by Mike Kimel
I haven’t written anything about Greece, largely because I’ve never been there, haven’t looked at Greek data, and otherwise until now have had no reason to think I have something useful to say about it. But reading this Tyler Cowen post, I realized that perhaps I have an insight to share because Greece seems to bear a curious resemblance to Argentina and Brazil, two countries with which I do have a fair amount of familiarity. Tyler’s post quotes Megan Greene who shares this anecdote:
A friend and I met up at a new bookstore and café in the centre of town, which has only been open for a month. The establishment is in the center of an area filled with bars, and the owner decided the neighborhood could use a place for people to convene and talk without having to drink alcohol and listen to loud music. After we sat down, we asked the waitress for a coffee. She thanked us for our order and immediately turned and walked out the front door. My friend explained that the owner of the bookstore/café couldn’t get a license to provide coffee. She had tried to just buy a coffee machine and give the coffee away for free, thinking that lingering patrons would boost book sales. However, giving away coffee was illegal as well. Instead, the owner had to strike a deal with a bar across the street, whereby they make the coffee and the waitress spends all day shuttling between the bar and the bookstore/café. My friend also explained to me that books could not be purchased at the bookstore, as it was after 18h and it is illegal to sell books in Greece beyond that hour. I was in a bookstore/café that could neither sell books nor make coffee.
Ms. Greene starts her post with this line:
I travel to Athens about once every six months and speak with as many contacts as I can, including top policymakers, bankers, journalists, economists and academics.
Now, with all due respect to Ms. Greene, who I don’t from Adam, I suspect she may be making an error similar to one that I used to see Americans and Europeans who flew into Buenos Aires or Sao Paulo. That error is to confuse laws on the books and complaints by the locals with reality. This is the view that a foreign consultant based in New York or London or Paris gets:
A number of contacts described their experiences trying to open a business or buy property, which involved high fees, several trips to different tax offices and months of navigating bureaucracy. This gets at the very heart of how Greece landed up in its current condition and why rapid change is unlikely. Entire professions such as notaries, lawyers, tax men, architects and inspectors have for years had automatic income in that they have formed the layers of bureaucracy involved in doing business in Greece. At least half of the MPs in Greek parliament hail from these industries, and consequently are incentivized to perpetuate the bureaucracy that impedes opening up, running or finding investment for businesses.
Now, you could change the word Greece for Argentina or Brazil and you could have been telling this same story at any time since, I would imagine, the 1920s. You could tell the story about Brazil right now, despite the fact that its one of the hot economies these days. (If you don’t believe that, find yourself a Brazilian and ask them to explain the concept of a “despachante” to you, assuming they are able.) Which is to say that, yes, you do need to jump through a fair number of hoops at various stages of running a business. But that is far the whole story. Before I get to the mistake, let me provide one more bit of information, something that these days we all know about Greece even if a lot of people were surprised to learn it about a year ago, namely, this:
According to a remarkable presentation that a member of Greece’s central bank gave last fall, the gap between what Greek taxpayers owed last year and what they paid was about a third of total tax revenue, roughly the size of the country’s budget deficit. The “shadow economy”—business that’s legal but off the books—is larger in Greece than in almost any other European country, accounting for an estimated 27.5 per cent of its G.D.P. (In the United States, by contrast, that number is closer to nine per cent.)
I can tell you this, again from my experience in South America: if the Greek central bank is admitting to foreigners that the shadow economy is 27.5% of its GDP, the real number is actually quite a bit higher. Now, think about it. If the Greek government can’t even collect taxes, an act high on the priority list of just about every government that was ever created, exactly how is it stopping a bookstore owner from selling books and/or coffee? But if you think that’s overly simplistic, let’s consider Ms. Greene’s anecdote again. Boiled down to the basics, it comes to this:
While the bookstore can’t sell its own coffee, nor is it allowed to sell books after 6 PM, the bookstore (and its coffee shop) is open for business in the evenings.
Now, from that one can only conclude that either the owner of the bookstore is an imbecile or there is a way that the bookstore can make money despite the laws on the books. (It is, of course, possible for both things to be true.) Now, here’s how things would work in Argentina or Brazil. There are indeed a bunch of hoops to be jumped through to start and run a business, legally at least. Many of them are ignored by everyone, the authorities included. Which of those rules a new business owner safely ignores depends on a number of factors, including the extent to which they have to deal with banks, whether they need to import or export anything, and the amount of real estate they need to operate. So yeah, it takes a lot longer to legally set up shop in Argentina than Singapore or Denmark, say, and the laws in Argentina, as written at least, are more draconian. But even so, it is often easier to get into and stay in business in Argentina than in Singapore or Denmark. After all, if you don’t have your paperwork in order in Singapore, if you don’t follow all the rules and regulations, someone will be there to shut you down. In Argentina, on the other hand, its hard to name the branch of law enforcement that is funded well enough to care. My guess is the same thing is true in Greece. I wouldn’t be surprised if the bookstore owner in Ms. Greene’s anecdote drives a new BMW and hasn’t paid taxes in years.
