Monday, August 20, 2012

A radical thought how to turn Greece around

The present Greek government has an absolute majority in parliament. Suppose the three party leaders made the following joint public announcement:

"We recognize that we cannot make the changes necessary to turn the Greek economy around through the political process. We have, therefore, unanimously decided to delegate the responsibility for new economic policies to an autonomous, politically independent institution. That institution will be staffed with experts of national economic management with no consideration to party affiliation. 

The selection criteria for those experts will be their conviction that free market policies, under clearly established rules and regulations, are the most effective way to achieve economic well-being for our society. 

We are taking a bet, if you will. We are taking the bet that such experts - if given the time and if protected from political interference - will achieve what we all want to achieve --- to turn the Greek economy around from a corrupt, crony-driven economy towards a value-generating economy based on market principles. 

Our commitment to that economic team is that we, as the parties with absolute majority in parliament, give them unconditional aircover for the remaining legislative period". 

A ray of hope would browse through the corridors of Paris, Brussels, Frankfurt and Berlin. If that is really to believed, they would say, then we owe it to them to support them.

That new economic team would probably signal the EU-authorities that, in order to achieve results over time, they can't waste their time fiddling over budget deficits every couple of months or so. They would argue that "If our government had the guts to give us aircover for the remainder of the legislative period, then you better follow suit! Either you trust us, or you don't".

Given their qualifications, that new economic team would in all likelihood know from the start what needs to be done. If they didn't, they would only have to read up on other countries which have accomplished similar feats before.

This could never work?

Well, it worked in Chile in the late 1970s. The then authoritarian regime knew it needed economic success  but didn't have the know-how for it. They put their bets on the Chicago-Boys and gave them aircover for about 5 years. The Chicago-Boys, out of their intellectual purity, made many mistakes which ultimately caused significant set-back's (like not paying attention to how the private sector was wasting foreign loans on consumption) but Greece has already learned that lesson.

Here is my own bet: within less than one year, if the new economic team acted credibly, the rest of Europe would start paying positive attention to Greece. They would realize that Greece was on to something new. On to something which offered new business opportunities for foreigners. At the end of the day, foreign capital would, again, flow to Greece voluntarily because private capital never wants to miss out on new, good opportunities.

I bet you everything I own that this would work!


  1. Your interesting proposal supposes that the political class responsible for the social and financial crisis of the country would recognize its responsibility and incapacity to reform and let the keys in this international institition. I doubt strongly if they even have such an intention. This political decision would mean a clear suicide for them
    Stelios Mavromoustakis, Salonica

  2. You are assuming that the driving motivation of these economic team, CHicago boys or not would be the interest of Greece. I do not think the interest of the Chicago boys in Chile was the welfare of the chilean people -rather the welfare of US companies there. Which is what democracy is about: the people being smart enough to realize their own good and act accordingly.

    1. I can understand your prejudice against the Chicago-Boys. It is shared by many people who judge the Chilean situation from the distance.

      I have LIVED IN CHILE during the time of the Chicago Boys. Due to my job, I knew the leadersship from the Finance Minister down very well.

      I can assure you that the Chicago Boys had only one overriding objective --- to improve the lot of the Chilean people. When they started with their new policies, 21% of Chileans lived in extreme poverty (and extreme poverty in Chile was really extreme poverty!). The Chicago Boys recognized one most important point: to improve the lot of the Chilean people, they would have to have growth. Since Chile did not have enough financial resources to finance that, they knew they needed to get foreign investment. And they got it!

      The Foreign Investment Law was designed in such a way that, on one hand, the foreign investors would find a marvellous place to do business but, on the other hand, they could not "milk" the country.

      The American bank which I organized there in 1980 was capitalized with 10 MUSD. That was 10 MUSD which came into the country as new foreign funding. Much of the capital was invested in the restoration of a previously run-down building in the center of Santiago. When we opened for business, we had a staff of about 30 Chileans who were excited to have the opportunity to work for an international bank.

      Virtually all of our customers were Chilean companies. Since our bank had more USD than Chilean banks, we were a desirable business partner for every Chilean company which wanted to benefit from international trade and needed the foreign currency to do that. One of our focuses was to finance the export of Chilean agricultural and forestry products all over the world.

