July 20, 2015
Asia’s View of the Greek Crisis–Project Syndicate
by Lee Jong-Wha
Lee Jong-Wha, Professor of Economics and Director of the Asiatic Research Institute at Korea University, served as Chief Economist and Head of the Office of Regional Economic Integration at the Asian Development Bank and was a senior adviser for international economic affairs to former President Lee Myung-bak of South Korea.
Asian countries have been watching the Greek crisis unfold with a mixture of envy and schadenfreude. When they experienced their own financial crisis in 1997, they received far less aid, with far harsher conditions. But they also recovered much more strongly, suggesting that ever-growing bailouts may not be the best prescription for recovery.
Since the onset of the crisis, Greece has received massive financing from the so-called “troika”: the European Commission, the European Central Bank, and the International Monetary Fund. It received bailout packages in 2010 and 2012 totaling €240 billion ($266 billion), including €30 billion from the IMF, more than triple Greece’s cumulative limit for IMF borrowing. The latest deal promises up to another €86 billion.
By contrast, South Korea’s 1997 bailout package – which was larger than those received by Indonesia, Thailand, or the Philippines – totaled $57 billion, with $21 billion coming from the IMF. At the time, South Korea’s annual GDP was $560 billion; in 2014, Greek GDP amounted to less than $240 billion.
The IMF seems to have lent Greece such a large amount for political reasons. For starters, at the onset of the crisis, then-IMF Managing Director Dominique Strauss-Kahn was a leading candidate to become President of France. More generally, major IMF shareholders, the European Union, and the United States have a vital interest in stabilizing Greece to safeguard French and German banks and preserve NATO unity. Desmon Lachman, a former deputy director of the IMF’s policy department, has called the institution a slush fund, abused by its political masters during the Greek crisis.
To be sure, the economic mess created in Greece – the result of government profligacy, official corruption, and widespread tax evasion – merited some international assistance. And the IMF did impose conditions on its loans to Greece – including fiscal austerity, privatization, and structural reform of its pension and tax systems – most of which were necessary to address the country’s insolvency. The requirements of the latest rescue deal are the toughest yet – even tougher than those that Greek voters overwhelmingly rejected in a referendum earlier this month.
But the scale of the aid remains massive, especially when one considers how little progress Greece has made in implementing the reforms it promised in the past. This contrasts sharply with Asia’s experience in 1997.
Unlike Greece, Asia’s problem was not an insolvency crisis, but a liquidity crisis, caused by a sudden reversal of capital flows. In South Korea, net private-capital inflows of 4.8% of GDP in 1996 swung to net outflows of 3.4% of GDP in 1997. Though the accumulation of substantial short-term debts in the financial system and corporate sector did amplify the shocks, the primary factors fueling the crisis were the lack of international liquidity, panicked behavior by investors, and financial contagion.
Yet the IMF imposed even tougher conditions on Asia than it has on Greece, including fiscal austerity, monetary tightening, and financial restructuring. Some of these requirements were clearly unnecessary, as evidenced by Malaysia, which recovered quickly from the crisis without IMF assistance.
In any case, the actions were temporary. Once confidence began to recover and market conditions stabilized, the East Asian economies shifted their monetary and fiscal policies toward expansion and embraced large-scale exchange-rate depreciation – efforts that enhanced their export competitiveness. Structural reforms, including the immediate closing of financial institutions and the elimination of non-performing loans, also helped to bolster recovery.
In South Korea, for example, real GDP growth quickly rebounded from -6.7% in 1998 to 9.5% in 1999. By mid-2003, some 776 of the country’s financial institutions were closed. And the authorities’ strong commitment to reform restored investor confidence, reviving inflows of private capital and reactivating foreign trade.
Greece, by contrast, has utterly failed to engineer a recovery. Instead of dropping to 110% as planned, the public debt-to-GDP ratio has increased to 170%. Annual per capita real income contracted 4.8%, on average, over the last six years. Unemployment stands at 26%, and hovers around 50% among young people.
Against this background, it was not shocking that Greece, unable to come up with €1.5 billion at the end of June, became the first developed country to miss a payment to the IMF. Belatedly, the Fund acknowledged that its lending and policy advice had failed in Greece.
Greece’s government then demanded more financial support with less stringent conditions. But, as its creditors have now recognized, providing more money will not address Greece’s insolvency. That is why the new deal requires that the government immediately cut pensions, hike taxes (beginning with the value-added tax), liberalize the labor market, and adhere to severe spending constraints. At the same time, a write-down of official debt, like the “haircut” given to private creditors in 2012, will be necessary.
Many have questioned whether agonizing reforms are entirely necessary; if the country returned to the drachma, they suggest, it could implement interest-rate cuts and devalue its exchange rate, thereby engineering an export-led recovery. But, given Greece’s small export sector, not to mention the weakness of the global economy, such a recovery may be impossible. Greece’s best bet is reform.
So far, Greece has shown itself to be unwilling to implement a painful internal-wage adjustment and reform measures forced by outsiders. Perhaps the latest deal, which was reached with Greece on the brink, will prove to be a turning point, with Greece finally committing actively to economic and fiscal reform. Otherwise, Greece’s exit from the eurozone – with all the concomitant social and economic strife – seems all but inevitable.
Asians watch with sympathy the fall from grace of the birthplace of Western civilization. But perhaps Greece should look to Asia for proof that, by taking responsibility for its own destiny, a country can emerge stronger from even the most difficult trials.