Tuesday, May 14, 2013

Alexis Tsipras: "Growth = Democracy + Investment"

That was a catching formula which I read that Alexis Tsipras had invented: "Growth = Democracy + Investment"!

I browsed the internet for a country with very high growth rates for longer periods and, bingo! - I found China. I then checked out China's political system and, oops - not a democracy. Well, I guess there are exceptions to every rule.

The question whether the political operating system called 'democracy' (at least the type of democracy lived in most EU-countries) is the best operating system to deal with economic crises is currently being severely tested throughout the EU. The rational Swiss may be an exception: when asked to vote in a referendum whether to increase the annual vaction period or not, they voted against it on the grounds that it would harm their economy. In most other countries, politicians do not win elections unless they offer gooddies to their electorates. This book makes a provocative case out of this issue.

I am not aware of any studies which show that investment is correlated with democracy. Why do people invest? I find Warren Buffett's extremely sophisticated argument convincing: "People invest cash because they hope to get more cash back from the investment". Conversely, if people fear that they might even get less cash back, for whatever reason, they won't invest.

Which brings me to the question what is required so that investments have a good chance of generating a positive return? Of the many factors which would have to be considered here, it seems that the most important factor is the existence of an attractive economic and business framework (state of law, clear and consistent rules of the game, strong institutions, adequate regulations, contained bureaucracy, etc. etc.).

Alexis Tsipras should take a look at the World Bank's Doing Business 2013 report. Greece ranks last among all EU-countries in that report. If he used all his resources and talents to help Greece move up the list in that report, he might find that this leads to growth much faster than any rhetoric about democracy.


  1. Dear Klaus,

    My compliments for this weblog entry and the last ones on Daniel Gros and the current account. Please note the following: (1) In itself the attention for democracy is proper. My own analysis is that the Trias Politica are failing, and we need a Tessera Politica with an Economic Supreme Court. See my book DRGTPE. (2) The deficit of Southern Europe translates into the surplus of Northern Europe. The North could do much about domestic demand, or investments at home, too. See DRGTPE. (3) There is a case of censorship of economic science in Holland, so one cannot fully "blame" Greece or Gros for not seeing the full picture.



  2. For me the photo at Ekathi has an eerie echo of the one seen here - Suharto signs IMF deal under the watchful eye Michel Camdessus

    That image and others like it played a role in Suharto's resignation, not necessarily a bad thing, but... thank goodness he had the good sense to resign when he lost the support of his people It took Indonesia a decade or more before its bonds were no longer rated as junk.

    Even under Suharto, Indonesia welcomed foreign investment. The world's biggest gold and third biggest copper mine in West Papua is its biggest export revenue earner, its major shareholder is Freeport of Phoenix AZ.

    I assume your suggestion of China as a model for growth for Greece is made tongue in cheek. It will take Greece at least another 10 years of punitive austerity to achieve the levels of poverty and misery that prevailed in China when Deng's reforms began to kick in the 1990's ;)

    Here's someone who claims to offer proof that Democracies Will Always Go Bankrupt

    Regarding Mr Tsipras' embracing of 'saying the right things'. That's easy to do when you're in opposition, but its so easy to 'do the right things' when you're in power.

    And here is some good news - I think

    Greek Corporate Junk Bonds Attracts US Investors

    Morgan Stanley: Buy Greek Government Bonds


    1. Errata - Regarding Mr Tsipras' embracing of 'saying the right things'. That's easy to do when you're in opposition, but its NOT so easy to 'do the right things' when you're in power.

    2. I have read the paper. Well, a bit too sophisticated approach in my opinion. The best book on the subject I have read so far is "Prolokratie - Demokratisch in die Pleite" (I had linked it in the above article). It states the case in very simple (albeit extremely provocative!) terms. In one sentence: as those members of society who, for lack of education or whatever, view the state as a seemingly endless source of benefits become the democratic majority, it follows only logically that this democratic majority will vote for continued benefits from the state. End of message.

    3. Regarding the speculators driving up the value of Greek financial assets (I take it the Greek stock exchange has increased by 80% y-t-y!), you will probably not be too surprised that I view this skeptically. Of course, it is a wonderful compliment to Greece. And, of course, some Greek shareholders are now happy to see the value of their holdings go up (perhaps that will even motivate them to spend a bit more). But in the longer run, I see money out for quick profits also as a dangerous thing. There is no way that the Greek story will evolve as an uninterrupted success story over the next years. And whenever there are major setbacks, that quick money will leave quickly, leaving behind damages.

