NEWS,07.08.2012

Why Financial Discipline Won't Save Europe and How Governance Change Might Do the Trick

 

The EU has taken a hesitant but crucial step towards its own integration and the survival of the Euro. Through the provision of bank guarantees, the vicious circle between latent currency instability and deposit runs may have been broken. Bankia may be relieved that it will not be run into the ground by Spaniards' fear of a Euro-exit.This solution might have been politically complicated, but it was not fundamentally difficult. And we all know that the deeper and more difficult issues remain. Press and politicians alike focus on fiscal integration and the need to revisit sovereignty and fiscal discipline. Some, mostly southerners, argue that an integrated Europe is worth the cost and adjustments. Others, mostly northerners, are concerned with the potential costs to themselves or the project's long-term viability and desirability. The European project risks becoming a zero-sum game edging towards disaster, and all seem to be forgetting an important point: The problems of the south are structural rather than fiscal.If we consult the OECD's statistics on hours worked per worker, we see that the country with the highest national average after Korea is none other than Greece, which has been steadily closing in on the top spot. The Netherlands comes last, with Germany just ahead. How can this be? Don't Greeks sip ouzo on the beach while the virtuous Germans build cars? According to the statistics, that is entirely wrong. If we look closely, we see that the real problem for Greeks  at least, those with jobs is not that they're work-shy. It's their monstrous public sector, which is inefficient, often corrupt, and prone to meddling with the allocation of productive effort in the private sector. In other words, Greece's problems are fundamentally structural. Its administration is bloated and hopelessly bureaucratic, unable to reform itself. The story of Greece is the story of a failure in governance.These structural problems, which cause tax evasion (and are often seen to justify it), are not unique to Greece. Spain's massive banking mess with the Cajas de Ahorros is due to local politicians' influence on banks, and their iniquitous links to property developers. Italy, too, suffers from nepotism, political clientelism and corruption. It is precisely this endemic southern European disease (most acute in Greece) that the EU can fix.The problem with structural reform is that it upsets established links, interests and routines. It goes against the grain of the political and administrative infrastructure. It is always part of political rhetoric, yet rarely translates into practice. So EU restructuring projects may offer the continent a unique opportunity to tackle this problem. In Greece, the troika (the EU, ECB and IMF) provide the ideal potential vehicle for something that the Greek public desires, but its politicians cannot (or will not) deliver. What Europe now needs is a union that helps reform the governance of weaker countries. It's not about wealth transfer, but about a set of changes that help us all. This might fly in the north, too. It's time to use the EU as an objective yet proactive arbiter who will help restructure weaker countries through greater transparency and the redesign of their administrations.The benefits are manifest, but change is alarmingly slow. Greece's story is a case in point. The last three years have seen little progress in structural reform, particularly in areas like administrative rationalization or tax evasion. Greece has been able to get away with disastrous "fiscally equivalent" measures where structural goals were not met, leaving the original problem intact. The EU task force is an overwhelmed and unwelcome band of mid-level European bureaucrats who speak Greek; what is needed is a focused group of senior change managers with a strong mandate. Neither resourcing nor expertise has been planned for administrative reforms. And while the troika now recognizes the problem, the new Greek government is poised to defend the crumbling public administration and its protégés. So what can be done? EU Task Forces such as those operating in Greece should not just support ministers with expertise. They should be empowered to identify governance issues, corruption and administrative failings and suggest solutions. They should be able to require for Key Performance Indicators to be published and support their digestible presentation. They should facilitate Greek-led initiatives to bypass or report corruption and cronyism, and their recommendations should not be merely consultative. But doing so not only requires Greek politicians play along and accept that mandate, but also means the EU has to change its ways and its people. Change managers and governance experts must replace polite bureaucrats with conservative reflexes.Europe has a future, and at the heart of it lies improving the governance of the south and borrowing from the achievements of the north. This will require a change of approach, so that we find those with the skill -- and the will -- to lead the change effort. Redesign and execution should be the target, and the World Bank's recent change of heart, now offering assistance to help rebuild Greece is welcome. Let's hope that northern European leaders will push in this direction. Southern Europe's citizens may eventually have something to be thankful for.

