Sunday, March 30, 2014

Chile in 1977 ... Cuba in 2014 ... and Greece When?

By the mid-1970s, Chile's new economic team ("Chicago Boys") embarked on a shock treatment course to reform the Chilean economy. Where Allende had attempted - with the active support of Fidel Castro - to turn Chile into a closed, communist society, the Chicago Boys opted for an open, market-oriented economy. One of the pillars of the new economic policies was the focus on foreign investment. The simple logic of Sergio de Castro, Finance Minister, was: "We need to grow the economy at 6-8% per year in order to catch up and we can only achieve that with foreign capital". To accomplish this --- a new Foreign Investment Law was implemented in 1977.

37 years later, in 2014, Cuba is still a communist society, now run by Fidel's brother Raúl. And yet, Cuba's Vice President and the czar of President Raúl Castro's economic reforms, Marino Murillo, is saying: "Cuba needs to attract 2-2,5 BUSD in foreign direct investment per year to reach its economic growth target of 7% and to advance its socialist socio-economic model, prosperous and sustainable". To accomplish this --- a new Foreign Investment Law was approved over this past weekend.

The only way for Greece to return to a reasonable level of economic well-being within a generation is through accelerated and sustainable economic growth. When will the Greek population, at least in its majority, begin to understand that accelerated growth requires accelerated investment? That accelerated investment requires accelerated capital flows from abroad? And that such accelerated capital flows from abroad should not come in the form of debt (of which Greece has far too much) but, instead, in the form of equity, i. e. foreign direct investment (of which Greece has far too little)?

When will the Greek population, at least in its majority, begin to understand that foreign direct investment is not a game of the devil where foreign capitalists exploit all the wonderful resources of Greece? That, instead, foreign direct investment is the most realiable long-term source of foreign capital and the most effective way to transfer know-how to the Greek economy?

The Wall Street Journal sees the Cuban measure as vital for the struggling economy. Since the WSJ is a capitalist paper, let’s instead listen to the communist Marino Murillo: “Not using those sources would retard national development”. Mr. Murillo said Cuba will especially look for agricultural investment.

The Minister for Foreign Trade and Investment, Rodrigo Malmierca, another communist, said: “We have to provide incentives in order for foreign investors to come. We need to stimulate foreign investment to resolve structural problems in the economy, not just in industry but also in livestock”.

The Foreign Investment Law is a fundamental part of Mr. Castro's package of reforms, begun in 2008 with the stated goal of "updating" Cuba's economic model. Cuba is hoping foreigners will invest in sectors throughout the economy except health and education.

Below are links to what the media are saying about Cuba's new Foreign Investment Law:

When will we read media reports about a new Greek Foreign Investment Law which offers real incentives to foreign investors?


  1. Two words only : Incentive is one thing. Troika has been working on it along with the Greek Government (internal devaluation, cuts on wages, related costs and working rights). However there is another significant factor. The legal and Fiscal framework. Point anyone who can implement a 5-year business plan based on thw Greek Fical status today....Thing change every 2-3 months...Who will risk on an investment which works under specific conditions but will terribly fail once things change (ie every now and then)....?

  2. It will be a real improvement for multinationals when Greece turns 100% into Chile, with oligarchic government, profits flowing out of the country, a disfigured capitol and environmental degradation.

    1. Affiliation arrangements have been taken in full advantage by Carrefour...They left the market unpaid - for Marinopoulos to take over - and channeled all profit abroad....

    2. I suggest that you inform yourself about Chile's more recent economic history and its economy's status today. That will help you to avoid making unqualified statements like the above.

      Since 1990, when Chile returned to democratic government, the country was governed by a center-left coalition until 2010. As of this month, it is again governed by a center-left coalition. It is worthy to note that the center-left coalitions adhered to the basic principles of the policies originally laid out in the 1970s. The "true" Chicago Boys ran the economy until about 1982. As a matter of fact, the "true" Chicago Boys failed because of a mistaken exchange rate policy. By 1982, Chile's economy nose-dived for very similar reasons that the Greek economy nose-dived in the last years. Luckily for Chile, the successors of the "true" Chicago Boys held on the the basic principles but applied more practical common sense (instead of ivory tower economics). Just a couple of points: poverty level declined from nearly 50% in the mid-1970s to close to 10% now. Infant mortality has literally collapsed. Life expectancy and health in general have significantly improved.

      The major weak point is the low level of social equality and mobility. The new center-left government has major plans to improve that; they intend to move Chile more towards a welfare state. And they can afford to do that thanks to the fruits of the excellent economic policies which they have pursued in the past.

