a little (~7 times) before reaching a whole new level in 2009-2011 with an average of 42 mentions per survey.


Fact #7: The bifurcation of the Greek economy. It is no secret that there are two very distinct, almost parallel economies in Greece. But the extreme divergence between the productive and the non-productive Greece still surprised me. From the 1993 OECD report: “Greek manufacturing industry is composed of two distinct sub-groups – dynamic private firms, with very high profit rates, and ailing (mainly state-controlled) firms, cumulating losses year after year.” By 1982, the losses of the loss-making firms exceeded the profits of the profitable firms and the overall profit rate turned negative through 1986. Yet throughout the 1980s, anywhere from 55% to 74% of the country’s 3,000+ firms were profitable and their return on equity was very high (20%).

Fact #8: Greece is a deep rentier economy. In an April 2011 post, I noted that Greece could be understood as a rentier state where work and reward were becoming disconnected. Mostly, I had in mind state spending for public employment and benefits. But delving more into the history of the Greek economy, I saw that the extent of rentierism was much deeper: large EU transfers in the 1980s and 1990s; sizeable remittances especially until the mid 1980s; and the massive boom in construction that created a pure “rentier” class, where rents form a household’s largest source of income (~10% of tax returns in recent years). So much revenue unlinked to work and effort.

Fact #9: The Olympics cost too little to explain Greece’s debt. The 2004 Athens Olympic Games cost around €8.954 billion, not including spending on projects that were going to happen anyway but that were accelerated for the Olympics. This is paltry compared to Greece’s debt of €298 billion at year-end 2009. Maybe the Olympics were a luxury that Greece could not afford – but they are not a cause of the current crisis.

Fact #10: For 25 years, Greece’s growth was the second highest in the OECD. In the past, I had written that Greece’s economy was vibrant not too long ago; yet this comment from the 1992 OECD report still surprised me; referring to the impact of the 1980s, the OECD noted: “after having recorded the highest GNP growth rate, next to Japan, in the OECD for about 25 years, Greece fell to the bottom place at the beginning of the 1980s and has remained there since. At the same time, the public sector debt reached one of the highest levels in the OECD area (113 per cent of GDP), representing a heavy burden for the economy in the future.”