The Germans would have you believe that the Greeks are nationally incapable of work and incapable of restraining their spending.
The US Republican Party and its supporting media would have you believe that the Greeks have an unsustainable welfare state.
The reality is that Greece has less generous social welfare than Germany, work longer hours than the Germans, and spend a typical percentage of their GDP on government.
So what’s the problem? Their system is corrupt. Laws aren’t followed, taxes aren’t collected, and this means that it’s impossible to finance a decent government. Even with that corruption they’d be OK, if not for their lack of monetary sovereignty.
Yup, it appears the Greek’s approach to life just did not work well with the Euro’s approach to life.
Well, i don’t know much
but trying to track down the causes of the Greek problem i ran into stories that said they were doing okay until the American banks failed.
debt peonage seems to be an old, old story. one the IMF and Argentina ought to be familiar with. I can’t say that’s what’s happening in Greece, but certainly some of the terms of the “bailout” look like it.
coberly: “debt peonage seems to be an old, old story.”
So Joseph bought all the land of Egypt for Pharaoh. All the Egyptians sold him their fields because the famine was so severe, and soon all the land belonged to Pharaoh. 21As for the people, he made them all slaves,a from one end of Egypt to the other.
Genesis 47: 20-21
Pretty old story.
“… and soon all the land belonged to Pharaoh.” That’s why they call it real (from the same root as royal) estate. It eventually comes down to you and what army.
“… and soon all the land belonged to Pharaoh.” That’s why they call it real (from the same root as royal) estate. It eventually comes down to you and what army.
“… and soon all the land belonged to Pharaoh.” That’s why they call it real (from the same root as royal) estate. It eventually comes down to you and what army.
“… and soon all the land belonged to Pharaoh.” That’s why they call it real (from the same root as royal) estate. It eventually comes down to you and what army.
I apologize for the multiple messages. I ran into a problem with third party cookies and was getting negative feedback even though the message was being accepted.
I apologize for the multiple messages. I ran into a problem with third party cookies and was getting negative feedback even though the message was being accepted.
I apologize for the multiple messages. I ran into a problem with third party cookies and was getting negative feedback even though the message was being accepted.
So in Argentina there is a branch of law enforcement that has the power, but not the funding, and that results in them not caring rather than extortion? What a country!
min
yep. pretty old story, but i hadn’t heard that version before.
Extinct Species,
Sure, there’s the occasional extortion, just like there is here. And occasionally there are bribes to be paid. But its not a matter of not caring. Its a matter of self-presevation and not being absolutely insane.
Some beat cop might shake down the corner bakery, but he’d be insane to tussle with a foreign megacorp that just set up a plant. Those guys have already paid bribes to the politicians. It’s much cheaper than paying taxes or complying with the law, apparently. And its a one stop shop.
(I have a cool story told to me by a Brazilian Federal congressman as he crashed the Club Med in Itaparica. I was kind of a reluctant participant – it was the middle of the night, the guy was drunk off his ass and moving back and forth between belligerent and overly friendly, and the last thing I wanted to do was get on the boat with him running the show (Itaparica is an island). But that will have to wait for another post.)
Multple messages fixed.
Mike,
“My guess is the same thing is true in Greece. I wouldn’t be surprised if the bookstore owner in Ms. Greene’s anecdote drives a new BMW and hasn’t paid taxes in years.”
I totally agree (I spent 2 weeks out of every six down thier deployed (west coast) for almost 3 years) and would bet that way also.
Its also, in a nutshell, why the German taxpayers have no desire to send more of their good money to Greece to chase bad. Better to use thier Euros to start fires in the fireplace on a cold winter night, at least you would get some utility.
Every indication is Greece will dfault and leave the Euro. The question is how orderly will it be and if any of the rest of the PIIGS will go also. Right now there are already indications that the smart Greeks are moving their Euro’s out of Greek banks to elsewhere in Europe. In any case things will not be going well until the Greek government can get their act together.
