Wednesday, March 12, 2014

Why Chile and not Greece?

Every time I have made the suggestion that Chile might be an example for Greece, I have received flak from just about everywhere. I can understand that because the Chilean economic model was formed and shaped during the reign of Augusto Pinochet and political correctness requires to think that everything which happened then was by definition bad.

On the other hand, I probably would not have started this blog if I hadn't lived in Chile in the early 1980s, during the time when the economic model was formed and shaped. By the mid-1970s, Chile had become much more of a failed nation than Greece is today. And yet, new economic policies led to a complete turn-around and laid the groundwork for an extraordinary economic development which lasts to this day.

Again, I see the flak coming because people will say that Chile today is not a success story at all. The uneven distribution of wealth will be cited; the uneven distribution of income; the Gini-coefficient; etc.

The point is, however, that Chile today looks back at 30 years of extraordinary growth; at an unemployment rate of 6% (down from around 20% 30 years ago); at a budget deficit of 0,7%; and at a national debt of 1% of GDP. In the last 10 years, Chile has weathered global economic down-turns exceptionally well. Chile now has a left-of-center President who plans to do some deficit spending for social purposes and investments in human capital. Good news! But the best news is that, thanks to the 30-year old economic model, Chile can afford such deficit spending.

I started this blog thinking that if Chile could make it, Greece could make it any time. Regrettably, Greece is not following the Chilean way but, instead, the Argentine way (where I lived for 4 years after Chile). It seems to me that what Juan Domingo Peron was to Argentina, Andreas Papandreou might have been for Greece.

One of the key elements of Chile's economic success was the top priority of foreign investments. Basically, the Chileans said "in order to grow, we need foreign capital and in order to bring our economy up to speed, we need foreign know-how". And, of course, the Chileans knew that foreign capital would only come if the country's creditworthiness was good and foreign investors would only come if Chile was an excellent place to do business. They put the public sector in order and they turned Chile into a wonderful place to do business.

End of story.


  1. I think this might explain the rise of Golden Dawn in Greece: Take the goverment, enforce a dictatorship, kick out the troika, go back to national currency, emulate Chile. Still, worrisome.

  2. Hear-hear, and send the foreigners home then there is full employment, we can all go in the fields and pick strawberries, I just wonder who is going to pay the wages.

  3. Back to the blog after several months. The use of Chile and Argentina as models to explain the Greek mess is, I feel, both correct and highly instructive.Just like the Argentinians wanted Peron to solve their problems, so Greeks expect, even today, for some political god to solve their problems. It is true that the human cost of the Chilean economic boom was unacceptable, but you can apply similar policies without the dictatorship. Greeks, like Argentinians, do not want such policies, hence the crisis.

  4. Well Klaus, you are in for some more flak, but friendly. I would also wish for Greece to take the road Chile did in 1973 (if they would have done so in 2010 we would have been half way out of the crises by now), it will not happen because:
    -Greeks are brought up to believe that they are born better and with more rights (the inalienable rights of Hellenism, ta aparegrapta dikaia tou Ellinismou) than other human beings.
    -Greeks are brought up to believe that each individuals personal freedom is unlimited and above the law.
    Most of the other deficiencies stems from the above two. Greece has never been through the learning process of suffering the consequences of their stupidity and recklessness. There has always been a new donor to take over from the last one. History has proved to them that they can go on behaving irresponsibly, without it having any negative influence on their standard of living (in fact it had a positive). Can we correct that by giving them more money? No. All of Europe is asking "how can we save Greece"? Even Greece is asking "how can THEY save us"?
    I'm asking save what? And why?

    1. Greek got into this mess because of a bad public finance system. You cannot maintain a modern state if you cannot levy taxes well.

      This is the only structural factor. The main cause for current Greek unemployment is austerity. To ignore this and turn everything around into a supply-side story is preposterous.

    2. @Anonymous of March 16
      It is not correct to simplify the current situation to "a bad public finance system". If this were correct, it would imply that the private sector economy was doing well until 2008 and that its success was unrelated to public finance issues.

