By Ricardo Hausmann

The generosity of the world is again being wasted on Greece. As officials meet in Athens to thrash out the details of the latest bail-out, we must urgently recognise that our approach to understanding the crisis is flawed.

Greece has so far been analysed through either a fiscal or a Keynesian lens. The fiscal view argues Greece can only be fixed by raising taxes, cutting spending and restructuring debt. The Keynesian one says these measures hurt growth and tax revenues and so undermine the very purpose of the policies.

Both approaches neglect that Greece must export its way out of the crisis or face ruin. Greece has a large external deficit, reaching 8.6 per cent of gross domestic product in 2011. This gap is funded by an unsustainable level of external debt that markets are no longer willing to fund. At present it is being paid by official sources, who expect this to be temporary. Greece will have to bring its current account deficit down to zero at some point.

This can happen in two ways: either Greece exports more or spends less. Adjusting the current account by spending less would require an additional fall in GDP of 25 per cent, given that in Greece only one in four US dollars of spending cuts goes abroad. This is clearly not a pretty picture. But adjusting by raising exports would require they increase by 50 per cent, not an easy feat. Achieving it through tourism alone would require the industry to triple in size – an unlikely prospect.

It is less painful to raise exports than to cut spending. But two problems conspire against this more humane solution. First, while in the eurozone, Greece cannot devalue to make its exports more competitive.

Second, Greece does not have what it takes to be as rich as it is. In our book The Atlas of Economic Complexity , my co-authors and I calculated the amount of “productive knowledge” across various countries. A country with a high level of productive knowledge is one that exports many different goods and where these goods are complicated to make. Productive knowledge predicts how rich a country will be and hence how fast it will grow.

Here’s the bad news for Greece: in our sample of 128 countries, it had the biggest gap between its current recorded level of income and the knowledge content of its exports. Greece owes its income to borrowed foreign spending it cannot pay back. It produces no machines, no electronics and no chemicals. Of every 10 US dollars of worldwide trade in information technology, it accounts for one cent.

This problem cannot be addressed by fiscal Keynesian stimulus, by bland trade facilitation or by paying lip-service to structural adjustment as the November International Monetary Fund agreement implicitly assumes.

The problem in Greece is uncommon in Europe. Ireland, for example, is also struggling with a fiscal burden caused by the bursting of its housing bubble, but has been able to move quickly to a current-account surplus, thanks to the knowledge base of its competitive export sector. In other words, Ireland does have what it takes to be as rich as it is now.

Greece should use its international support to reduce rather than postpone the pain of adjustment. It needs to expand its export base, not delay pension and public wage cuts. It needs to be able to fund Irish-style institutions that lure potential new exporters by guaranteeing specific investments in infrastructure, labour training and research and development. This should be funded by the EU but, if not, it is better to make cuts elsewhere.

Greece is a good place to try to replicate this aspect of the Irish model. We have calculated how easy it would be for countries to move to exporting more complex goods. Greece ranks second only to India in this dimension, a heartening finding. It needs to identify the missing knowledge and infrastructural inputs required by new industries and assure their provision, the way the Irish Industrial Development Agency does. Putting resources into creating the productive base for a more prosperous future is more important and less painful than wasting them in protecting an unsustainable past. Unfortunately, this lesson is not being heeded and Greece is ever closer to the brink.

The writer is a professor at Harvard University and the director of its Center for International Development

Copyright The Financial Times Limited 2012.

http://www.ft.com/cms/s/0/ec138fb2-524c-11e1-9f55-00144feabdc0.html#axzz1n7ysCsHS

Greece is safe from a disorderly default, but not out of the woods yet. The European Union and the International Monetary Fund approved Greece’s second rescue package – worth €130bn – after 13 hours of difficult deliberations. This is the good news.

The bad news is that Greece is still wading neck-deep in murky waters. Worse still, the country’s economic crisis (the worst since the second world war) can be transformed into a crisis of confidence between its people and the state – regardless of which party is in government.

Greeks are starting to question whether their economy can ever be revived. They are losing faith and growing increasingly pessimistic about whether the sacrifices they are making will be enough to end the crisis.

