Small countries in a time of dramatic global change: What can Greece teach us?

Friday, 11 March 2011 00:16 -     - {{hitsCtrl.values.hits}}

The citizens were pleased to hear the Secretary to the President articulate during the 500th presentation of Benchmark TV programme last weekend that Sri Lanka had a positive track record and consequential international image, having successfully faced during the term of office of the present President the international food crisis, financial crisis and the oil crisis.

He went on to emphasise that at the same time, the regime had achieved what was previously believed to be unattainable goals in the form of winning the war against terrorism and establishing political stability, whilst recording annual growth rates that were admirable in a global context.

Gratifying statement

The most gratifying statement made by him was that the President was politically-savvy, well aware of the needs and expectations of the people and was ever sensitive what is happening locally and globally, and that Sri Lanka is now governed different to all other countries and thus ready to face any internal and external challenges.

He resolutely argued in support of the strategy of investments in infrastructure, including investments supporting sports tourism and justified the spend on two new cricket grounds for the World Cup and the bid for the 2018 Commonwealth Games.

He summed up that being truly nonaligned and having successfully managed the conflicting regional relationship challenges and China supporting key economic investments in ports, airport and cultural centre, Sri Lanka has demonstrated international support necessary to develop the nation to achieve the dream of becoming the miracle of Asia.

Derek Gatopoulos in an article titled ‘Greek Financial Crisis: Did 2004 Athens Olympics Spark Problems In Greece?’ reminds us that “the Greek government has not had a balanced budget in 40 years and narrowly-averted bankruptcy before European partners grudgingly put up massive rescue loans.

Whilst many factors are behind the crippling debt crisis, the 2004 Summer Olympics in Athens if not the sole reason for this nation’s financial mess, some point to the games as at least an illustration of what’s gone wrong in Greece. Their argument starts with more than a dozen Olympic venues – now vacant, fenced off and patrolled by private security guards.

Irresponsible spending binge

Stella Alfieri, an outspoken anti-Games campaigner, says they marked the start of Greece’s irresponsible spending binge stating, “I feel vindicated, but it’s tragic for the country... They exploited feelings of pride in the Greek people, and people profited from that,” “Money was totally squandered in a thoughtless way.”

The 2004 Athens Olympics cost nearly $11 billion by current exchange rates, double the initial budget. And that figure does not include major infrastructure projects rushed to completion at inflated costs. Six years later, more than half of Athens’ Olympic sites are barely used or empty. The long list of mothballed facilities includes a baseball diamond, a massive man-made canoe and kayak course, and arenas built for unglamorous sports such as table tennis, field hockey and judo”. (http://www.huffingtonpost.com/2010/06/03/greek-financial-crisis-olympics_n_598829.html.)

The recently held Pathfinder Foundation and Harvard University Leadership Dialogue led by Richard Parker, a Lecturer in Public Policy and Senior Fellow of the Shorenstein Centre, reviewed a presentation titled ‘Small countries in a time of dramatic global change: What can Greece teach us?’ This presentation gave leaders in governance, business, academia and civil society much to reflect upon and learn lessons from.

High debt

The high debt of Greece was built over three phases; investing in infrastructure with borrowed capital; despite unbalanced budgets going for growth in the economy supported by foreign borrowings; and even when the national income largely influenced by tourism inflows fell significantly with the financial crisis and recession that followed, continuing with the same spending levels without tightening budgets.

Greece had growth rates of over 4% annually despite substantial fiscal deficits and had been the envy of other EU nations and a darling of Wall Street receiving acceptable sovereign ratings and debt support. These debt subscriptions took place despite the recognised fragility of the tax and State revenue systems and the prevailing high shadow economy, estimated between 15-30% of the GDP.

The Greek economy had a large contribution from non wage-based incomes linked to tourism and was highly sensitive to tourism earnings. Its population enjoyed a higher living standard than indicated by the per capita GDP, mainly due to the shadow economy.