      Of course, it is true that the high level of Greek unemployment (and the same for many other austerity-ravaged economies) has been created directly from an extreme fiscal policy that was imposed on Greece. However, the structure of the Greek economy prior to that was unsustainable without being supported by either massive borrowing or massive transfers from surplus eurozone economies. That structure had implicated most of the private sector in public sector mismanagement, in various ways. Moreover, the private sector had deteriorated since eurozone entry, owing to an overvalued currency impeding exports (already weak) and facilitating capital inflows that were wasted on consumption goods and property speculation.

      Greece managed with its incompetent and corrupt taxation system until it chose to enter the eurozone and compete with developed economies without the cushion of an exchange rate. The economists advisting Pasok offered no such warnings and many have been rewarded with economics professorships for their complete incompetence (and lack of serious publications to boot).

      However, I do not share Kalus' enthusiasm for adopting any model from anywhere. My experience is that models in economics are country-specific: we can learn some things by understanding the economic history of other countries, but there is no easy solution to be imported. Greece has made this mistake many times before, with a totally inappropriate German legal system, a healthcare system that is partly German and partly UK (public hospitals) and now with a non-European private health industry, French-style civil service and labour market rules,,,, the list is endless. What is needed is a carefully thought-out strategy that will work with Greeks in Greece. Nothing less with work. Alas, the buffoons recruited by Greek politicians (along with the corrupt politicians themselves) are not capable of performing such a task. Nor do they have sufficient humility to ask others to do it for them.

    3. @Xenos
      I wholeheartedly agree that the exclusive belief in a social or economic model, any model, is wrong because no individual model can suit all the complexities of a society. What I mean by "the Chilean model" is the basic thinking behind it; the overall concept. Such basic thinking, in order to work, must make economic sense AND it must fit the respective society. The basic thinking behind the Chilean 'model' was:

      'Our economy is underdeveloped; we need to grow above-average in order to catch-up; to finance growth we need savings; since we don't have enough domestic savings, we need the savings of other countries; in order to get the savings of other countries, those lenders/investors must have confidence that their loans/investments are put to good use; we have to do everything to build up such confidence'. End of story.

      That made a lot of economic sense to me and, luckily for Chile, it also fit the mentality of Chileans. Thus, they responded to the challenge appropriately and successfully.

  5. Why Chile and not Greece?
    A contributing reason for Greece not choosing the way of Chile is that Greece is not where Chile was when they took the decision. Greece is still a rich country; they do not have the stark misery Chile had when they changed. That can easily change with 3 years out of the EU and a SYRIZA government. Will Greece try that? No nation with an iota of logic would, but then again, The Hellenes may have identified logic, The Greeks are not known for applying it. If Greece stay in the EU it will not be a conscious decision, it will be because they do not choose (they hate it, it involve taking responsibility).

  6. There is another interesting aspect to the Chilean 'model' which reminds of Greece. In June 1979, after about 5 years of new economic policies, the Chileans decided to go all the way and created their own 'Euro-experience': they fixed the peso to the dollar "forever". Luckily, they only fixed the exchange rate but did not convert the currency.

    The fixed exchange rate had the same impact on the Chilean economy as the Euro had on the Greek economy: foreign capital started to flow into the country like there was no tomorrow because the exchange rate was fixed "forever" and local returns were higher than in the US. And, of course, Chileans also used a lot of that new capital for consumption spending. Imports skyrocketed; wages/prices exploded. By 1982, Chile had the "May 2010 moment" which Greece had. The entire bubble created by enormous inflows of capital busted.

    Luckily for Chile, the country did not throw out the entire 'model' but only that part of it which was wrong with it: they did away with the fixed exchange rate. For some years, they had to pay the price for the fixed exchange rate but then they were back in business.

    Personally, I doubt that the same thing would have happened if Greece had returned to the Drachma in 2010 because Greece did not have a functioning economic 'model' to return to. Let me just quote the followiing from Wikipedia:

    "Chile has the highest degree of economic freedom in South America (ranking 7th worldwide), owing to its independent and efficient judicial system and prudent public finance management. In May 2010 Chile became the first South American country to join the OECD. In 2006, Chile became the country with the highest nominal GDP per capita in Latin America".

    By the way, the Wikipedia description of the Chilean economy (which is linked below) describes the Chilean economy quite accurately. Just test yourselves and ask whether you could see something similar in Greece!