  3. I am really sorry to be your critic again, but there is a general fault in this standard economic thinking. New investments will not save the greece economy. apart from the fact it will exempt the rich from taxes again it is predestined to fail.

    Obviously, the global competition for foreign investors is the predominant reason for social predicaments world wide. It is the main reason for pollution of the environment and the exploitation of workers. Bringing down greece down to level with Bangla Desh (in environmental protection, workers rights, wages etc. ) would be desastrous. But that it is not why your plan will not work.

    It seems impossible for economists to grasp the possibility, that the economics will have to change to make sense of our present and future. .
    Classical economic models do not concern themselfs with physical limits. Mainstream economists, like Larry Summers, see the physical world as a subsystem of the economy. For any scientist outside the economic profession this attitude is ludicrous and it lead to the current loss of credibility of the economic profession.

    If you look at the numbers, the accumulated amount of debts in the PIGS countries can caorrelate with rising oil prices and oil imports. (See i.e. here for numbers in italy ).

    As Greece is dependent of oil imports, it will not be able to compete globally as long as oil prices are high. The margins will be too low to allow production in greece to compete internationaly.

    It is no soothsaying to predict oil prices to be very instable and rising in the future. The reason are the physical limits of oil extraction. If you have models that do not take account physical limits, naturally they work fine as long as those limits are not reached. But as soon as reality reaches those limits, models will fail abysmally to describe it.

    This kind of thinking is common in all natural sciences. Not so in economics it seems. When Steven Keen put forward a paper about physical limits to the American Economic Review it was not even considered for publication..

    ( See his lecture about economphysics here: )

    1977 was a very different time. Extraction limits were still very far off. Concerning growth, the sky was the limit. Today, the story is alltogether different. Not taking into account realistic prognosis of global economic development can only lead to wrong results.

    Of course, to suggest that growth might be impossible and collapse is the more probable future does not at all sit well with investors. Investing, in general is betting on growth. Only very delusional or very desperate investors will bet on growth in greece, and if they do, their investments will fail.

    1. I have no idea who you think is trying to bring Greece down to the level of Bangla Desh. It is certainly not I. Instead, I think any policy needs to aim at bringing Greece to the level of an EU member state.

      The debate about physical limits to growth is a valid one, however, a strictly philosophical one. And it's been around for ages. There are billions of people on this planet who want to improve themselves and their economic lot. As long as they are around, there will be growth. No doubt about it.

      The threat of limited natural resources discounts the ability of humans to find new answers to new problems. Ever since I was in school, we heard that the Earth would sooner or later run out of oil. Today, proven oil reserves, despite the enormous consumption over the decades since then, are far greater than they have ever been before. And who knows? Perhaps there will be nuclear fusion as a nearly unlimited source of clean energy in a few decades? Perhaps scientists will develop a space elevator and transport Helium-3 from the Moon to take care of the Earth's energy needs? (n. b.: this idea is no longer science fiction!). All I am saying is that mankind's innovative capacity will deal with new issues as they arise.

      Now to Greece. What you haven't answered is the question how Greece, if growth is not the answer, will ever return to a satisfactory standard of well-being for all of its citizens.

      Countries like Chile, Cuba or Greece have relatively small economies. Small economies have the advantage of not always having to move with global trends. If they find the right niches, they can even move against global trends. If Greece doubled its GDP from one day to the next, it would still account for only 5% of the EU's GDP, at best. Mind you, GDP represents national income. If you have it, you can set policies to make sure that it is fairly distributed. If you don't have it, you can't distribute much.

      Again, I respect you philosophical views but please explain how Greece can improve its national standard of well-being if not via economic growth.

    2. First of all, your faith in human ingenuity is misplaced. I often come across this attitude in people that never studied the laws of thermodynamics.

      There is one example that I think visualizes the scope of the problem we face. If we would want to decarbonize all energy production by using nuclear fission and keep up with growing demand we would need to build one nuclear power plant every day from now until 2050.

      Please do also not insult your own intelligence with the "they always said it would come and it never did" argument. You are smarter than that. Its not the left or the doomsayers that lead this discussion, but the oil industry and the oil consuming industries. There has been a fundamental change when saudi arabia had to admit (2008) that their wells were falling dry, since then, negating this problem became impossible.

      Also there is the problem of understanding net energy and EROI that is necessary to understrand our predicament and the fact that the problem is not how much carbon is still in the ground.

      Of course there are countries that still need growth. This is not to be disputed. There is however a global cap on production we will reach. We need to find new systemic answers to our problems other than growth.

      I will not presume to tell the people of greece what to do. Actually many adapt to the situation in various ways.