Cuba's aging population will test economic reform

The scene at Havana's Victor Hugo Park is unfortunately typical, with a handful of boys kicking a soccer ball through trees while dozens of gray-haired seniors bend and stretch to the urgings of a government-employed trainer.So few children, so many elderly. It's a central dilemma for a nation whose population is the oldest in Latin America, and getting older.The labor force soon will be shrinking as health costs soar, just when President Raul Castro's government is struggling to implement reforms that aim to resuscitate an economy long on life support."We must be perfectly clear that the aging of the populace no longer has a solution," Castro's economic czar, Marino Murillo, told lawmakers in an alarmed tone last month. "It is going to happen, and that cannot be changed in the short term. ... Society must prepare itself."The aging of Cuba's population has its roots in some of the core achievements of Fidel Castro's revolution, including a universal health care system that has increased life expectancy from 69 years during the 1960s to 78 today, comparable with the United States.Abortions are free and it is estimated that half of Cuban pregnancies are terminated. High university graduation rates, generally associated worldwide with low fertility numbers, have Cuban women averaging 1.5 children, below the rate of replacement.Cuba's National Office of Statistics says about 2 million of the island's 11 million inhabitants, or 17 percent, were over 60 years old last year. That's already high compared to Latin America as a whole, where the rate is somewhere north of 9 percent, extrapolating from U.N. figures from 2000.That U.N. study shows Cuba's population is aging even faster than that of China, which has forbidden couples to have more than one child. Cuba's rate would be typical in a wealthy European nation. But Cuba lacks the wealth to cope with it.The trend is accelerating, with the number of seniors projected to nearly double to 3.6 million, or a third of the population, by 2035. During the same period, working-age Cubans are expected to decline from 65 percent to 52 percent.The future may look a lot like Emelia Moreno. Still vigorous at 75 years old, she lives alone in a small apartment in Central Havana and spends much of her time at a neighborhood senior center that provides 1,000 retirees with medical attention, meals and social activities such as singing and dance classes."Cuba is fighting so that people of a certain age don't feel too bad," she said.But her only child left for the U.S. a decade ago, and she knows that one day she'll be completely dependent on the government because she has no family to take care of her when she cannot."I had heard people talk about how they felt empty when a family member left, but I had no idea," Moreno said, caressing a photo of her daughter, Yeniset.The graying trend can be traced partly to the country's weak economy, resulting in the loss of people such as Yeniset, an outflow of 35,000 per year as people seek opportunity in the United States and elsewhere.Research shows emigrants are increasingly women of child-bearing age, which compounds the problem, according to Alberta Duran, who was among the first to examine the aging trend before retiring from her post at a Cuban sociological research institute."The aging population has been turning into Cuba's biggest demographic problem since the 1990s," Duran said.By 2021, more Cubans will be leaving the workforce than entering, according to government projections.The contracting labor pool presents a challenge for Cuba's goal of making the country more productive and efficient without abandoning its policy of providing for everyone's basic needs. Officials aim to eliminate 1 million redundant government jobs and grow a non-state sector that, it is hoped, will account for 40 percent of economic activity compared with about 15 percent today."Reform becomes more difficult due to emigration,"said Sergio Diaz-Briquets,a Washington-based expert on Cuban demographics. "Those who leave are the youngest, best-educated and most ambitious."And with the ranks of seniors increasing, Diaz-Briquets said, resources that could be used to stimulate the economic project inevitably will have to be diverted to care for the elderly.Demographers agree that Cuba's population has topped out around 11.2 million, and negative growth will be the rule for the foreseeable future.Murillo, the economic czar, said authorities are studying measures for next year to try to stimulate fertility rates, but he did not give details."We are going to have a serious problem with the availability of a labor force," Murillo acknowledged.In recent years Cuba has implemented a number of measures for the aging, including an expanded denture distribution program and establishing "grandparents' circles" of elderly citizens who get together for activities and help each other out when the relatives they live with are at work.Authorities recently asked seniors to keep active later in life by rolling the retirement age progressively back from 55 to 60 for women and from 60 to 65 for men. Raul Castro himself is already 16 years past his golden-watch moment, at 81.Cuba recently allowed retirees to return to work and still collect their pensions. They're also being encouraged to join the class of small-business owners setting up shop under Castro's reforms, though experts say that idea has limited potential.Aging populations present difficulties for countries around the world, and attempts to spur birth rates have produced meager returns, Diaz-Briquets said.But he suggested that if Castro's reforms can create more opportunities for private enterprise, Cuba might be able to woo immigrants from countries where extreme poverty is rampant and homicides are skyrocketing, places where the Communist-run island's free health care and relative public safety might seem a good alternative."The situation in Haiti and some Central American nations will continue to be even worse than in Cuba," Diaz-Briquets said, adding that a post-U.S.-embargo Cuba could be even more attractive to potential migrants from those countries. "The way things are going, and assuming some more positive scenarios for Cuba, the idea doesn't seem that outlandish."