Friday, September 24, 2010

An unnatural disaster

First there is Ireland:
After posting an increase in growth in the first three months of the year, official data showed that the former "Celtic Tiger" sank into a double dip recession in the spring.
Larry Elliott comments:
The reason for this is simple: the budget cuts have impaired the economy's ability to grow. The Irish government wants to slash the country's budget deficit from 12% to less than 3% by 2014, which would be eye-wateringly tough even if the economy were growing robustly. But when the economy is shrinking, it means the government is in effect running to stand still, hence the calls for even greater austerity to mollify the markets. That would, of course, simply weaken growth prospects still further.

Ireland, in other words, is perilously close to locking itself into permanent depression and deflation, from which the only way out may be a default that would further damage consumer and business confidence.
Then there is Greece. And Jean-Claude Trichet, the president of the European Central Bank, has said, "Greece has a role model and that role model is Ireland." Ah.

Much of the reporting of the Greek crisis consists of sending someone, blissfully unencumbered with knowledge, somewhere nice for a week or so to write about the crazy goings-on of those pesky foreigners. So it was great to read this thoughtful analysis of the Greek economy from Aristos Doxiadis, written with insight and respect. Doxiadis identifies the main features of the economy to be its reliance on small scale family enterprises and self-employment, a persistent rentocracy and opportunistic behaviour. This, he argues, is a consequence of the history of the modern Greek state and its very different model of development.
In the West, feudalism, monarchy and the Catholic Church interacted to create the absolutist state which was mandated to rule and guide society. The bourgeoisie inherited this state and reinforced its role of societal guidance. In parallel, during the industrial revolution large business hierarchies were developed, which assigned stable positions to workers and clerks. Such things did not happen in Greece: we overthrew the Ottoman state rather than developing it, and we resisted economic hierarchies.

In other words, advanced western economies were founded not only on free markets and individual incentives. They were founded on hierarchies (vertical rules) and on strategies of cooperation (horizontal rules). Successful and hegemonic capitalism is free markets embedded in a society of rules and responsibility. Otherwise, it is either a jungle, or a community of corner shops. We Greeks have subscribed neither to vertical nor to horizontal rules. We are neither obedient nor cooperative. If we have avoided the jungle, it is because we have kept the corner shops.

Instead of despairing at Greek foibles, Doxiadis makes pertinent observations about the strengths of some Greek behaviour to go with his critique of the features of the economy that are dysfunctional and in urgent need of reform.
Within this context, we have developed some admirable economic institutions, which western-educated technocrats find peculiar.
I would urge anyone interested to read the article in full, it would be well worth your time.

I harbour huge doubts about the wisdom of economic orthodoxy in any circumstances, however the imposition of an orthodoxy, conceived in the context of very different societies, on somewhere as unorthodox as Greece strikes me as destructive folly. Instead, Doxiadis argues for the recognition and support for an economy based on small-scale activities, an alternative model of development, rather than the use of the sledgehammer of austerity, accompanied by wishful thinking about the emergence of a competitive and orthodox economy from the wreckage.
A new model of development for Greece should not imitate the ones that have been most successful globally. We start from different initial conditions, and will follow a different route. Let us accept our peculiarity.

But then again ...

Whole EUR 19.000.000 (no typo! nineteen million euros!) was spent in rubbers by eco-friendly Greek ministers in a period of five years.


Ann O'Dyne said...

back in the 1980's a record company I ran had a hit in Greece. a number 1 hit. I learned that their government deliberated on outgoing finance every 2 months, and every 2 months they decided to NOT Send any Royalties to Australia.
Beware of Greeks Not bearing gifts.

mikeovswinton said...

First lesson I was taught in local government; always write your memos in pencil. If you drop a b*****k you can rub it out later. Funnily enough the guy who told me that came from Salford. Or I thought he did. Perhaps he was from Athens? He knew a heck of a lot about Rugby League if he did.

DorsetDipper said...

The correct solution to a trade imbalance is for the currency to fall so that the country can then export its way back to profitability. This is what happened to the UK in the early 1990's.

Without that route Ireland and Greece are in trouble, but this is equal trouble for Germany. Germany is finding that wining the export war is a Pyrrhic victory.

Anonymous said...

Thanks for quoting!