Tuesday, August 28, 2012

Special Economic Zones

Having argued tirelessly in favor of Special Economic Zones, I find this piece of news from the Ekathimerini simply sensational!

What did the Chinese do a couple of decades ago? On one hand, they remained steadfast communists but, on the other hand, they recognized that communism alone would not better the lot of their people. So they discovered a wonderful solution: while holding on to communism in general, they allowed "pockets" here and there where some form of capitalism was allowed. Visit China today and the results are staring straight into your eyes!

Greece cannot be changed from A-Z in a short period of time. However, one can start with "pockets" where none of the bad system of "old Greece" is at work and where only the good system of a "new Greece" is allowed. Call them Special Economic Zones. If they work well, their system will rub off on the rest of the economy over the years.

The critical thing is the design of the SEZs. If the design contains compromises or flaws, the effort will become self-defeating.

The design has to be such that, if the SEZs were to be examined by the World Bank for its "Doing Business Report" and Transparency International's "Corruption Index", they would rank among the top-5 places in Europe (Greece as a country presently ranks by far the lowest among EU-countries in these two reports).

To be sure: the idea of a SEZ cannot be "special perks" like unsustainable tax give-aways, etc. It is perfectly sufficient if the idea is to create near-perfect business conditions. Investors who come only because of the perks will leave again once the perks are discontinued. And unsustainable perks always have to be discontinued at some point.

I am not familiar with the details of the SEZs for which Greece has requested approval. One can only hope that they are near-perfect.

Once the SEZs are in place, they have to be marketed. There have to be investment projects on tender all the time. There have to be base case business plan scenarios. And, last but not least, it would not hurt for the government to line up a couple of its best foreign-investor-friends to kick the process off with some exemplary new investments. An atmoshphere must be created that something like a run on investments in Greece develops, sort of like "let's invest now as long as the door is wide open and before is possibly closes again!"

Finally, the biggest hurdle on new foreign investments in Greece must be addressed - the convertibility risk. Greece cannot guarantee its on convertibility risk. All possible avenues should be explored if the EU could find ways to guarantee the convertibility risk on new investments in Greece. That wouldn't cost the EU any money and if many new investments came because of it, the convertibility risk would decline as a result.


  1. From the same article:

    "Hatzidakis urged the country's EU partners to accept Greece's plan to establish these zones. «There are already objections outside Greece because it (the zones) would give the country a comparative advantage,» he said."

    1. Such objections are plain silly and will not withstand public debate. Either put weaker countries in a position that they can support themselves or, if not, keep sending them money. This is indeed an either/or proposition!

  2. http://www.spiegel.de/politik/ausland/eu-parlamentspraesident-fordert-sonderwirtschaftszone-fuer-griechenland-a-853380.html

    are they reading your blog?

    1. I don't think so because, if they did, they wouldn't talk about "policitians getting together to steer capital flows...". I hope they don't mean it the way it sounds because it sounds dangerous. What I mean is that politicians (and others) should get together and think about incentives which which would make capital flow in and by itself. And when politicians identify project, I get scared as well. Investors should do that, instead.