How possible is this? The real economic situation in Greece is worsening. The unemployment rate has hit a record high, currently 17.7% and close to 50% for young people. Pensions and salaries are being cut. Businesses are shutting down every day. New taxes are being levied. The “informal” labour market is swelling – it’s pushing 50% of the country’s potential workforce.

And as fear and insecurity spread, many Greeks are packing their bags again and leaving their country. They want a new political system. Dissatisfaction crosses party lines, as people are no longer willing to play by the old rules of empty pre-election promises. They want to see results.

Even the smallest amount of progress, however, will require politicians to roll up their sleeves and propose viable reforms that can and will be implemented. What we need is radical structural reforms that will help us to rebuild the country’s wobbly foundations of productivity. We need reforms that will promote entrepreneurship and generate new ideas.

We need a new set of rules that will allow for the smooth transition from the informal to the formal economy. One example is through the simplification of process and deregulation of markets – a simple and fair taxation administration system would be more efficient and would create a friendlier business environment. This would increase the investment possibilities in Greece not only for foreign investors, but also for local ones.

The country was brought to the brink of bankruptcy. Though safe – for now – Greece could find itself struggling to meet the strict conditions outlined in the second bailout memorandum if these key structural reforms don’t take place.

Let’s not forget, however, that there are no quick fixes for the Greek economy. Any viable solution will require a lot more than just another round of bailout and austerity measures. The new measures include an immediate 22% cut to the minimum wage and the elimination of 150,000 public sector jobs by 2015.

The alternative, however, would have been a messy default – a nightmare scenario that would have opened the floodgates and piled on more misery. It would also guarantee our ousting from the world markets for at least 20 years – our partners would make sure punishment would take place.

As such, a solution would directly benefit the eurozone. This is why we need to focus on the structural and institutional reforms. Though these reforms will take time to bear fruit, they will eventually yield the best results.

Success depends on how well we can reform the Greek state. What we need to do is simplify judicial services and enforcement of rules and laws. We also need to apply quality control on goods and services, eliminate organisations with overlapping mandates and rationalise the public sector.

It’s not too late for the crisis to serve as an opportunity. It might, however, be Greece’s best chance to make all the necessary changes and put the country back on the path of prosperity.

For the article: http://www.guardian.co.uk/commentisfree/2012/feb/22/greek-entrepreneurship-crisis

Approved by European finance ministers after 13 hours of negotiation on February 20, the agreement put an end to the perennial threat of a disorderly default. The situation, however, remains precarious.

A full economic turnaround is only possible if Greece follows through on widespread structural reforms.

Greece, which is in its fifth year of recession, can no longer rely on bailouts. We need to lean more on Greek and foreign investment.

What we need is to find people with new ideas and to invest in them. This will help us to boost Greece’s competitiveness and attract investment.

Entrepreneurship should be the new buzzword on our roadmap for growth.

The country’s future is riding on structural reforms in the labor market and the deregulation of industries.

To achieve this, goals must be reset and strategies redrawn. So what needs to be done?

Greece needs to turn back the clock and rebuild its production base. We need to find ways to make optimal use of our vast human capital. The potential is boundless. Investing in our people — boosting entrepreneurship — can become a real growth engine.

The same recipe should also be applied in the other European Union member states. Just like Greece, the entire bloc must prove it is made up of 27 countries with a robust productive base that is capable of innovating, attracting new ideas and boosting entrepreneurship.

The EU’s 2020 strategy (adopted two years ago) is aimed at transforming Europe into a “knowledge-based” economy by increasing the number of people in employment and boosting investment in research and development.

The 27-member bloc boasts a combined population more than 500 million people.

Economists, however, have questioned the EU’s commitment. For years they have been calling for deregulation and simplification to reduce production costs and increase productivity.

The EU, however, has been moving towards a deep recession. The consequences are now being felt in board rooms and living rooms across the EU. The repercussions are also being seen at central squares in Brussels, Athens and other European capitals where demonstrations and strikes have become an almost-daily occurrence.