      Yes, Greece has some results to show of late (primary surplus; current account almost in surplus). But is that really the only reason why things have become somewhat quiet? Or could it also have to do with the fact that huge amounts of money were disbursed to Greece in the last few months? When money flows, peace and quiet return quickly.

    4. "And whenever there are major setbacks, that quick money will leave quickly, leaving behind damages."

      Does that view extend to the recent corporate bond issues by Frigoglass (€250m), Hellenic Petroleum (€500m) and OTE (€700m)?


    5. CK
      First, I think it is remarkable that these companies could raise those amounts of money in the market. No chance of that happening in the mess of a year ago. Thus, it is proof that there are positive consequences of Greece's improved credit rating.

      I don't know pricing or tenor but I would suspect that tenors are at least 5 years; possibly even 10 years. Thus, that really is not 'quick money'. If there were a sudden major setback, it would not harm a, say, OTE. They would watch the prices of their bonds collapse in the secondary market but they would not feel any liquidity impact. In fact, should their bond prices go down, it's a benefit to them accountingwise because, according to IFRS-accounting, bond debt is carried at market value of the bonds (leading to the strange situation that if bond prices collapse, the debt in the books of OTE goes down). Or they could buy back their bonds, if they had the money, and take a huge profit.

      It would be interesting to know what the purpose of the financing was. I doubt that it was for new investment. Instead, I presume it serves to refinance existing debt in order to extend the average maturity structure of the debt. Suppose the average maturity structure of existing debt was 3 years and they refinanced some of it with 10-year bonds, then the overall average maturity of their debt may go to, say, 5 years. That, too, is good because it protects against liquidity problems.

      By 'quick money' I mean principally money which goes into the stock exchange or into banks with short tenors (say 1 month). We could recently observe in Cyprus what can happen to a banking sector when it has short maturities. Banks always transform tenors, i. e. they take money in short-term and lend it out longer-term. When the short-term money leaves, they have a problem.

      I am now tempted to put some money into a Greek bank because rates are so much higher than in Austria. If I did, I would only do it for 1-month deposits so that I could take them out again at a short notice.

      S/T-investors always have a pro-cyclical impact. When the market goes up, they reinforce the upwards trend. Vice versa when it goes down.

      Contrary to bonds where OTE could care less (in the short term) whether the prices go down, prices in the stock exchange matter. There, it is not only the hedge funds who take losses while other hedge funds may take profits. There it has a strong domestic impact. First, Greek shareholders may lose a lot of money and, secondly, a sharp decline in the stock market has something to do with consumers' confidence.

      Bottom-line: my view does not necessarily extend to longer term bonds where the money is used to constructive purposes. My view applies principally to 'quick money'.

    6. I think all three mature in 2018 - Hellenic & OTE increased the amount they borrowed after they announced they would be issuing the bonds - I guess because there was a good response.

      One has to wonder if the 'calm' is induced by the approach of German elections, I assume the 'markets' would prefer the return of Merkel.


    7. Well, the calm cannot really be explained by objective facts. The quarterly review by the Troika is a standard requirement. In the past, those reviews have taken weeks and produced lots of conflict. Prior to the last review, concerns were mentionened that the Troika would raise serious issues (like public sector eimployment and all those others issues which the IMF noted as 'causes for concern' recently). The Troika came and - saw that everything was fine and that substantial new funds could be disbursed. I am not aware that they spent any length of time in Greece.

      My guess is that the next Troika review (late June?) will be similarly uneventful but I would not want to speculate what the reviews will be like after the German elections...

  3. The swiss can make direct democracy work with a successful economy. From what I can tell, this is culturally anchored. As a generalisation, Swiss grow up discussing upcoming referenda in a family context and with friends, in a pretty serious fashion. Then they vote on the issue. (Exception: that crazy Minarette ban).

    I wish I could say that kind of attitude is widespread. But having seen

    1. Some of the incredibly stupid decisions taken in ireland at referenda (normally with the motivating factor of "let's give the government a kicking" rather than anything to do with the issue at hand)

    2. The way local referenda in germany are so easily captured by the "let's spend more money" or "let's not allow even desperately needed infrastructure here" tendency.

    I'm no longer a fan of direct democracy. "Basis Democracy", yes, where a party gathers and reflects opinions upwards from townhall meetings and similar.

    As for Greece (and probably most of south-eastern europe, in fact, Rumania, Bulgaria, Croatia, Serbia, Slovenia and Hungary don't look too great either). I'd say that for most citizens, it's perceived as a Rentier State, whather it's current government is a democracy or not.

    That's not going to change quickly. Political cultures don't.