A high level of corruption mars the entire economy whilst disaggregated data at the street level affecting the daily lives of citizens accessing services were higher than the aggregate Transparency International indices.

The public sector is poorly organised and administered whilst being overstaffed and lacking in capability to deliver public services with economy, efficiency and effectiveness. This unproductive expense is a burden on the budget and directly impacts on the deficit.

The budget management governance systems are antiquated. Excessive decentralisation with cities managing their budgets on their own and incurring independent debt commitments makes effective national level budgetary management a nightmare.

The government loosely supports the local government budgetary allocations without effective control and value for money evaluations and thus compounds the negative issues. There is a severe shortage of leaders and managers with capability and commitment to drive the public administration, especially as regards budget management and control.

The use of ICT tools in budget management is low. In this context decentralised spends get accounted sometimes as late as two years after the actual disbursement.

Lost international cost competitiveness

Besides the severity of its fiscal problems, Greece has, over the past several years, gradually but persistently lost international cost competitiveness, resulting in widening of current account deficits, a deteriorating international investment position, and a poor record of inward foreign direct investments.

Public and private sector have a great degree of interdependence, with the public sector contributing over 40% of the GDP. The remnants of former public sector investments in the economy in pursuit of socialist policies have left its mark. There is however no systematic significant difference between public and private operations in terms of efficiency or other performance measures.

The Greek health system (also banking and energy management) is inefficient with the decentralisation adding further costs and creating barriers to the challenges of reform. A large part of the consolidated deficit and borrowings are as a consequence of the decentralised systems of administration.

The Greek Government is reviewing options of consolidate micro admin units with centralisation as well as options for improving transparency, effective budgetary control at allocation and administrative and management control at a decentralised level.

Tax evasion needs to be controlled and revenue streams made consistent and regular and this is a major challenge of the reform process. Some other challenges facing Greece include integration of the nation’s migrant minorities.

The education system fails to produce motivate and capability embedded human resources. As a consequence Greece lacks human resource capability and this leads to a week sector recovery, especially in civil service.

Domestic reforms

Domestic reforms are hard to implement with human resources lacking technology, quality enhancements being a challenge and due to the inability to leverage productivity and economies of scale.

As a consequence wage levels are not matching the productivity and quality of the human resource pool and in addition the high pension costs make costs uncompetitive and reforms more difficult to implement, without risking political instability and industrial unrest.

The only avenue for future growth (i.e. until HR reforms change the capability of resources) is to seek niche production centres to be invested in to critically leveraging strategic alliance led technology and best practice transfers to gain competitive advantages.

‘Window of opportunity’

The crisis however opens a ‘window of opportunity’ for Greece to engage in deep fiscal and structural reforms, rather than relying too much on one-off temporary measures, as has often been the case in the past.

Tax collections need to be improved by fighting tax evasion and simplifying and widening the tax base. Control over government spending needs to be strengthened by improving administration, reducing the public sector wage bill, and more strictly controlling public entities (including in the health system) and loss making state enterprises.

Measures need to be taken to substantially reduce the increase in public pension outlays in the years ahead, including bringing Greek pensions more in line with OECD best practice and introducing measures to increase the effective retirement age.

Greece should also embark on reforms of wage bargaining, which remain too rigid, and of product markets, which remain over-regulated and insufficiently innovative. In fact, Greece has been slow in taking advantage of the potential of the knowledge and green economies, with innovation indicators consistently lagging those of other advanced economies

It was deduced that what Greece needs now are economists to fix the economy, psychologists to implement HR linked capacity and attitudinal changes, and leaders who can contain the budget deficits by reigning in necessary budget cuts and making spends yield more value for money and change of national values and norms to accept essential public commitment to the reform process and shock therapy that will be necessary to mend the broken national economy.

Unfortunately the dialogue could not discuss the undernoted three pertinent issues:

1.Greece is amongst the top 10 militarised nations according to the Global Militarisation Index and is this level of militarisation a key cause and a driver of the debt crisis?