So, what’s the solution? Every EU country needs to develop a robust economy — one that is strong and diversified. Reforms should be aimed at boosting their capital base and generating growth. The ultimate goal is to make the 27-member bloc an attractive destination for both foreign and domestic investors.
Read the post: http://www.huffingtonpost.com/elena-panaritis/greek-bailout_b_1291283.html

Read Elena Panaritis topical presentation at

THE ECONOMIST CONFERENCE
16 February 2012 –Nicosia, Cyprus

Read the PDF file of the presentation:

Elena-Panaritis-ECONOMIST-CONFERENCE-16-02-2012.pdf

Portugal Is the Next Greece

Europe is on the wrong path because its prescription for the sovereign debt crisis, so-called expansionary fiscal consolidation, is a failed economic paradigm. The thinking has been that sacking government workers and cutting government spending would eliminate the budget deficit in countries like Greece and Portugal and, therefore, restore market confidence in their sovereign debt. The reality has turned out to be quite a bit different. Instead of reduced debt loads, we are witnessing higher government debt burdens as the reduced economic output from cutting government is met with cuts in the private sector. If Europe continues on this path, the euro zone will break apart entirely with unpredictable political and economic repercussions.

In Portugal, the government has adopted steep austerity measures as a condition of its aid package. However, the country’s economy will now shrink because European policy makers fail to understand the dynamics of debt deflation. What they miss is that the Portuguese private sector is highly indebted. When the economy contracts, indebted individuals and companies in an indebted private sector have an overwhelming incentive to save to reduce debt burdens and prevent default and bankruptcy. This means that the private sector will always attempt to increase its net savings position irrespective of the government balance. When government then attempts to move to a net savings position as well by cutting spending and increasing taxes, it is met with cuts in the private sector which still wants to net save and pay down debt. Irresistible force meet immovable object!

The result, then, of government cuts or tax increases when the private sector is indebted and the economy is stalled is debt deflation, as more and more parties cut back, threatened by insolvency due to the decreased economic output. Europe must understand that Greece is not a special case. Rather it is the leading edge of a debt deflation, which risks claiming Portugal as its next victim. Put bluntly, Portugal is the next Greece.

To their credit, the ratings agencies and the International Monetary Fund have all voiced disquiet with this policy response in Europe. In fact, in each of the last rounds of sovereign credit ratings downgrades, Standard & Poor’s and Moody’s wrote that they had downgraded several countries in Europe in part because the austerity-centered approach was making matters worse. The ratings agencies indicated that Europe must turn toward more pro-growth policies if it is to have any hope.

The bottom line is this: Europe is fixated on the wrong problem, budget deficits. The bigger problem in most of Europe is private indebtedness and financial sector leverage. If Europe wants to fix its problems, it must address this indebtedness, and that requires a lot more than endless rounds of fiscal austerity and budget cutting.

The Need for Big Changes

Vanessa Rossi is an independent consultant and global economics adviser to Oxford Analytica.

February 14, 2012

Whether a debt burden is massive (Greece) or simply heavy (Portugal), cutting debt will not resolve a problem of chronic twin deficits — that is, living beyond your means. Rising debt is just the symptom of the underlying disease for Greece and Portugal, which are still failing to adjust not just excessive budget deficits but also large current account deficits.

Greece has seen a sizeable internal devaluation (probably similar to that of Latvia) but, unsurprisingly, this has not generated much adjustment in its external deficit: it still needs to borrow money abroad to pay for its appetite for imports. It simply has insufficient exporting capability. Total goods and services exports are less than 20 percent of G.D.P., but competitiveness-sensitive exports are probably about 10 percent of G.D.P.: this is the reason a euro exit would also fail to solve the Greek problem, as illustrated by its pre-euro crises.

Portugal has failed to cut its external deficit for a different reason: it has had virtually no internal devaluation. Nominal G.D.P. remains at its 2008 peak. The nation has export capability (over 30 percent of G.D.P.), but it must do more to boost net trade. Portugal may actually be a country that would find adjustment a whole lot easier if it could have a little more wiggle room on its exchange rate.

By comparison, Ireland may be struggling with the sudden appearance of bank bailout debt, but early fiscal austerity coupled with internal devaluation were effective in stimulating net exports and eliminating its boom-time current account deficit. And export-led growth will at least help to stabilize the Irish economy and improve a budget position now saddled with debt servicing costs.