      Mind you, Chile then experienced something very similar to Greece and the Euro. They didn't give up their local currency but they fixed it to the USD "forever". Result like in Greece: new foreign loans entered the country like there was no tomorrow. A consumption-hungry people used the long-term loans to finance short-term consumption. The bubble had to break (it was exclusively a private sector bubble; the state had its house in perfect order).

      The Chicago Boys blew that one. In purist ideology, they looked at the massive foreign borrowing by the private sector as something which was none of their business. Those were loans between private sector parties, they said, and if they went sour, the private sector would have to take the losses.

      The Chicago Boys lacked the experience of knowing (or they refused to accept it) that, when push comes to shove, private sector problems become problems of the state. The profits went to the private sector, the losses had to be taken over by the state. Like Ireland or Spain today.

      The successors of the Chicago Boys learned from that. They kept the good policies and changed the bad ones. The result of all of this can be visited in Chile today. Instead of being the Cuba which Allende/Castro had had in mind, it is one of the most solid economies in the emerging world. Absolutely no reason why Greece couldn't accomplish something similar!

  3. Interesting take. Of course the late 70s were Pinochet's times and the general feeling was that the US was quite active in the coup that overthrew Allende to protect the interests of US companies(who were in danger of being nationalized or else lose some profitability) and not so much to save poor chileans. But I would be very interested to learn exactly what were the good policies by the Chicago boys other than opening a bank that got Chile going. Of course with Pinochet in power we understand there is a total ban on anything resembling a strike, but other than that what exactly did turn things around? I should ask that in Greece if you ask some Golden Dawn supporters they will also glorify the economic miracle of the junta, but that
    story does not always hold water.

    1. 1 of 3

      I know this is going to be a long response…

      I did NOT say that the US involvement in Chilean affairs during the 1970s had as its goal to save poor Chileans, nor would I think so. That kind of a dreamer I am not. Of course, the US involvement in Chile had geopolitical objectives --- Allende/Castro were on their way towards turning Chile into a second Cuba (that was their publicly stated objective) and the US, for understandable reasons, had no interest at all to have more than one Cuba in the Western Hemishphere. Protecting US investments in Chile was not a principal objective because the US had no major investments there at the time.

      I know I am moving onto thin ice when I say the following, but bear with me.

      Pinochet’s bad luck was that of all the zillions of coups in Latin America in the last couple of centuries, his coup was the one which kicked out the world’s first democratically elected Marxist President. With that handicap, the Chilean coup will forever go down into ivory towers as the most brutal coup in the world.

      Any coup is one coup too many and any person killed in a coup is one person too many. Having said that, I was almost amazed how Argentina – where I lived after Chile – could practically at the same time have a bunch of butchers slaughter off tens of thousands of people while the whole world focused on Chile. And those butchers left a mess behind and not a well-functioning economy!

      Mind you, Chile – if I recall correctly – has the most constitutional history of all Latin countries. I believe they had had only one coup before and that had been many decades before. Against that historical background, the idea of a coup was a nightmare, even to the military itself.

      What is generally not publicized is that, according to the Constitution, there had actually been the obligation to remove Allende from office. Allende had been in fights with the Supreme Court for some time. The latter eventually ruled that Allende had violated the Constitution and Allende ignored that judgement. According to the Constitution, the President had to be removed from office. The only thing is: after removal, a new election should have been called and the military, as militaries tend to do, forgot about that part. That was the crime of the coup (and the civil rights violations), not Allende’s removal from office!

      Now to give you even more of a feeling. Pinochet had been appointed by Allende himself to his post about a year before the coup. The story was that Allende chose Pinochet because he was considered as a weakling. At home, he was under the rule of his tough wife (correct!) and in the military the Head of the Air Force was the power guy. I had met both and I could subscribe to that view.

      Chileans had run out of food (except for those close to the Communist Party). It is well documented how housewives would populate the streets of downtown Santiago drumming on empty pans. “Do something!” they shouted (meaning the military). The story goes that Pinochet did not have the guts to do anything because, as I said above, a coup was so much against Chilean tradition. It was said that the Head of the Air Force finally gave Pinochet an ultimatum to either do it or to be gone. Within weeks after the coup, Chileans had food again.