2.China has said it is willing to bail out debt-ridden countries in the euro zone using its $ 2.7 trillion overseas investment fund and has approached struggling European countries with financial aid, including offers to buy Greece’s debt and promising to buy $ 4 billion of Portuguese government debt. Are these easy debt offers by China driving irresponsible debt management behaviours by debt ridden countries?

3.Without the leadership driving a change management initiatives leading to positive and acceptable attitudes, societal norms and values being embedded in society, can effective sustainable results be achieved in the longer term?

The answers to the above questions will provide a useful guide to Sri Lankan leaders! The moderator of the dialogue Dr. Indrajit Coomaraswamy summed up the dialogue highlighting that the key challenges of Greece were debt, fiscal deficit, fiscal devolution, exchange rate management, public sector reform/capacity building, shadow economy, becoming a nimble and competitive niche export player, tourism development and control of corruption. He noted that there is no neo-liberal solution to the crisis and in any solution the government and business sector must work closely together.

All present at the dialogue were of opinion that the significant similarities existed between Greece and Sri Lanka. Therefore learning lessons and having in place effective risk mitigation measures will be an essential responsibility of leaders in governance, business and academia.

This column had previously highlighted an interview with George Papandreou, the Greece’s American born Harvard educated Prime Minister – a Socialist – which was carried in the Newsweek, where he outlined that the following reform measures, adopted since negotiating a Euro 120 billion international bailout for his debt ridden nation , aimed at slashing debt and reigniting growth, and importantly using the crisis as an opportunity to clean up Greece’s corrupt politics and deregulate its uncompetitive economy, noting that the financial crisis highlighted reforms not attempted and implemented for decades, which led to mismanagement of the country:

nreforming the pension system

nrevamp the state, cut bureaucracy and increase transparency

ndigitising government, with the web recording every government action, every line of every budget, every government expenditure

ngovernment purchase will not be payable unless first published on the web for all to see

nfull online survey of civil servants, their qualifications and duties

nhealth system digitalised to cut graft and increase transparency

nopen up all regulated businesses and professions that lead to cartels and monopolies, price control and low quality services

neliminate many layers of the bureaucracy

nnew laws to encourage fast tracked new foreign and domestic investments, making it easier to start a business and for younger generations to become entrepreneurs

nfreeing education system, eliminating central control over universities and schools, with free education being supported by a competitive voucher system

ntax reforms placing a higher tax burden on the richer community and cracking tax evasion, including the use of satellite imaging techniques to identify undeclared real estate holdings

n‘naming’ and ‘shaming’ prominent tax dodgers and publishing all tax filings online

nensuring reforms are equitable

Papandreou had summed up stating “a successful reform isn’t about market orthodoxy and it is all about good governance, about changing the structure of government and making it more transparent, effective and efficient”.

Despite all of above commitments, early this week Moody’s has downgraded Greece’s debt to “highly speculative” Moody’s cited “endemic tax evasion”, “very ambitious” austerity plans, and the possibility that the EU may force a debt restructuring on Greece after 2013 as reasons for its decision.

Are there lessons for politically savvy people sensitive leaders to learn from Greece in time of dramatic global change? The internet of course is full of quotes that reflect leaders are reluctant to learn lessons from history:

“That men do not learn very much from the lessons of history is the most important of all the lessons of history” – Aldous Huxley.

“If men could learn from history, what lessons it might teach us! But passion and party blind our eyes, and the light which experience gives us is a lantern on the stern which shines only on the waves behind – Samuel Taylor Coleridge.

“What experience and history teach is this – that people and governments never have learned anything from history, or acted on principles deduced from it” – G. W. F. Hegel.

“History repeats itself because no one was listening the first time” – Anonymous.

“Those who cannot learn from history are doomed to repeat it” – George Santayana.

(The writer is a former Chairman of the Ceylon Chamber of Commerce.)

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