So if Portugal and Greece are going to make the grade, they must find ways to tackle their chronic twin deficits. Debt restructuring alone is insufficient and may even encourage a return to laxity.

Compared to Europe’s other ailing states, Portugal did everything right. It adopted steep austerity measures in exchange for international aid, but now nearly a year later, Portugal’s economy is shrinking and the nation is struggling to repay its debts. What went wrong?

Compared to Europe’s other ailing states, Portugal did everything right. It adopted steep austerity measures in exchange for international aid, but now nearly a year later, Portugal’s economy is shrinking and the nation is struggling to repay its debts. What went wrong?

Private Debt Becomes Public

Daniel Gros is the director of the Center for European Policy Studies in Brussels.

February 14, 2012

Portugal’s policy makers are understandably confused by the reaction of the markets to their heroic efforts to cut the budget deficit in the face of a rapidly contracting economy. The risk premium on Portuguese government bond has risen to double digit levels while it has fallen for everybody else, except Greece.

But the problem of Portugal is not fiscal policy. It is the excess consumption of the private sector, which for more than 10 years now has become used to spending much more than its income. This can be seen in the large current account deficits the country has run (over 10 percent of G.D.P. for more than 10 years). Their cumulative effect is now a net foreign debt worth more than 100 percent of G.D.P.

In Greece the excess consumption was financed by the government, and as a consequence most of the foreign debt was owed by the government. A fiscal adjustment coupled with a cut to the government debt thus addressed the core of the problem for Greece. Not so for Portugal. In this country the excess consumption was not financed by the government, but by banks, especially branches and subsidiaries of Spanish banks in Portugal.

This is also the reason that, despite the strong fiscal adjustment, the external current account of Portugal is still in a large deficit.

At first sight one is tempted to say: so what? Why should the markets worry if Portuguese households continue to consume on credit? As long as the government gets its accounts under control, the risk premium on government debt should decline. However, markets factor in a simple lesson learned from this crisis: excess private debt becomes, in the end, public debt. The losses that Portuguese banks are likely to experience when their customers cannot repay their debt as the economy spirals downward will in all likelihood become public debt – just as in Ireland and Spain. What matters in the end is the total debt (public plus private) of the country.

This presents the authorities in Lisbon with a particular challenge: they must not only get their fiscal accounts under control, but also reign in their own banking system to ensure that consumption falls to a level compatible with income. This would require another fall in (private) consumption of more than 10 percent and would be highly unpopular. But if this is not done the country cannot succeed in its adjustment.

For European policy makers, the fate of Portugal is crucial because they have solemnly declared that Greece is a “unique and exceptional” case. But if they do not recognize that excess private consumption is the real problem in Portugal, they might soon have another country that will need debt forgiveness.

Executive Summary and Recommendations

Property rights function as the foundation for a robust and efficient property market and its derivatives – land – housing – construction – mortgage etc. Economic research and the work of notable economists (some Nobel Laureates) explain that property rights allow for the smooth socioeconomic development of markets and of an economy in general (North, 1995, 2005; Feder 1988; Panaritis 2006).

It is estimated, however, that more than fifty percent of the world’s population lives in and works on informal property. Informal property is defined by a significant level of insecurity of ownership that leads to illiquidity of the asset as it is rendered riskier and less tradable.  This in turn leads to further lack of security, further inaccessibility in formal low-cost credit, lower levels of enforceability of formal property rights (ownership – leasing etc) and poorly functioning property and land markets (Panaritis 2007).  Poorly functioning land markets (due to the lack of property rights’ security), discourage private investment, home improvements, as well as investments on infrastructure, utilities, social development of the community and its community members. It also becomes costly and risky to run any sophisticated financial markets or capital markets, as well as the above mentioned derivative markets (Panaritis 2007).
Transforming informal property to formal liquid property – by securing the system that emits and governs property rights – affects economic growth in pivotal ways. Among others, secured property rights have the following economic and social impacts:

-Increased ownership security;
-Increased level of participation of citizens in their community and strengthen their political voice;
-Improved social homogeneity of the communities;
-Reduced child labor;
-Increased incentives of households and individuals to invest in their homes and properties because of cheaper access to formal credit;
-Property assets becoming tradable in the formal market, as they are less risky;
-A larger variety of tradability options (sale, lease, inheritance, financial instruments);
-Reduced transactions costs in the emission, enforcement and tradability of the right;
-Increased net wealth of the poor and middle class making them less reliant on wages, reducing their vulnerability to macroeconomic shocks;
-Improved governance allowing for effective and more efficient provision of utilities and infrastructure;
- Increased labor mobility;
-Reduced cottage industry;
-Increased private investment and security of ownership;
-Improved application of fiscal policy, especially related to property collection, which in turn promotes fiscal discipline;
-Enhances the accountability of the government officials;
-Reduced environmental degradation;
-Improved waste management.

Investment, in a poorly functioning property market, bears immense risk related to economic growth and social stability.  A set of two examples can illustrate partially this risk. Recently in India, TATA Motors cancelled their manufacturing plant in West Bengal state, because of widespread farmer protests questioning TATA’s proper land acquisition (property ownership right).  This meant abandoning a project in a site where the company had already invested USD 300 million (Iyer and Alfaro, 2009).  Similarly, the World Bank’s engagement in Albania’s Costal Zones Integrated Management and Clean-Up project jeopardized the full USD 17.5 million World Bank funded project – more so, the institution’s reputation as the WB was basing much of its project design on the Albanian property rights system. The system was proven to be broken and easily manipulated (The Economist 2009).  There are too many similar anecdotal stories presenting the connection of investment risk to property rights.  These stories vary in magnitude of cost – ranging from players being multinational companies to small private individual owners.
The scope of the literature review is to provide some of the available documentation that outlines the significance of secure property rights to socioeconomic impacts and the doing business environment. The review also airs that such an important and rather fundamental element in economic growth and social stability is treated in a segmented manner. More so, its analysis and resulting policy prescriptions are not holistic, instead they are even perceived as isolated topics–for example, Land Tenure, Tenure Policies, Land Management, Titling, Registration, Cadastre Reforms, Slum Upgrading, Slum Policies, Housing Finance, Housing Policies, Rural Finance, Urban Rehabilitation, Construction and Mortgage Finance. Such segmentation results in not tackling the systemic problem of informal property markets and the cross-cutting impacts at their root. Instead there is an overall spreading of efforts that results in a less than effective outcome in each and every one of these topics, but most importantly it is ineffective in reducing informal or illiquid property markets.

Download the PDF article – Property Policy Review

What Does a France Downgrade Mean for Europe?

Is this the beginning of the end?

S&P announced a reduction of France from AAA to AA.

As it turns out, S&P’s December 5th warning was not addressed to satisfy fears in the market.

What does a downgrading of France really mean?

It means that a market fatigue has reached its maximum. Patience has run out over the last two years while waiting for a notable reaction for handling the euro.

We’ve had more than enough telephone calls between country leaders. We’ve had more than enough long Euro summits. And we’ve had more than enough big announcements. The crisis was still not handled.

Basic economics should not be forgotten. The euro is a single currency, which represents productive models of 17 different countries. All of them very much bound by rather sticky and high productivity costs.

Since the early 1990s, the criticism of economists has been for the European zone’s productive base to be deregulated and simplified so that its cost-base would be reduced and its productivity increased. In addition to this, the inability or unwillingness for the Euro zone to establish a common fiscal structure and a growing indebtedness resulted in a crisis that started in Greece and today touches France (after having touched Ireland, Spain and Portugal).

Now with the very possible French downgrade, the core of the euro is at stake.

So what is really needed?

We need to prove that the European Union is made of countries with a flexible yet robust productive base capable to innovate, attract new ideas and boost entrepreneurship.

What does this mean for Greece?

It’s a reality check through a shock that may very possibly postpone discussions about national elections in Greece. Such discussion may generate further political instability. The outcome of the election may not generate a one-party government. Such scenarios increase stress in the euro zone and the market as political instability is not something to take lightly.

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