      There are lots of communities where people learn to solve the problems locally and in solidarity. This is the way the world will have to adapt as a whole. People could and should learn from greece, not the other way round.

      These communities should be supported. Solidarity and local economic cycles should be given priority over growth and export.

      "We can't solve problems by using the same kind of thinking we used when we created them." Albert Einstein

    3. Also "Today, proven oil reserves, despite the enormous consumption over the decades since then, are far greater than they have ever been before."

      this is simply wrong, actually the calculations by Hubbart in the 50s very very accurate.

      Also the amount of reserves is not the issues. the issue is if there is a net energy gain in exploiting them. The energy gain for drude was 1 / 100 (for every unit of energy you could gain 100). Today many wells are downt to 1:5.

      There is actually serious doubts that there is a long term energy gain with tar sands. If there is an energy gain with fracking it is very low. Nobody wants to look into the long term energy costs of dealing with environmental issues though, it would hurt business.

      So even if we had 50 Times more hydrocarbons in tar sands and shale we would still not come equal with crude net energy gain.

    4. I think Einstein’s quote is superb and hits on what I have tried to bring across: if we only rely on today’s thinking (for example as you do with regard to energy), we will hit the end of the road some time for sure. I am definitely a layman as regards energy and you know a lot about it. But I did read that nuclear fusion (not nuclear fission!!!), if it ever comes in the next 100 years or so, will be a nearly limitless, safe and clean supply of energy.

      I have read a fascinating novel (I thought it was science fiction but later discovered that it no longer really is) by Frank Schätzing titled “Limit”. The plot in short: a space elevator is developed which allows to transport Helium-3 rather inexpensively from the moon the earth. The oil industry faces distinction and reacts, true to form, with all sorts of illegal and/or criminal measures. Truly fun to read. The point is: with today’s thinking, we cannot see a world without oil. But with tomorrow’s thinking?

      I maintain the following: there is not one material or immaterial value (except natural resources) in the entire world which does not have its origin either in the brains or the hands or a human being (or, with deference to Real Madrid, in the feet of a human being...). That is my belief and with that kind of a belief it is hard to fall in line with doomsayers.

      I entirely agree with you on the issue of local ingenuity. I think one of the great threats of our time is centralization. It simply is not true that everything gets better if only it is centrally managed. The entire EU was based on the principle of subsidiarity, i. e. those things which are better handled at the regional/local level should be handled there. Regrettably, that principle went out the door a long time ago.

      Allow me to chuckle when I read that the world could and should learn from Greece, and not the other way around. If you refer to local initiatives like the “potato movement”, I would entirely agree with you. If you mean it in more general terms, you would have to be a bit more specific as to what exactly the world could learn from Greece in terms of how to run a country/society/economy; how not to misuse/waste/corrupt other people’s monies; how to support oneself through one’s own efforts; how to achieve meritocracy; how to achieve a well-functioning state of law; etc. etc.

      By the way, you still haven’t told us how you suggest Greece can solve its economic problems other than through growth.

    5. If you are interested, the scale needed to bring down carbon emissions is explained scientifically in this blog by Joe Romm.

      The CO2 emission and peak oil problems match in regard to decarbonization. He shows that the problem we face is not one of ingenuity but willingness to adapt and to engage in policy.

      He also discusses why hoping for a technological breakthrough is an illusion:

    6. It depends what you define as "economical problems". I would define it as giving people the posibility to live under circumstances that ensure their well being and happiness. This could be achieved by encouraging local solutions.

      If "economic problems" are defined as the accumulated debts, I should say that this is a political problem not an economic problem. Clearly europe has to find a political position regarding accumulated debts that is sustainable and takes into account realistic developments.

      I should say that political problems will not be solved top down. Special interests of financial institutions outside of greecde and the people they represent have to much influence on policy and prohibit a solution that would ensure the wellbeing of the people.
      It is a problem that can only be solved by a mass movement and the retaking of political power by a true democratic movement.

      I would personaly prefer a postnational solution for europe. The "Europa der Regionen", real subsidiarity instead of the nationalist competition for local industries that dominates european politics today.

      There is in my opinion not such issue as a greek economic problem, there is only an european economic problem that has ist fundamental reasons in the gap between the haves and have nots.

      In short: take the money from the rich, wherever they are.

    7. I define the "economic problem" the same way you do --- " people the possibility...". I am also with you regarding the "Europa der Regionen" (in fact, that was the original intent!) with strict subsidiarity.

      But you have to be realistic --- Greece cannot resolve the above "economic problem" without foreign capital. If all of Greece's debt were forgiven, Greece would have a budget surplus of a couple of billion Euros and a similar current account surplus; i. e. financially, Greece could stand on its own. But there are close to 1,5 million unemployed and even more in near-poverty. No way that Greece could solve that problem with its own resources as of today.

