Tuesday, April 10, 2012

Dimitris Kontogiannis - a sole voice in the wilderness!

The Ekathimerini journalist Dimitris Kontogiannis has done it again! He has once before written about the current account as the key economic variable for Greece and he has now written about itagain. If only political and other opinion leaders would wise up to that simple fact!

Since independence almost 200 years ago, Greece has had current account deficits; i. e. Greece has depended on funding from abroad. The US has had a current account deficit for decades. So where is the problem for Greece?

The US (still) has the creditworthiness to attract foreign debt and it is one of the best places in the world for foreign investment. Thus, the US can live with a current account deficit for a long, long time. Greece has no creditworthiness at this point and it is the worst place in the EU for foreign investment (according to the World Bank).

Thus, two things are crystal clear: Greece must reduce its need for foreign funding (current account deficit) and of the funding it still needs, as much as possible of it must come by way of foreign investment instead of foreign debt. Why? Because every country reaches at some point its maximum debt capacity (and Greece has already reached its; at least for the time being).

Thus, and thank-you Dimitris Kontogiannis, the current account must be at the center of all short- and long-term economic planning for Greece.

I am not sure that Greeks understand that their living standard is “imported”; i. e. Greece needs foreign funding to pay for all the imports it buys. If Greece didn’t get foreign funding anymore, the foreign revenues from exports and services would just about suffice to pay for essential imports like energy, medicine, etc. Not much left for cars, motorbikes, smartphones, etc.

To avoid that the living standard collapses for lack of foreign funding, Greece must first of all reduce the import of those products which could just as well be produced in Greece. And guess what? As you substitute imports with domestic production, new jobs are created; jobs which pay income taxes in businesses which pay corporate taxes and which belong to owners who pay taxes on dividends!

The nice thing about import substitution is that it can be implemented almost overnight. All it requires is that a business framework is offered to investors where they can produce domestically at competitive terms with imports. Particularly when it comes to agricultural products, no one could understand why that shouldn’t be possible right away.

The next step is to expand exports. Greek policy makers must fire up Greek farmers to produce for exports. That, too, creates jobs. It will take a little more time than import substitution but not all that much more.

Then Greece must increase revenues from tourism. If Greece were not a cult for many foreigners, Greek tourism would be in shambles because it is really not competitive with, say, Turkey. To improve that situation will require more time because, to an extent, it involves cultural changes. To put it bluntly: Greeks will have to run after tourists and thank them for their business instead of giving them the impression that they are doing them a favor when they allow them to visit Greece.

All of the above will not be sufficient, at least not in the foreseeable future, to make the current account balance. Thus, Greece will still need foreign funding. And this brings me to the most important point.

There are only 3 long-term solutions for Greece’s economic problems: foreign investment, foreign investment and, again, foreign investment. Foreign investment comes automatically when a country is a wonderful place to do business. As pointed out above, Greece is by far the worst place in the EU to do business (#100 in the world; between Yemen and Papua New Guinea). Can this be improved overnight? No way, because it not only requires reform but, above all, a change in attitudes towards foreign investment! One cannot expect an entire country to change attitudes in a short period of time.

My proposal is to establish Special EconomicZones where a business framework is offered to investors which would rank #1 in the world. While it may take a generation to change attitudes of an entire population, to establish in selective areas the right business framework with people sharing the right attitudes can be done virtually overnight. McDonald’s has been doing it for decades in the whole world. All it requires is the political will to do it.

I cannot close before making my usual side blow against Greek political and opinion leaders: they worry about all sorts of things but they do not spend resources on those possible solutions which are called for (and, actually, quite simple). Except for Dimitris Kontogiannis, of course!


  1. "The US (still) has the creditworthiness to attract foreign debt and it is one of the best places in the world for foreign investment. Thus, the US can live with a current account deficit for a long, long time. Greece has no creditworthiness at this point and it is the worst place in the EU for foreign investment "

    So - what is happening in Greece is that foreign investors are being scared off by the world bank. Would it not make sense for the world bank to have a positive role in this affair?

