Sunday, February 9, 2014

Greece --- Time To Learn From Cuba?

I have published at least half a dozen articles in this blog arguing in favor of Special Economic Zones (SEZ) in Greece. Here is the last one. My major point is that one cannot change an entire country in a reasonably short time frame. Thus, one should establish 'pockets' in the economy where foreign investors find everything they desire right away. If those SEZ work well, they would over time rub off on the rest of the country.

I have also mentioned Cuba a couple of times in articles about Greece. When the Soviet Union collapsed, Cuba lost the foreign funding on which its economy depended. Cuba found a replacement for this foreign funding through Venezuela, but that was not enough. In consequence, even the communist Cubans had to recognize that foreign investment is the only type of foreign funding which does not carry interest and does not have to be repaid (other than grants or gifts). Canadians made massive investments in Cuban tourism.

I am now stunned by the latest information out of Cuba --- that last communist country has decided to open a Special Economic Zone! The idea is to attract foreign investment. The hopes are "to get foreign investment for the production of drugs, biotechnology, renewable energy, agriculture, industry, tourism, real estate, telecommunications, information technology and infrastructure". Well, it seems they have covered all areas... "What the zone is intended for is to create a special climate where foreign capital is going to have better conditions than in the rest of the country", Cuba's Foreign Trade and Investment Minister is quoted as saying.

When reading details about the planned SEZ, I came across several points which I think are less than prudent. I have always argued that SEZ should not offer undue 'perks' (Cuba is planning to offer exemptions from "tax on the use of the labor force", property tax and local sales tax). Friends whom one buys with money will also leave for money, and that is particularly valid for some foreign investors.

While some financial incentives may be unavoidable to be competitive, the focus of a SEZ must be on offering absolutely the easiest way to do business in all regards. If the Greek government wanted to know what the key criteria for attracting foreign investment are, I would recommend that they study the World Bank's "Doing Business Report". They could find all the criteria which are important to foreign investors right there.

So, the recipe is actually quite simple: establish an SEZ and structure it in such a way that it would earn top ratings in the Doing Business Report. Then work out contracts to be offered to foreign investors whereby these contracts must not only serve to please foreign investors but they must also ascertain that Greece gets out of foreign investment what it desires.


  1. It could be argued that the Chinese-owned and run part of the Piraeus shipyards is an excellent example of an SEZ, yet it's had little impact on the remaining Greek-run part. Is it that the Greeks need to learn? Isn't it more about lacking political will, meaning that nothing can be learned until someone has the guts and sufficient clear political backing to tackle continuing vested interests?

    1. Yes, I have on several occasions argued that Cosco is an excellent example of 'good' foreign investment: they tripled business volume in the first 2 years; a new port is in the planning; Piraeus is back on the map of mediterranean industrial harbors; multinationals are increasing their investment in Greece because they see Piraeus as a future gateway to Southern European markets; and --- by 2018, Cosco and everything that goes with it are expected to add 2,5% to Greece's GDP.

      And yes, the Greek side has not copied anything from Cosco. Instead, they berate Cosco for being a Chinese sweat shop. Somewhere I read that the union chief on the Greek side has a annual income of about 180.000 Euro. Well, compared with that, everything is a sweat shop!

  2. Three problems.

    1) Cuba is not bound by intra-EU treaties which prohibit SEZ. Greece is.

    2) SEZ stop us from observing the elephant in the room. The elephant in the room is the ECB and the way it handles the common currency. At some point the Eurozone has to recognize that you can't have a common currency without proper liquidity provision for the banking system and support for member bonds in the secondary-market. That's just how it is. The more it delays in doing so, the higher the chance that the Eurozone will break up.

    3) SEZ also stop us from observing other important facts that this crisis has taught us (well, actually we already knew them, but the crisis has exposed them further).

    First, it's not that economic players don't invest because economies are not "reformed", but rather because of non-adequate aggregate demand. The more governments wait for the private sector to lead the way out of the crisis, the more we're gonna be in crisis.

    Second, free capital movement severely distorts central-bank policies, as has been proven once again with the actions of the FED (loosening led to an emerging-markets bubble, tightening is causing the bubble to burst). The actual goal (investments in the US) hasn't been achieved.

    To cut a long story short, the international finance system has broken down. What we're experiencing right now is the difficult interval period, which will undoubtedly lead to a new international finance system (a Bretton Woods 3).

  3. Special Economic Zones

    Regarding Cuba and others. Your observation that investors in Cuba's SEZ's will not pay taxes is not correct. They will hire their manpower from a government agency and pay the agency (in USD). The agency will then pay the manpower roughly 5% of the investor's fee (in local currency). There are further specified taxes they will have to pay, all in line with other foreign investments in Cuba (Reuters 23 September, 2013). SEZ's have had success in some countries'; they are characterized by their governments willingness and ability to enforce the governing laws and rules. There is therefore a fair chance that it will work at Cuba.