      You could argue that once Greece is forgiven all of its debt, it would have a new borrowing capacity. True. But that can't be the answer to the problem. Yes, Greece might have another decade or two of spending other people's money but then you would be back where we are today.

      Thus, there will have to be a bit more ingenuity than you suggest.

    8. the solution that is the common ground between us is investments not by private investors but by the eu. A state (or the eu) can invest strategically without the need for revenues.

      This is the strategy that has always been the basis of innovation and comptitive abilities in western nations.

      I.e. a "lean state" was never the reality in the USA. When looking at successfull companies like apple, microsoft, IBM, etc. you will find state sponsorship at the heart of their success Most of this sponsoring is part of the 600 billion defense budget. No country in the world comes even close to this US government sponsorship.

      In this TED talk Maria Mazzucato, a professor of economics at the Science and Technology Policy Research Unit, argues that Europe needs today to rediscover that role -- that what the continent needs is not austerity but strategic investments

    9. Uff, I need to digest what you are saying!

      Yes, if you have a Plato-formed republic governed by wise men above special interests, then I might buy into your belief and trust in the "state". We are, however, in parliamentary democracies and the rulers are, by definition, political parties. And, again by definition, political parties represent special interests. You mention the US. Well, just look at all the political horsetrading and ear-marking which takes place when the Federal Government has money to spend. The "bridge to nowhere" is still in memory. I agree that there are some investments which have to be made by the state (typically, those are investments related to public services where the return is very long-term and not only financial). But I hope you are not suggesting that the state should become involved in building up middle-market companies or even major industries. We had that in Austria for several decades after WW2. The going saying became: "you need 3 people for every job; one Conservative, one Socialist and one who does the job". That's why the state-owned industry eventually went bankrupt.

      States, by definition, make prudent strategic investments and private companies do not? Well, I got news for you. A corporate management which makes major investments of no strategic value is unlikely to remain corporate management for very long. There is never a similar reaction of responsibility in public governance (currently, the Berlin airport is a wonderful example of that!).

      Mind you, I am not ruling out public investments. They are necessary but to bank an entire recovery plan on the overriding role of the state simply is not realistic. Least of all in Greece where it could be taken for granted that much of the public money will end up in private offshore accounts.

    10. State sponsorship does not automatically imply state owned businesses. Though I do think they are necessary far more often than you probably do, I was not talking about these.

      We were talking about strategic investments, not state-planned economy. (Watch the talk)

      The state can fund innovation and hand out venture capital. These investments can be into green energy and the community projects that we talked about. It could start the small businesses needed in the local production cycles.

      You were very optimistic about innovation solving the peak oil problem. Who would you think has in the past dealt with problems of this magnitude?

      No private investor would sponsor a fusion reactor. No company would ever fly to the moon. You need to get over some prejudices and myths about the state.

  4. Imho Klaus has fully convincing arguments. However, for Cuba it has to been seen if that new law enables a turn around.

    I have some doubts that investors have sufficient confidence in the political, fiscal and legal system of Cuba to put their money in that country.

    I see a similar, albeit less important problem for Greece.

  5. Just came across these links:


    1. I think there is a good chance of Cuba having success with attracting foreign capital, exactly for the reasons that H. Trickler doubts it, plus one more. For the same reasons I think Greece will fail.
      POLITICALLY Cuba is a stable country, we may not like the politics, but stable they are. Greece, on the contrary, has a fragile government that is likely to topple next year. A strong and lunatic opposition that promise to nationalize banks and generally revert to the bad old days. How is that for stability?
      FISCALLY Cuba is in a perfect position; they have a "non free tradable currency" and can nominate it any value they want. Greece is locked by the EURO and seems to prefer that.
      LEGALLY The Cuban government is able and willing to enforce laws and rules, again, we may not like the laws but enforce them they do. Greece has a long and unbroken track record for not being able and willing to enforce the law.
      The last thing I would look at as an investor is the question of the citizen's genuine wish for investment, without that investments can not be a long term success. Cubans sure as hell want investments, and the consequent knowledge transfer, improvement of living standard, opening up and a sense of being part of the world again. Greeks do not know what investments are, politicians and media has for too long been confusing them by indicating that grants and investments are the same. It therefore comes as a surprise when investors wish to have a profit. The average Greek think that an investment is, when EU pays a bridge, half of the money is sucked up by corruption and the rest is paid to the Albanian workers who do the work. As for the knowledge transfer it is irrelevant if you are omniscient. As for improving living standards history has told them it is possible without investments.