    2. 2 of 3

      Am I supporting the coup? Of course not, but life is full of choices and I can imagine what the choice would have been (in fact, I had talked about this with many Allende followers and they essentially saw it the same way. The owner of the house we rented, a former ambassador of Allende and someone who was pursued by the junta for some time, told me a lot about that). Chile was indeed on its way to become a second Cuba. The political process had lost the self-corrective power. So, if there hadn’t been a coup, Chile today would probably have many similarities with Cuba today (and Allende would probably be glorified for that like Castro still is). Everyone is invited to judge what his/her preference might have been. There was no “third way”.

      In the economic area, THE masterstroke of Pinochet & Co. was that they recognized that they didn’t know anything about economic affairs, and that they shouldn’t mess with it. The Chicago-Boys were Chileans who – since the 1950s – had formed a following, principally at the Universidad Catolica, of the Austrian National School of Economy (Hayek, Schumpeter, Mises, etc.). Later, several of them went to study at the University of Chicago where they become favorite students of Milton Friedman. The Chicago Boys were brilliantly intelligent people, like many brilliantly intelligent Greeks today. Unfortunately, they based everything on theory and lacked practical experience.

      Pinochet delegated ALL economic affairs to the Chicago Boys and promised them, so it was said, air cover for 5 years. They needed that because the radical reforms they introduced would not have been possible in a democracy (I fear).

      In short, there is no question that neither the military nor the US were driven by boy scouts motives. The military, of course, wanted Chile to become the kind of country they wanted it to be and the US didn’t want to have another Cuba. But that is not the issue which I raised. The issue I raised was that the Chicago Boys had at their core the objective to improve the lot of ALL Chileans.

      What did they do?

      They opened up the economy so that Chile could make use of its competitive advantages. First, they defined what they saw as Chile’s competitive advantages and then they made plans to make use of them. Chile, formerly an exporter of only copper and an importer of just about everything else, became an important exporter (which generated foreign currency). Foreign investors brought capital to the country because they considered Chile to be a great place for doing business. They freed the economy of excessive rules and regulations but made sure that there was an overall regulatory structure in place. Milton Friedman would have called that: “They established the rules of the game within which the private sector could operate competitively and fairly”. They privatized a lot, not primarily for financial gain but for acquiring private sector know-how.

      Their major blunder was fixing the exchange rate which lead to a massive inflow of cheap foreign funding which was misspent by the private sector on consumption and which caused a crash around 1982. The way they handled that crash was a text book case (that was already the successors of the Chicago Boys). Probably the best bank rescue program I have ever seen! Shareholders and institutional investors lost but not the tax payers!

      In short, the Chicago Boys gave Chileans the opportunity to develop their own creative powers and talents with very little restraint from government. The new business start-up’s were at a phenomenal rate. Here is how Milton Friedman later described it: "The Chilean economy did very well, but more important, in the end the central government, the military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society." I subscribe to that 100%!

    3. 3 of 3

      One of the most eloquent spokesmen of the Chicago Boys was the then still very young José Pinera (a brother of today’s President). In debates about whether or not Chile should exploit its natural resources, he often stated a phrase which, to this day, makes my heart feel warm: “We will use our natural resources. Not to waste or to spend them. Instead, we will use them so that we can invest in the only resource which has eternal value --- our human capital!” That’s what they did.

      There is absolutely no doubt in my mind that if Greece had a similar economic team in place, with the necessary powers, the same results would happen in Greece. Chileans are characterized by an extreme love, if not passion for their country; so are Greeks. Chile then had a whole generation of extremely well-educated people who were eager to accomplish something; so does Greece. At the same time, Chile had a large part of the population which was “underdeveloped”, so to speak. Not all that educated; not all that familiar with modern times; in short: ideal targets for populists and demagogues. Greece does too (in my opinion). The trick was that the Chicago Boys could ignore the populists and demagogues and focus on the job at hand instead.

      No doubt about it: the original Chicago Boys failed in 1982 and they were replaced with more down-to-earth economic leaders. But they had instilled into the Chileans a sense of self-determination; a conviction that – regardless how small a country was, how remote and how seemingly short of competitive advantages – the conviction that even such a country could succeed internationally if it only put its mind to it.

