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Thitinan Pongsudhirak: Greek drama presents moral lesson for developing Asia

The Greek crisis highlights the emerging reality that established international institutions and power structures dating back to the second half of the 20th century are no longer capable of dealing with global demands and expectations. For Asia, this is both an opportunity and a warning.

     By calling into question the permanence of the eurozone, the currency union among 19 of the European Union's 28 member states, the dramatic events in Greece have exposed the fragility of the EU's long-term ambitions for economic union and political integration.

     The eurozone now looks as though it will survive, at least for the moment, but Europe's troubles serve as an instructive warning to others. Asians should view the Greek chaos as a cautionary tale of what not to do (and what to do) in trying to find paths that are mutually beneficial for the region.

Seen it before

It was not long ago that East Asia experienced similar problems. Thailand, South Korea and other regional economies were weighed down by unsustainable external debt and overvalued exchange rates in 1997 and 1998. Their problems were exacerbated by an unholy combination of free capital movements and pegged currencies.

     Eventually, these Asian economies reduced debt levels through bailout loans (mainly from the International Monetary Fund), currency devaluation, exchange rate flexibility, fiscal vigilance and income generation. But it was half a decade before East Asia regained its growth momentum, assisted by China's economic boom in the 2000s.

     The problem that has faced Greece in recent months is slightly different. Greek membership in the eurozone was controversial from the moment it joined in 2001. Many warned that its political and economic systems were not mature enough to cope with the requirements of a currency union. 

     Just three years later, Athens admitted to having cooked the books, massively understating the scale of its structural budget deficit and its need for external financing.

     When it joined the eurozone, Greece gave up its sovereign right to print its own money, along with the ability to operate an independent monetary policy and to run fiscal deficits outside strict limits set by the eurozone authorities. Unable to generate sufficient euros to pay the interest on its debts, and in spite of the relief offered by two earlier bailouts, Greece was forced on July 13 to accept a humiliating third bailout from the EU institutions or tumble out of the eurozone with no alternative currency in place.

     No East Asian government has made a commitment comparable to Greece's membership of the eurozone. This is why Japan, with a ratio of public debt to gross domestic product of 234%, is not facing the kind of existential crisis that has engulfed Greece, whose ratio is 183%, according to a February survey published by U.S. consultancy McKinsey.

     Japan retains control of its own currency, and owes most of its public debt in yen to its own citizens and corporations. Like other Asian countries, Japan retains the emergency options of inflating its currency to minimize its debt burden, or of defaulting on its own citizens by refusing to repay some of the debt. Greece, though proportionately less indebted, has borrowed most of its debt from foreigners, who must be repaid in euros -- a currency Greece uses but does not control.

     Nevertheless, Greece's experience holds valuable lessons for Asia. The country's three bailouts from the eurozone and the IMF total nearly $360 billion, much of which has gone to repay its EU creditors. But there would have been no crisis without Greece's shaky public finances, shoddy accounting and shady reporting practices. As expenditure continued to outpace revenue, partly due to egregious tax evasion, the government kept on spending, creating a spiraling budget deficit and ballooning debt, thanks in no small part to welfare programs.

Shaky finances

Unlike East Asia's private sector-dominated debt burdens and asset-price inflation in the mid-1990s, Greece's debt accumulation is public sector-driven, rooted in mismanagement of the nexus between democracy, welfare and taxation. Western democracies with market economies tend to run up large and rising government debt over time because of welfare policies intended to promote income redistribution and social justice. Greece's official retirement age, for example, was until recently 57, the lowest in the EU, though it has now been raised to 67 under pressure from creditors.

     At the same time, wealthy groups often pay relatively little tax. This was a particular problem in Greece, where a client-oriented political system encouraged complex tax breaks for some powerful groups, and a lack of state enforcement capability allowed nonpayment by others. To spread wealth and achieve greater egalitarianism in a sustainable fashion, taxation, welfare and democracy must be brought in line. Wealthy people, many of whom are part of or aligned with the political elite, must be willing to share the fiscal burden by paying more taxes.

     Welfare programs are difficult to abandon once introduced. As these programs expand, the revenue base must keep up with spending. In most countries with welfare systems, much of the yawning gap between revenue and expenditure is attributable to social spending. However, this is not a simple tale of Western profligacy and Asian prudence. Although Japan is an outlier in terms of its ratio of public debt to GDP, many Asian countries have ratios that are higher than is deemed prudent by the Organization for Economic Cooperation and Development, the club of mostly rich countries.

     The OECD said in an Economics Department Policy Note in early July that government debt should not exceed a range of 70-90% in advanced economies or 30-50% in developing countries (because they remain exposed to the kind of capital flow reversals that triggered the 1997-1998 Asian crisis). Yet fully developed Singapore's ratio of government debt to GDP is 105%, according to McKinsey, while Malaysia and China are at 55% and India is at 66%.

     By contrast, New Zealand's government debt-to-GDP ratio is just 35.9%, according to the country's treasury. Yet New Zealand is a good example of a "Western" democratic market economy with quasi-socialist egalitarian aims and a comprehensive welfare system. For example, New Zealanders aged 65 and over are entitled to a pension that is not means-tested. The current annual rate, from April 2015, is 14,981 New Zealand dollars ($9,886) each for married people, rising to NZ$19,475 for single people living alone.

     As New Zealand's example shows, generous social benefits need not impoverish countries if they are covered by taxation and administered by governments that avoid unnecessary borrowing.

Rudimentary benefits

With the significant exception of Japan, the world's third-largest economy, most of Asia is still at an earlier stage of the welfare state. Welfare programs are expanding, especially in Northeast and Southeast Asia, but remain a long way behind those in the West. Excluding public-sector employees, Asian countries -- from China to Indonesia -- have, at best, rudimentary unemployment benefits and retirement pensions. However, experience in the developed world suggests that as the region becomes more democratic, governments will come under increased pressure from voters to boost welfare spending. The Greek example suggests three important lessons that Asian policymakers should learn.

     First, be more like New Zealand than Greece. Restrict growth in pensions and welfare benefits to what can be paid for comfortably from tax revenues. Debt is not a problem in itself, especially for countries that are not fully developed. But it should be focused on investments that will boost productivity, such as infrastructure improvements, education and workforce skills. Do not borrow to finance welfare; to do so is to court disaster because debt will build to unsustainable levels.

     Second, robust public finances are as important as strong economies in sustaining long-term growth and avoiding economic dependence. One of Greece's problems was a lack of credibility implied by its long history of indebtedness and inability to reform; the country has been in sovereign default for roughly half of its independent existence since it broke from the Ottoman Empire nearly 200 years ago.

     Third, cooperation among regional economies is desirable when it expands markets, reduces trade friction and promotes diplomatic amity. But it is deeply undesirable when it locks countries into rigid and fundamentally flawed systems like the eurozone.

     East Asian countries should not be deterred from efforts to cooperate more closely through institutions such as the Association of Southeast Asian Nations and the Greater Mekong Subregion -- the Asian Development Bank grouping that includes China and several ASEAN countries. There is also much that can be done by policymakers to improve cooperation between the three East Asian giants: Japan, China and South Korea. Japanese support for Beijing's launch of the Asian Infrastructure Investment Bank would be a good start.

     As Greece has discovered, however, cooperation can go too far: On the day that someone suggests a currency union for Asia, think of Athens and show him the door.

Thitinan Pongsudhirak

Thitinan Pongsudhirak, on leave from Chulalongkorn University, is currently the Sir Howard Kippenberger chair at the Center for Strategic Studies, Victoria University of Wellington, New Zealand.

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