Islam will change
I have heard the same thing about tax avoidance being sort of the Greek national pasttime. Exactly what the GOP wants to do in this country.
buff,
Nice to see you and I sometimes agree on things.
But I’m going to potentially spoil it… with a comment about the gov’t getting its act together. Greece is still Greece, Argentina is still Argentina, but something seems to have changed with Brazil. For at least a decade people have been talking about Brazil being a hot economy. That hasn’t happened before. (I can’t say it will stay that way or that it won’t… I haven’t been staring at Brazilian data so I would not be comfortable stating an opinion about the future, merely about the rearview mirror.)
What changed about Brazil is not that the gov’t suddenly become Singaporean. There was a bit of a clean-up (credit Franco, Lula, and above all others, a name Americans will never hear: Romeu Tuma.. although toward the end it seems one of the most honest men Brazil was no more than that – being the most honest man in Brazil doesn’t mean honest). But the small clean-up wasn’t enough. What created the boom was the focus on redistribution to the poor (see Lula’s , the shrinking of Brazilian (poor) families (see the decline of Catholocisim and the rise of Evangelism, and the parallel decline increase in contraception) and to a much lesser extent, the discovery of pre-salt oil.
Brazil isn’t Singapore. Most Brazilians wouldn’t be able to function in Singapore. Ditto most Argentines and Greeks. But there are things that can make a country function well despite (or even taking into account of) the form of corruption specific to the country.
Mike,
A bit of overstrech about the Gov. – the Greeks can make their country work. And there is no way they will ever be Germans. But they need to roll back the expansion they did using borrowed money. Its not sustainable. The country functioned quite well, with all the Greek cultural baggage, back when I was going there so often. They can get back there. But its not going to be painless.
I no longer see how they can stay in the Euro. they can’t print there way out of this mess. Austerity will bring the government down sooner or later in a revolution. That may change the tax avoidance culture and high corruption but I doubt it. The Greeks best bet (second to the ECB just continuing to give them money, forever) would be a orderly as possible seperation from the Euro and bringing back the dracma. Might be very painful in the short term but would allow them to get there feet back under them and start over. (After defaulting on all Euro Debt). BUt we shall see what happens. I’m not hopeful for a orderly or peaceful transition.
I still have on mu ‘bucket list’ to go see parts of Chile, Brazil and Argentina. I’ve been all over Europe and lived there. Never been to South America (except for 8 hours in Caracus a decade+ ago).
Countries with a culture of corruption and tax avoidance can work. And work well. They just have less margin for error….
Islam will change
buff
the strategy of money lenders has long been to lend money to people who can’t pay it back. then you either take their property outright, or you force them into a kind of slavery.
that seems to be what is taking place in Greece. Mike knows more than I do about Argentina, so he may have a different take.
Certainly, as you said, the Greeks managed well enough to be Greeks before they borrowed all that money.
buff,
If you ever go to South America, contact me ahead me of time. I’ll give you the best advice I am able about what to see and where given the time you have available and your interests… Note that given my experience, that would be Argentina/Brazil/Uruguay heavy. That said… there’s enough in those three countries to eat up a six month vacation.
Agreed that countries that are corrupt can still work. There’s no choice. Argentina and Brazil will never entirely clean up, but there are ways to function better under the circumstances and there are ways to function worse.
coberly,
I think I wrote a post a few years ago about how the hyperinflation in South America could be traced back to big American banks making loans to dictators in the 1950s and 1960s, knowing damn well that the dictators were simply skimming off the money. The bankers didn’t care because they got their bonuses and were well into retirement by the time the debts came due.
India and China are wildly different from Greece, since they were both extremely poor on a per capita basis, and extremely large when the capitas were added up, but both offer a good demonstration that modest change in a really inefficient economy can produce great results. Neither stopped at modest change, but a look back at the record, growth got going on very little reform. There is no reason to think Greece has to be a basket case.
mike
and what i read is that the banks knew when they made the loans that they would not be repaid.
coberly,
Banks and corporations don’t know anything. People who work there do. And the folks who made the loans either knew or should have known. But they also knew it didn’t much matter, as they’d be retired once the bill came due.
kharris,
As Buffy notes, a corrupt place can work. Brazil is working pretty well today, and as I pointed out upthread, probably the most honest guy in that country’s history has turned out to be somewhat corrupt too.
Kharris,
A very good point. And you have to start somewhere, probably take generations to fully change.
I don’t see any reason greece needs to be a absket case either.
Mike,
I sure will. Just need to get the kids through college or win the lottery (Heck with college prices probably both!).