    2. Lennard, my impression is that you fully neglect the possibility of a revolution in Cuba. Imho it is not at all a question of my dislike for their government, but as an investor I would not want to loose my investment as it happened to huge farmers in Africa etc. etc.

      Regarding Greece, I wont follow your beliefs regarding the understanding of the Greek population. It certainly is the same as in ALL other southern countries of the EU!

      I write now for several years that Greece urgently needs kind of a Greek Lech Walensa. Nobody ever wrote an intelligent comment to this suggestion. That also explains a lot ;)

    3. A new hero for Greece? Well, then you will enjoy the below article which was published in the Huffington Post over 3 years ago.

    4. I am glad to see that I am not the only one following such thoughts. Since you - Klaus - resisted to tell your own opinion about that idea:

      What does your Greek wife say about it?

      Thanks and regards

    5. My wife takes no interest in current political or economic affairs. She pains that the Greece which she first left 45 years ago no longer exists. Today's Greece is not the Greece of her imagination but, then, the Greece of her imagination probably never existed. Totally disillusioned by today's Greece, she even wants to give up our apartment in Thessaloniki.

      If the right hero came along, my wife would probably enthusiastically support him even if he were an authoritarian individual. "Greeks need to be governed by a strong hand", she often says. Who knows, perhaps even a benevolent dictator would be acceptable to her as long as he recreates the Greece of her imagination.

    6. Thanks for your interesting answer. In May and evt. June I will for the 1st time make holidays in Greece and I look forward to see it all from close.

      If at that time you are in Thessaloniki I would be pleased to invite you for a beer or whatever else you like ;)

  6. Here we go again, back to the future. Although it is true that some hydrocarbons now require more Joules per Joule to extract, the opposite is also true. Technologies have been invented and are being invented. I cannot subscribe to the idea that we should stop all innovation and in fact all activities ("sit still until you die children", I'm not willing to do that even in my age). If that makes me naive then so be it. It also makes me profound happy and proud when we discover new posibilities, even when they are not discovered by me. With his knowledge of thermodynamics and the chemical composition of Mother Earth the Alien Observer should have been on my team, sad story. Since we are into quoting let me quote a more modest writer, Piet Hein. Experts have their expert fun, telling you "it can't be done".

    1. I am not saying we will not have the inventions. Actually we do have the inventions we need already.

      What we dont have is time and willingness. I am saying we need to find ways to function without permanent growth and on a lower level of energy usage. This is not saying we should "sit still until we die".

      We need inventions in social organisation, inventions in sustainable living and inventions in living with nature. I am looking forward to these inventions.

      We need to be inventive in naby ways, but many are just waiting for a technological miracle because they are not willing to see that they might need to invent themselfs again. This is wishful thinking. Its similar to the great ghost dance of the native americans when the white man destroyed their culture.

      To find the right way, we need to open our eyes, look around and see were we are at right now. We will not find our way out of the woods by closing our eyes and praying for a miracle.

  7. @H. Trickler
    Yes, I disregard the posibility of a Cuban revolution or counterrevolution, when the Cuban system changes it will happen in one of 2 ways.
    1. If they attract foreign capital and know how, and they strike the right balance between the investors and the nation's interests then: They will slowly become a democratic, market orientated country. That is the soft landing.
    2. If they do not attract foreign capital, or abuse it then: They will collapse from economic fatique like DDR. That is the hard landing, or even crash.
    I'm not so sure about Greece, that could go any odd way, even a coup d'etat. And never, never say that Greece is like the other southern European nations. I will go as far as saying that it is like NO other nation, and all Greeks would agree with me. I see it as their problem; they see it as the worlds problem. Who is right or wrong is irrelevant as the world is not going to emulate Greek ways.

  8. Lennard, you are kindly invited to invest in Cuba as much as you deem reasonable. I would never do it and we will see if their approach is successful.

    What you describe as way #1 imho would be the preferred one. But history shows that more often revolutions achieve changement.

    Re. way #2: For Cuba and Greece: We will see.

    I must explain more clearly what I intended to say about Greek population:

    Imho .they are not different regarding intelligence (IQ), personal motivations and their feeling of national identity. If you travel in other southern countries, they all feel special, they all see that the world changed in a direction they do not like etc.

    This kind of feeling is also present in Switzerland, Germany and Denmark, where I personally have many friends. But in these countries it is clear to everybody that a successful economy requires competitive products and services!

    Greece does have such possibilities, but nobody seems interested in doing what must be done.

  9. @ H. Trickler
    I'm too old to invest. I don't even buy unripe bananas. But I'm not too old to change.