      Compared to Chile then, Greece today is in much better shape. Chile did not have an extremely rich oligarchy. Greece’s oligarchy belongs to the richest in the world. Much of Chile’s entrepreneurial talent had left for Spain during the Allende years and they led great lives there. One of them (Jorge Cauas) once told me: “We were having the greatest life in Spain but we were all scared of one thing: that Pinochet would call us and appeal to our loyalty and our responsibility to the ‘patria’. We knew that if he called, we couldn’t say no. But we also knew that we would be leaving a great life and return to a life of uncertainty and to a public servant’s salary with little purchasing power, as well as the risk of immediate termination of contract if we failed”.

      Jorge Cauas and many others of his kind received the call and accepted the responsibility (Cauas became Pinochet’s first Finance Minister). Not to their disadvantage in the end, I might add.

      So ask yourself the following question: what would it take for a Greek leader to appeal to the country’s economic oligarchy, to their loyalty and their responsibility to the Greek ‘patria’? To make their talents and resources (if only a few billion of the many, many billions they have expatriated from Greece…) available for the turn-around of their home country? If you have an answer to this, you have half the problem’s solution.

    4. Pinochet's 'patriotism' is quite transparent among other things from the size of his bank accounts....

    5. I admit that I was totally floored when I read about Pinochet's foreign accounts. That didn't fit with the times then at all. There was no corruption in Chile during my time. And believe me, when you represent a foreign bank in an emerging country, you quickly find out whether or not there is corruption! The private sector oligarchs did all sorts of "creative things" during the time of the Chicago Boys but certainly not the government and public administration.

    6. is there any dictator out there, that has no foreign account in switzerland, cayman island etc.?

    7. There is a difference in how good one is in hiding that. I hear similar things about the greek junta from Golden Dawn supporters: That they were clean, that they died poor etc. Among other things Papadopoulos aquired a villa by the beach(according to international law the beach is common to all) while being dirt poor. So it's an issue of how good one is in doing these thing silently and keeping a clean profile.

  4. It would take the leader/political elite to have been more honest with its own citizens. Right now you have people who worked abroad, made some money and invested in government bonds only to lose 80% in the haircut. You also have people who, encouraged by the government (both the ND and PASOK governments) invested in solar power, including some that borrowed to do so. They thought with a guaranteed contract they were safe. Well, think again: The great minister now (I might add with the troikas blessings) decides that we will pass an act to unilaterally change that contract. That will teach them. As one of those people (who even bothered to check with supreme court people who considered such an act very hard to pass) I should say I might accept a loss if that's for the good of the country, especially if accompanied with a 'we're truly sorry the prices in the contract are not sustainable and we'll try to figure out some way out'. But for me to unilaterally take a loss while the great ministers who set this framework and the MPs who voted for this 'unsustainable' prices to be untouchable, that's calling you a sucker in your face.[Some will also add the question who profited from all this? Answer: German companies]
    Another issue is who is one doing this for?
    In order to support the pay of the Supreme courts who only deal with disecting hair? The prosecutor who rules (untouchably again) that a caught fugitive is not suspect of fleeing, so he is released and flees again? The furlough commitee members who rule that a convicted multiple murderer serving a life sentence who did not return from his first furlough deserved a second furlough(and of course he never returned again)[Shades of Dukakis-Bush-Willie Horton]? Various people with connections who get a job in the public sector blatantly violating the new recruitment laws? MPs who vote to give 15mil plus government land to build a mosque and pay a mufti for eternity?

    Last, I have left out the private sector cancer: CEOs and other managers who work on the principle "nobody was fired for buying IBM". Lots of smart people have ideas and implement them. Say a greek guy makes a Google competitor, call it Groogle and it's 10 times better than Google. Leave aside the fact that the american Google will find a guy to invest, so they can hire some good programmers to fix the initial flaws and further develop it so as to grab a market share, while Groogle will have a problem with that. The main obstacle is that greek managers and CEOs will not even bother checking whether Groogle can help them do their job better and cheaper. Why? Because innovation is something that only foreign companies do. And because no greek can possibly be worth rising to their level(let's not say how they got to that level) or god-forbid, above it! So the groogle guy has no chance if he stays in Greece. Similar like your Arnie example, only with lots of brains this time.