I have argued in this blog several times that Greece’s problem is primarily an international one: if Greece were sitting on the world’s largest oil reserves and didn’t need any funding from abroad, few people outside Greece would care what the Greek government spends money on and/or how much it wastes.
Instead, Greece has been foreign-funded as long as memory serves. Initially, world powers provided funding in view of Greece’s geopolitical importance. Then, Greek guest-workers remitted their earnings back to their home country during the 1960/70s. After joining the EU, the flow of EU-grants began. And, finally, with the Euro, the flow of cheap Euro-loans began. Had Greece not received any such foreign funding, its living standard today would be reminiscent of a developing country (or it would have tried harder to improve the living standard on its own…).
Thus, the Greek economy has become dependent on foreign funding in a similar way that Cuba had become dependent on financial support from the UDSSR (export markets for overpriced Cuban goods, loans and grants).
Greece should pay attention to what happened to the Cuban economy when Soviet support was dramatically curtailed after the fall of the Iron Curtain. During the 3 years following, Cuban GDP collapsed by 30-35% because imports had to be radically curtailed and couldn’t be substituted domestically! The country which had become poor after the Castro revolution now became an economic basket case. The same thing would happen to Greece if foreign funding came to a halt.
Soviet support (i. e. foreign funding) made the inefficient Cuban economy even more inefficient because there was no incentive to improve. Just like Greece is now importing agricultural products like olive oil, tomatoes, potatoes, oranges, etc., Cuba imported sugar. Since Cuba could export poor quality products at high prices to the former communist Eastern block, it didn’t have to try hard to develop an export culture. Greece didn’t have to try hard to develop an export culture because it got cheap foreign funding from banks almost without trying.
So what did Cuba do in order to improve its situation?
Basically, Cuba did what this blog has argued all along (albeit with limited success in the context of a planned, communist economy): if you recognize that your biggest challenge is to get foreign funding, you have to figure out ways how to get that.
Cuba tried to attract foreign investment and tourists from abroad. Secondly, many Cubans became guest-workers (mostly in Venezuela) and remitted their earnings back to Cuba. Finally, Cuba found a new sponsor with Venezuela.
Despite all the progress since then, Cuba is still in an economic condition which Greece never wants to find itself in. But Greece could get there because its trade balance is not much better than that of Cuba and its tourism even lags behind Cuba’s (proportionally).
Cuba has secured voluntary foreign funding through increased tourism, new foreign investment, guest-workers’ remittances and – above all – through a new foreign sponsor. If the Cuban economy is still a basket case despite of that, this only proves that the communist system is not a very good one.
I have found this – quite old – country review of Cuba by Rabobank which repeatedly points out the importance of the Balance of Payments (primarily the current account) when attempting to increase the living standard of a developing economy. Thus, the often stated message of this blog is very simple:
1. Curtail imports.
2. Substitute them domestically wherever possible.
3. Increase exports (Free Trade Zones) and tourism.
4. Attract foreign investment.
4. Attract foreign investment.
5. Stop capital flight with capital controls.
And if Greece does all that, it won’t need to look for a new financial sponsor because the EU will be happy to support a well-functioning Greece.