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Sales Tax Hike Won’t Help Greece has increased its sales tax from 19% to 21%. While this might in the short term help the deficits, as usual, more money in the hand of the government will only crowd out private investments, depressing future growth. But a better question is: will this tax increase work? Mostly, while in Greece, I was given “informal” receipts. When I received a formal-looking one and I wanted to take it, they took it back and brought out a receipt made on a different cash register, meaning they maintain a different cash register for the taxman. I wouldn’t be surprised if the increase in tax stays a pie in the sky. If it does work, it means that those who pay the higher taxes will be competing against those who are evading them, making the former uncompetitive. This is always a recipe to marginalize hardworking, law-abiding entrepreneurs. |
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“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. |
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“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 |
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Greece = India? Greece reminds me of India. Over the last decade, the Indian government has developed a very bad habit of running high fiscal deficits, printing more money as a percent of GDP than most other countries in the world. 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 is not only being ignored but getting worse. |
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During a just concluded fact-finding mission to Greece, whoever I talked to 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, for they were angry about having to forever subsidize the country. 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. 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 of the world, 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 is 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. While sitting in a coffee-shop in Athens, I struck 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, which kept the economy going through increased money 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 a blink, with supreme confidence and a complete absence of any 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 is because she did not feel an iota of guilt for being on dole. Those memes have been systematically annihilated. This is a life in complete contradiction to the natural principles. Not only does the educational system teach falsehoods, the machinations of the system are such that there are seemingly no consequences to misguided living. The minds of those brought up in today’s zeitgeist work in a way that they perceive as antidote exactly what created the disease in the first place. 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 the rich, modern societies, the state of economic illiteracy in Greece is perhaps worse than elsewhere. 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 super-powers of the latter two with their sophisticated, diverse economies, Greece has a rather 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 acceleration of wage costs relative to the rest of the eurozone. Productivity gains lagged. The Greek manufacturing industry declined as a result of a drop in cost-competitiveness. Greece could have used cheap credit to its enormous advantage, had its regulatory mechanisms allowed free competition in the domestic economy and had the labor and regulatory structure been flexible, which would have enabled elements of production to switch to other industries when times changed. A free-market approach would have kept the costs down, increased the growth rate, and would have made the economy naturally more 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, the changing shape of the world’s economy led 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 went well. Greece is laboring under a budget deficit of 13.6% and has a hard time getting itself out of trouble because of the 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 from the IMF and EU worth a total of $144 billion 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 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 the locals’ desire to take up certain jobs, assisted by a huge informal economy, makes it an attractive immigration target for people from Albania, Hungary, Romania, etc. 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 a typical reader of this publication associates 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 the social mindset and economic structure. 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 export industry, a non-diverse industrial base, excessive corruption, graft and bureaucracy, a lack of individualism and culture where 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 is showing 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 on where the developed economies of today are going and the problems that the developing world will likely face. |
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Jayant Bhandari |
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Casey Research correspondent Jayant Bhandari is consultant to an institutional investor specializing in natural resources and emerging markets. In addition to starting and running two businesses, he has developed and run Indian subsidiaries of two European companies, one of which became the market leader in its sector. He has an MBA from Manchester Business School (UK) and now lives in Vancouver, Canada. |