    1. @Klaus: you forget that the Greek drachma was pegged to the ECU within the snake of the ERM. It was for this reason that economists were very complacent about the risks of EMU.

      The difference between the pegged currency and a shared currency is not the theoretical possibility of de/re-valuation (or the small movements within the snake limits) but the following:
      (i) no longer able to print your own money (loss of national monetary policy)
      (ii) lower interest rates from a monetary union with a strong economy (Germany) -- ie cheap capital and also loss of monetary policy
      (iii) limits to public sector borrowing through the EMU agreements -- i.e. partial loss of fiscal policy

      So, Greece was in the position of Chile in certain respects in 1999. Probably over a longer period of time there would have been a similar effect, but eurozone membership sped up the whole process.Now, I see nothing to return to, because the underlying structure of the Greek economy was always very weak.

      In principle, Andreas Papandreou gave a breathing space (with long-term international debt and a long transitional period for EU liberalisation measures until 1989) for Greece to develop. Greeks chose consumption, corruption and arrogance over production and economic development -- especially over the last 20 years. The question is, therefore, whither now? Not one political party has the slightest idea!

    2. Just one example of the difference. Greece is now into its 5th year after the financial collapse and I don't see the public sector all that much different from what it used to be. After a similar time period, the Chilean public sector was no longer recognizable. State-owned companies were essentially told: "If you can't make it on your own, you have lost your legitimacy to stay in business". All cronies in public administration were weeded out and replaced by a new generation of 'modern spirits'. And all of that without a Troika. The Chicago Boys themselves were the toughest Troika one can imagine. In other words: what the Chileans did they did on their own accord and not because some evil foreign power forced them to do it.

      It is worthwhile to remember that, by the mid-1970s, over 20% of the population lived in 'extrema probeza' and, believe me, extrema probreza was far from what is considered poverty in the EU. In some cases, a home meant to have a pole and a tent around it. At the same time, Chile, unlike Argentina or Greece, never had a very wealthy upper class, not even to mention oligarch families. In fact, what one saw in Chile was most of what the Chileans had. No fancy balances in offshore accounts.

    3. @Klaus
      I must confess to more or less complete ignorance about the political history of Chile (although I did read most of the Latin America economic development literature in the 1980s when preparing my thesis on the Greek economy).

      But my guess is that no Latin American country has had the dual misfortune of a powerful non-meritocratic political class PLUS the distorted economic structure that Greece had already developed by the 1980s and which continued to deteriorate with a complete lack of meritocracy in all state institutions. The economic distortion consisted of far too large a primary sector and far too many self-employed people (espeically retail) for the GDP level, in comparison with Portugal and Spain for example. And almost no industrial development to speak of. The state institutions problem is often attributed to Papandreou (with his placing of Green Guards on taking power) but I do not concur. His was a logical step to retain power, and was capablle of later correction if people had wished to do so.

      The key phrase in all of this is "lack of meritocracy". Nothing has changed in this regard, with the so-called reforms. I am of the personal opinion that Greeks are culturally opposed to competition and meritocratic structures -- and accept them only as immigrants in other countries, where they are unable to fuck up an already-existing system. If I am correct, then it doesn't matter how much FDI you bring to Greece, or how much oil/gas is found, Greeks will still fuck up. The only alternative would be to employ a lot of immigrants (for both skilled and unskilled work) and leave Greeks -- like the Ottomans -- to sit back and collect the taxes instead of working. But you need Saudi quantities of oil to do that -- rather unlikely.

  7. @Lennard / Xenos
    Since both of you always offer so much content in your comments, I would be happy to publish a guest article of either of you. All you would have to do is to collect your thoughts and bring all of your interesting points across in one piece. I don't think it's a good idea to only publish individual comments out of context.

    1. Thank you, Klaus. I may have some time to do that next week. Probably a more focused piece would be useful -- maybe on the structural problems of employment in Greece.

  8. Klaus, thank you for the offer, can I keep it as a rain check? Blogging is per definition fragmentary, it will often deteriorate into defend-attack mode, that can not be helped. I shall be looking forward to Xenos contribution.