    Your model for Greek SEZ's is a subsidized, regulated and protected market. It is preposterous, it is illegal, it could never work, it is immoral, and it goes against everything that you have been preaching.

    The legal part of it is easily covered; the EU agreements do not allow it.

    It would not work because Greece is not a country where the government can enforce the governing laws and rules. Because Greeks resist any foreign investments, they want grants. Because Cosco is not a shining light for the Greek nation. Because the investors (or EU) would have to make the SEZ's autonomous enclaves independent of Greek political, legal or union influence, with Greek laws enforced by the investors. It would roll back all our efforts at creating a global market. Everybody and his uncle would ask for special rules. The French would love it; it would justify everything they have done the last 4 decades. If you wish to go back to trade barriers then say so.

    You suggest that you can increase the profit of a rich Greek investor by 400% without increasing his risk, you are right if you shift that risk to another party. You suggest that EU (the Austrian tax payer?) underwrite the political risk for rich Greeks (or foreigners) investing in Greece. How do you fit that in with your TINSTAAFL philosophy? Two parties sit down for lunch (Greece and the investor), the lunch is not free, but another party pays it (EU, the Austrian tax payer?). Other nations (poorer than Greece) are working their way out of the crises with more determination and dignity, and less self-pity and whining, your suggestion is making a mockery out of ther efforts.

    To "underwrite" is not an abstract formality, it has a price, what do you think insurance companies live from? Since nothing comes from nothing you will most likely find the premium reflect the 400% extra profit, and that the premium for the same insurance at Cuba would be much lower. The Greek nation should pay the premium for the political risk insurance with the investors as beneficiaries; they shall not underwrite or guarantee it, because their guarantees have no substance. Only the Greek nation can minimize or eliminate the political risks, and thereby influence the premium. Your proposal smacks too much of the way we operate banks (and some nations) today, "the profit is mine and the risks yours".

    PS. Why worry at all? We have a primary surplus and new car sales in January are up 18% y.o.y.


    1. “Your model for Greek SEZ's is a subsidized, regulated and protected market. It is preposterous, it is illegal, it could never work, it is immoral, and it goes against everything that you have been preaching. The legal part of it is easily covered; the EU agreements do not allow it” - Your observation is correct (except, I hope, for the part about preaching…). Why did I still propose something like this? (the first proposal goes back to early 2011).

      The answer is ‘Chile’. There, the Chicago Boys did not have to worry about things like democracy; they could simply take their model out of the laboratory and instal it over the entire country. They didn’t need an SEZ; they turned the whole country into a nirwana for foreign investors. All they had was a very good Foreign Investment Law and investment contracts were made within that law. Plain simple.

      Since Greece is a democracy and since Greeks always have a hard time supporting anything that smacks of foreign, I thought how the Chilean model could be adapted to Greece. Changing the entire country within a reasonable time frame seemed out of the question to me. That’s when I came up with the idea of ‘pockets'.

      Why should foreigners worry about Greece in the first place? I have one simple answer: Greece presently owes foreigners about 420-430 BEUR. If foreigners are prepared to write everything off, they could easily leave Greece alone. If they want to entertain the hope that maybe, maybe at least some of that debt can be collected, then they must take an interest in jumpstarting a productive Greek economy; a productive Greek private sector. So that’s the choice: operate within existing treaties and legalities and write your money off, or shed the shackles and straightjackets of an unworkable structure (temporarily), apply common sense and try to get Greece to really earn the money which it needs to pay some of the debt back.

      You know, my gut tells me that the 4 EU-freedoms may come under greater scrutiny going forward. The Swiss had hardly voted on curtailing immigration and German and French populists broke into great applause. I am now reading that in both of those countries a similar vote would yield similar results (60% according to polls in France). I pick up an increasing number of commentaries which at least discuss the pro’s and con’s of capital controls. Trade controls may not be far behind.

      So let’s see what happens. You have identified all the weak spots in my proposal and that was good. I am walking a thin line here: yes, I am all for market forces but, at the same time, I think it was a liberal economist who first coined the concept of “infant industry protection”.

      PS: if I recall, the EU approved last year Greece’s application for an SEZ but I don’t know what became of it.

  4. Sorry about the preaching part, slip of the tongue.
    Our assumptions are different. You assume that Greece can and will enforce laws (investment and others), you assume Greece is a democracy, you assume Greece will (wish to) pay their debt. I do not. We therefore recommend different solutions.
    Modern Greek history suggest that yours has a bad track record and is unsuitable.
    Greece has for several decades been an SEZ, its economy has received massive stimulus from EU and others. The funds have not stimulated anything but consumption and greed. You suggest more of the same, I suggest to try something else, "starve the beast".