The inexorable descent of Greece

The inexorable descent of Greece

By Dhiraj Nayyar | 18 July, 2015
In recent history, only Argentina in the early 20th century went from being a very rich nation to a third world one.

It's a wonder that the financial "rescue" package for beleaguered Greece is still being called a bailout. In its present form, it is only going to imprison a vast majority of Greeks in a future of relative poverty. It is a most unusual historical occurrence, at least in the last 115 years, for a rich country to descend to "third world" status. The two World Wars damaged the economies of the advanced West (plus Japan), but that damage was temporary. The collapse of the Soviet Union impoverished Russia and many of the Soviet Republics but they were never rich countries except in the eyes of Communist ideologues.

The only example from the last century and a bit of a rich country falling into long term decline is Argentina, which in the early 1900s was among the ten richest countries in the world, richer than many in Europe, including Germany, but which subsequently became a developing country in the course of the 20th century.

Interestingly, Greece has drawn several comparisons to Argentina in recent weeks. But the comparison dealt with relatively recent Argentine history. In 2002, the South American nation took the radical course to default on its international debts (after years of failed IMF-imposed austerity), devalued its currency and began a process of slow recovery that left its economy in better shape than the austerity years. Experts have pointed out that the default option may not have worked for Greece. Unlike Argentina, which is a global heavyweight in the export of agricultural commodities, Greece has little to export other than tourism. Also, Argentina did have its own currency (though pegged to the dollar), while the legal tender in Greece is the euro — that makes the logistics of an exit much harder and likely chaotic for Greece. For now, a Grexit has been stalled, but for how long and at what cost?

The conditions of the bailout are seriously recession-inducing. Raising VAT on restaurants seems designed to rob Greece of whatever comparative advantage it may have. Other measures, like cutting pensions and wages will only stifle consumption, deepening the slowdown. Expecting Greece to deliver a decent growth rate under such conditions is expecting a miracle.

That said, both the government and people of Greece should study the 20th century experience of Argentina more closely to develop an appreciation for how dysfunctional government and bad policy choices can destroy a nation's economic well-being. It is easy for Greeks to lay all the blame for their plight on Germany, the EU and the IMF. But they shouldn't ignore the role played by their own governments (especially in the 2000s) in causing the economic crisis. Governments that are neck-deep in crony capitalism, that run irresponsible fiscal policies and that refuse to carry out sensible market reform (of inefficient public sector companies, for example), are likely to let their people down. It was governments run by mainstream parties (not Alex Tsipras's radical left), which brought Greece to the precipice. The creditors just threw Greece over the edge.

The future is bleak for Greece. The options available range from bad to worst. And no political party seems willing to address fundamentally the many long term problems of the Greek economy. Externally-imposed austerity gives them an easy excuse for inaction. So, over the next few years, the country will lose more of its GDP (it has lost 25% in the last five years) and its people will see their living standards collapse. The decline of Greece will likely be more precipitous than even Argentina's in the last century.

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