Sunday, November 17, 2013

Key for Greece's Economic Recovery

Just found this report and thought it would be good to share it:

Export-led growth key for Greece's economic recovery, says American economist Jeffrey Sachs

 Economist Jeffrey Sachs, seen here in a file photograph, was recently in Athens on an invitation by the Harvard Business School Club of Greece.
By Eleni Varvitsiotis
“They put the train through the Agora? That’s a little crazy.” Although he doesn’t always seem to grasp how things works around here, Jeffrey Sachs is a big fan of Greece.

In an interview with Kathimerini, the American economist and director of Columbia University’s Earth Institute who was recently in Athens on an invitation by the Harvard Business School Club of Greece describes the country as a top global brand. He praises its healthy cuisine and lifestyle, and believes it has huge reserves of talent.

The 59-year-old, who is also special adviser to United Nations Secretary-General Ban Ki-moon, is realistic about people’s suffering as a result of the stubborn recession, but remains optimistic about the not too distant future, provided that policymakers do the right things. The key, he says, is export-led growth. “Growth not from gimmicks of short-term spending, but growth based on real international competitiveness of Greek goods and services.”

The recession is continuing, unemployment is soaring and incomes are going down. What would you say to the average man on the street in Greece today?

I think the perception is correct. This has been a very painful period. Greece has seen its living standards decline and had to cut back sharply, unemployment is very high and it has been a very difficult period overall. It has been a sharp and harsh adjustment. But what I would say is that now, realistically, this is the bottom – meaning that now there is the prospect for recovery and for a future, not only for economic growth but for a better life. So this has been a very difficult period and now Greece is in a position, if it does the right things and if its partners give the right help, to start new jobs, to create employment for young people, new business, the basis for new prosperity.

If you could pinpoint three things that Greece should do, what would they be?

The basis for Greece’s future growth and job creation would be exports, because the domestic economy will remain compressed. Greek standards have gone down, Greece doesn’t have access to lots of capital, so it’s going to have to earn its way by selling goods to the markets. But I’m quite optimistic Greece has a tremendous amount of talent. It is arguably one of the most beautiful places in the world, it is one of the great tourist destinations, it has one of the healthiest populations and lifestyles in the whole world. It has a world-famous cuisine and diet, so people want to visit and get healthier. Health tourism is high-potential.

Also, Greece has enormous untapped energy resources: the sunshine and the wind. In order to tap these resources, one needs investment in a grid that links Greece to the Northern European electricity distribution. So the basic challenge is export-led growth. In order to make that happen you have to identify markets, you need good diplomacy. I recommend that the prime minister sends leading businessmen on trips to the Middle East, Africa and Asia so that businesses abroad and political leaders abroad will know about Greece’s markets, services and so forth – real export promotion.

Tax policy should help to promote these new industries, along with special financing for youth employment and startup enterprises. Such a package of measures has been introduced before in other places; it’s time for Greece to do this during the emergency.

It has been hard to think of these things because for the last four years Greece [has been trying] to stay alive and the creditors were also thinking short-term and were not giving Greece a long-term perspective. In my view, it is necessary to push for a longer perspective based on growth and not austerity. Growth not from gimmicks of short-term spending, but based on the real international competitiveness of Greek goods and services. I’m optimistic because you can see where this can happen, you can see the interest internationally in these sectors.

You have said in the past that Greece is a good brand.

I think it’s the best brand because, first of all, Greece gave birth to Western civilization; everybody knows it and everybody wants to come and see it and to feel a part of that. During a recent visit to the Vatican, I ran to see Raphael’s famous painting “The School of Athens” because for me it’s the epitome of Western civilization and I just wanted to have another look at Plato and Aristotle and Socrates.

People also come here for the natural beauty, the islands, they know Greece and they know about the Mediterranean diet, which is the healthiest diet in the whole world. Apart from this marvelous climate and beautiful location, Greece is also a crossroad – in fact, a very complicated one. It has seen lots of fighting, lots of wars, which go back 3,000 years and more. But the fact of the matter is that in a global world, Greece sometimes feels at the end of Europe; it is at the same time at the crossroads for Africa, Asia and Europe. That is a great location, which is why China is so interested in Greece as a place both for manufacturing and for port services.

You said that we keep looking inside, while the EU is not a closed system.

Sometimes people say “Germany must do this so Greece can accomplish that,” and some economists say that Germany must spend more domestically so Greece can sell goods to Germany, or if Germany doesn’t reduce its trade surplus then Greece will not be able to reduce its trade deficit. This is a kind of zero-sum mentality that treats the eurozone as a closed system – i.e. what happens inside is the only thing that counts. The fact of the matter is that Europe is part of the world economy and Greece is, of course, part of this world economy so Greece doesn’t need to sell its goods only to Germany or Italy, France and so on. Greece should be looking at the Middle East, Greece should be looking at China.

