24 October 2016
Alexis Tsipras (left) could follow the lead of Brazil's Luiz Inácio Lula da Silva (middle) and South Korea's Kim Dae-jung (right) in tackling far-reaching reform. Photos: Agencies
Alexis Tsipras (left) could follow the lead of Brazil's Luiz Inácio Lula da Silva (middle) and South Korea's Kim Dae-jung (right) in tackling far-reaching reform. Photos: Agencies

Can Greece learn from previous emerging market crises?

Greek Prime Minister Alexis Tsipras has the chance to become to his country what South Korea’s Kim Dae-jung and Brazil’s Luiz Inácio Lula da Silva were to theirs — a man of the left who moves toward fiscal responsibility and freer markets.

Like Tsipras, both were elected in the midst of an economic crisis.

Both immediately confronted the international financial constraints that opposition politicians can afford to ignore.

On assuming power, Kim and Lula were able to adjust, politically and mentally, to the new realities that confronted them, launching much-needed reforms.

Some reforms were “conservative” (or “neo-liberal”) and might not have been possible under politicians of the right.

But others were consistent with their lifetime commitments.

South Korea under Kim began to rein in the chaebols, the country’s huge family-owned conglomerates.

Brazil under Lula implemented Bolsa Familia, a system of direct cash payments to households that is credited with lifting millions out of poverty.

Tsipras and his Syriza party, however, spent their first six months in office still blinkered about financial realities, unable to see things from the perspective of others.

The decision to hold a referendum on the bailout terms set by Greece’s creditors showed that they were politically blinkered as well.

If Tsipras were reading from a normal script, he would logically have asked Greeks to vote yes.

But he asked them to vote no, which they did by a surprisingly wide margin.

He evidently thought that this would strengthen his hand; instead, it merely strengthened the position of those Germans convinced that the time had come to let Greece drop out of the euro.

Only a week after the referendum, Tsipras finally faced up to reality: Greece’s euro partners are not prepared to offer easier terms.

On the contrary, they are insisting on more extensive concessions as the price of a third bailout.

The only possible silver lining to this sorry history is that some of Tsipras’s supporters at home may now be willing to swallow the creditors’ bitter medicine.

One should not underestimate the opposition that reforms continue to face among Greeks.

But like Kim and Lula, Tsipras could marshal political support from some on the left who reckon, “If he now says that these measures are unavoidable, there truly must be no alternative”.

(The same thing has of course happened on the right: Only Nixon could go to China.)

None of this is to say that the international financial realities a country faces are necessarily always reasonable. Sometimes global financial markets’ eagerness to lend results in unreasonable booms, followed by abrupt reversals.

Foreign creditor governments can be unreasonable as well.

The misperceptions and errors by leaders in Germany and other creditor countries have been as damaging as those on the part of the less-experienced Greek leaders.

For example, the belief that fiscal austerity raises income, rather than lowering it, even in the short run, was a mistake, as was the refusal in 2010 to write down the debt.

These mistakes explain why Greece’s debt/GDP ratio is even higher today than it was then.

Each side’s refusal to admit its mistakes reinforced the other side’s stubbornness.

The Germans would have done better to admit that fiscal austerity is contractionary in the short run.

The Greeks would have done better to admit that democracy does not mean that one country’s people can vote to give themselves other countries’ money.

In terms of game theory, the fact that the Greeks and Germans have different economic interests is not enough to explain the poor outcome of negotiations to date.

The difference in perceptions has been central.

“Getting to yes” in a bargaining situation requires that the negotiators not only have a clear idea of their own top priorities but also that they understand what the other side wants most.

A “bad bargain” would call on each side to forgo its top priorities.

The European Central Bank should not have to agree to an explicit writedown of Greek debt.

And Greece should not have to run a substantial primary budget surplus for now.

Under a relatively “good bargain”, the creditors would modify interest rates and extend maturities further as the International Monetary Fund now suggests, so that Greece does not have to pay the unpayable over the coming years, in exchange for growth-enhancing structural reforms.

One hopes that the awful experience of the past six months has led both sides to a clearer perception of economic realities and priorities.

This will be necessary if the two sides are to arrive at a good bargain, rather than a bad one — or even an outright failure to cooperate, so that Greece effectively drops out of the euro.

A recurrent theme of the Greek crisis since it erupted in late 2009 is that both the Greeks and the eurozone’s creditor countries have been reluctant to consider lessons from previous emerging market crises.

After all, they said, Greece was a eurozone member, not a developing country.

That is why, for example, the ECB and European Commission initially did not want Greece to go to the IMF and did not want to write down Greek debt.

Emerging market crises do hold important lessons.

If Tsipras can now follow the course taken by Kim and Lula, he will serve his country well.

Copyright: Project Syndicate

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Professor of Capital Formation and Growth at Harvard University

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