    This investment business is a queer one and no mistake. The investors base their decisions on profit and little else. That is how they are so easily mis-led. They think nothing of the circumstances or the opportunities that abound in Greece. They think nothing about Greece whatsoever save as a row of figures on a piece of paper. In investment terms, this is rather foolish, and I think from your experience as a banker, you are likely to agree with me. Yet everyone does it because it is simple, quick and easy. It is also easy to automate and forget, whilst you lie back in the sun and wait for your automatic profits to roll in. What I know as a marketer is that this is precisely the thing you should not do! You cannot guarantee the continuance of these states of affairs. They need continual tending.

    AMERICA - you say that Greece has living standards based on foreing borrowings. So the US has living standards based on its ability to print dollars. Just imagine for one moment if the US (and the UK for that matter) had to borrow these trillions on the open market? How much would that cost? What damage would this do to their prized AAA ratings? More importantly - what would it do to the interest rates in their countries.

    The problem the US faces is that when the markets realize that they are being duped, they will be swift in action and quite as unkind. I see the US as being prepared for this as Greece was for its own denoument.

  2. You raise a couple of separate points here, Gemma.

    Those foreign investors who base their decisions only on (perhaps even short-term) profits are the wrong investors to have. You always want to have foreign investors who add value to the economy on a sustained basis. Take the former SwissAir. A foreign investor (Lufthansa) took it over after bankruptcy and today’s Swiss is a larger and more profitable airline than SwissAir had ever been. Something similar could/should happen to Greek public sector companies after they are privatized. But there are so many other things which foreign investors could/would do in Greece if they were given incentives to do it. I remember that Andreas Papandreou (father of George) implemented special incentives for Near-Eastern companies to establish regional holdings in Athens. They came in troves. And they left in troves when Papandreou changed the law again.

    The World Bank is definitely not scaring off investors; the Greeks are doing that on their own which is why they only come out at #100 in the comparative analysis. The FYROM proves that a Balkan state, too, can be successful because they improved their rank from #24 to #22. Just read this report about one investor’s experiences.


    On America you are mistaken. The US government borrows all the money it needs in the open market at market interest rates. They do that via short- and long-term treasury bills. And only a smaller portion of the US’ sovereign debt is placed offshore (mostly in China). The bulk is held by Americans themselves. Yes, it is true that the US is the only country in the world which can raise foreign debt in a currency which it can print itself. That’s one of the pluses of being a reserve currency but there are minuses, too.

    The dollar printing is done by the Fed and not by the US government. When the Fed buys US treasuries (quantitative easing), it is essentially printing money. Or rather: it is putting new money into circulation.

    There is no worry to be had about the US’ possibly taking some adverse actions against foreign holders of their debt. They don’t have to because they have other means to pursue their interests. They can inflate the international value of the dollar which is nothing other than a partial haircut on their foreign debt outstanding.

    But the most important thing is that foreigners can do something meaningful with the US debt instruments they hold (in case they no longer want to hold them). They could by all S&P 500 companies; much of Manhattan’s real estate; etc. etc. If foreigners want to convert their paper claims against the US into real values, they can easily do that. They can’t do that in Greece.

  3. I happen to be what sometimes is referred as a "classical" economist. Personally, I like to refer to bad economists and good economists. Bad economists are the ones prone to fallacies, mainly stemming from the tendency to only examine the short-term and not the long-term effect of a given policy, to examine only the effect for a given group of people and not for the whole society.

    That said, what happened to Adam Smith's view in "The Wealth of Nations" that is always good (on the long run, for the whole of the society) for the people to buy the goods that are the cheapest???

    Of course, many will say that "now special conditions exist for Greece, etc., etc". Well, that was always the excuse of the bad economist when they were touting their fallacies, wasn't it???

  4. Ideally, individuals should always buy the cheapest goods and put their money in the safest banks. Ideally, the interests of individuals should be the same as the interests of society, i. e. what's good for Greeks is also good for Greece. The dilemma is that this theorem doesn't work with Greece today. Greek savers should put all their savings in foreign banks to be really on the safe side (and that is legal) and Greek shoppers should only buy the cheaper imports. In the long run, though, there wouldn't be any banks left in Greece and no imported products to buy.

    If Greece were a laboratory, this would work. Sooner or later, and after gigantic "creative destruction", new balances would be reached, assets would find new values, people would find new senses and the spiral would go up again.

    Since Greece is a country of humans with human feelings and emotions, the outcome might be quite different. And, as the Japanese say, the cost of careful prevention beforehand is less than the cost of repair afterwards.