The world economy market is 90 trillion dollars and Greece is a very small part of it. There is a large world market out there that can be the source of prosperity and growth. It is interesting that the largest growing countries in the world in the last quarter century have been the East Asian countries who held the view that export-led growth was the key. Even China with 1.3 billion people – 100 times Greece’s population – went for export-led growth and was able to find a world market, so Greece, with its very small footprint in population, has a large market. If China looks outside with such a market within, it is unbelievable that Greece doesn’t.

All the debate about stimulus and austerity based on the Keynesian model is based on a closed economy system vision which has never been true for any country, especially for a small economy like Greece. You don’t have to wait for domestic government stimulus to have demand, the demand is everywhere in the world, you just have to earn the way – that’s the difference.

Take a look at Korea. Korea faced a huge crisis in 1997 when the financial crisis hit East Asia, and at that point Korean businessmen told me: “Don’t worry. We will grow out of it.” I don’t know how they were so confident about it. “Don’t worry. Within a few years we are going to have a huge surplus and pay off the debt.” I was rather surprised as it seemed unrealistic at the time. But they achieved everything they said because they had the drive to go out and do it. They have taken the view that they have to be excellent in technology, new markets. Look at Samsung to see how it has taken the world of mobile phones. Who would have expected it? Competing with Apple, defeating Nokia, competing at the very top of the world in the most competitive sector, it’s a good role model and relevant for Greece.

Don’t you think Greece should get a debt writedown?

I think the first thing that should be clear to everyone is that if the face value of the debt is reduced or the interest rate is reduced, it means the same thing in real economic terms. The question is what is the amount that Greece will have to pay its creditors over time, and you can measure that in the year-by-year cash flow or in the net present value and that has to come down to reasonable levels, either by the haircut approach or by low interest rates and a long period of retainment. I think it is more reasonable to expect the latter approach for many reasons, political perhaps, even constitutional.

Greece’s creditors are less interested in the haircut approach than they are in the low-interest approach. The low-interest approach is close but of course the details matter because an extra point in the interest rates is a big deal. So it is something to negotiate very carefully, and my view in this crisis is that the creditors have the same interest as the debtors in finding a reasonable solution that builds the prospect for economic recovery.

Already in 1987 I wrote a paper about the economics of debt overhang and it was about the economies of Latin America. It was the argument that if the creditors are too tough, they lose also. So I showed that a mathematically reasonable compromise benefits both creditors and debtors. It played an important role in resolving the debt crisis in America at the end of the 1980s. Of course, the situation here is different in many ways, but the basic point is that Greece’s creditors have an interest in the country’s recovery and growth, and I think it’s clear. Two years ago there was a lot of misguided talk of a Greek exit. Fortunately that went away, at least for the time being.

Do you think that the troika has made mistakes? Do they really get what is going on here?

The troika will never define a comprehensive approach. They see themselves more as policemen rather than policymakers, but they often make mistakes, thinking that what they say is the whole story. The only way to take on the troika is through very positive direct and persistent negotiations put forward by Greece itself. In other words, you don’t wait for the outside to get it right; you have to put forward your framework, saying: “This is what we want to do. It fits your criteria but you can’t dictate the micromanagement because we have to do the micromanagement ourselves. It has to be our program, our design, our strategy. You have to give us the space. We are going to be good partners but you cannot define our program.” This is an important point that is repeated over and over.

At the same time, however, the Greek government is not following the guidelines so I cannot blame them 100 percent. But the guidelines are not always right. The government should not agree to silly things that it is not going to follow. This leads to more confusion, misunderstanding, lack of trust, ill will. I have spent a lot of time negotiating, not with the troika but with the IMF over 25 years. They often get key concepts wrong although they get many things right. The way to go is not to wait for them to solve it. A good government has to put forward a tough, realistic program and push hard for that, and it’s not guaranteed but it is the only way to find a way. That’s why it is so important for Greece to very affirmatively define the terms. Not to scream, but to be very clear of what is needed for recovery.

Do you feel that the government is headed in the right direction?

I think the adjustment so far has been painful but has put Greece in a position that will resume growth. Without more growth, this kind of pain cannot be tolerated and will not work. Growth has to resume and this is the real test coming up – the ability to start creating the new scenario. This has been a very long, deep contraction, extraordinary by historical standards, not normal. In general I resist the word depression. Paul Krugman uses the term depression in the US, which I don’t think is accurate, but for Greece this is depression by standards of economic history: The output is down by a quarter, unemployment is more than 25 percent, youth unemployment is 60 percent. By any standard this is a depression, every bit of unhappiness is understandable, and that’s why it’s so important to find a path out of the crisis. , Tuesday November 12, 2013 (19:34)