What They Haven’t Told Us About the European Financial Crisis

University of Cambridge economist Ha-Joon Chang, author of 23 Things They Don’t Tell You About Capitalism, discusses the ongoing financial crisis in Europe, the economic situation in Greece, the myths surrounding the crisis and the new economic bubble, which he argues is about to burst.

Michael Nevradakis: In your book, you debunk many of the myths about capitalism that we often hear in the media and in conventional teachings of economics, myths that are often seen as conventional wisdom. What are some of the biggest myths that you have identified?

Ha-Joon Chang: Well, at least 23 of them, as I wrote in the book. I mean, there are more. But I think there are a few important ones that have played quite a big role in shaping our economy and society in the way it has evolved in the last two or three decades.

The first myth is that free markets are natural things, like the mountains or rivers, and we shouldn’t interfere with them. That’s the biggest myth, and I try to debunk it in the very first chapter of my 23 Things book. Also, there is a persistent myth that, starting from Britain in the 18th century and the United States in the 19th century, all successful countries have developed because they used free trade and free-market policies, which is completely untrue if you look at the historical record. For example, in the 18th century, Britain was the most protectionist economy in the world, and in the 19th century, the United States was the most protectionist economy in the world. This government industrial policy that countries like Germany, Japan, France and so on have used is quite well known.

The third one I would say is this myth that inequality is good for growth, that making rich people richer makes all of us richer. You might have a smaller slice of the pie, but if you give more money to the rich people, they invest and create wealth and jobs and in the end your pie will be bigger than what you had in absolute terms even if it’s a smaller piece of the entire pie. There are many more, but I think these three are probably the most important in creating the notion in the past two or three decades that the best thing you can do for the economy is to increase inequality, have free trade, privatize everything, and then everything will be fine.

Another myth that you’ve identified in a recent piece of yours is the myth of the so-called “lazy mob.” We’ve heard numerous media refer to the Southern European peoples in particular as lazy, as unproductive and people who simply don’t work hard. What’s your response to these accusations?

Well, first of all, what is this notion of being lazy? It’s based on even racist kinds of stereotypes, the stereotype that people who live in cold countries work harder and people who live in warm countries like Greece and Italy don’t work very hard. But if you actually look at the real statistics, you will find that on average, a Greek worker works for 2,040 hours, this is from 2011, and this is 40 percent more than the Germans and 50 percent more than the Dutch. So who’s the lazy one? Italians work over 1,700 hours per year and that is 25 percent more than the Germans. So it’s based on this completely mistaken idea that they are lazy, but that’s not why countries like Greece and Italy have problems.

The problem in those countries is that they have lower productivity than Germany or the Netherlands; their workers produce less income even though the hours they work might be much longer. This problem of low productivity is not really the fault of the workers. It’s the fault of their capitalists and the government, because unless your capitalists and your government invest in productive machines, invest in research and development to develop new technologies, invest in infrastructure like roads and ports and so on, national productivity isn’t going to rise. So if it’s anyone’s fault, it’s the fault of Greek capitalists and the Greek government, not Greek workers. So I think that this story of lazy Greeks and Italians is just an excuse invented by people who don’t want to do anything fundamental about the problems with those countries in the context of the European Monetary Union, and it’s very unfortunate that this kind of groundless theory circulates and is so widely accepted. We have to really rectify this kind of misconception.

We’ve heard proclamations by Greek politicians and also from European Union officials regarding Greece’s economic “success story,” and in particular the county’s new “primary budget surplus.” Is this success story and this surplus also a myth, in your opinion?

[Laughing] Well, yes, what you count as “success” depends on your goal. If you are Hitler, the number of Jews you have killed, the more Jews you kill, the greater the success. My view about this interpretation is that they are looking at the wrong goal. Why are we interested in creating wealth and generating income and so on? Because we want people to be happy and to have good jobs and have a fulfilling life and a comfortable life through material consumption.

On that account, the unemployment rate in Greece is still above 25 percent; youth unemployment is still above 55 percent. On that account, this is a complete failure. Yes, you have a so-called primary surplus, which means that your current tax revenue is bigger than your current spending if you exclude your repayment of government debt, but that can be called a success only when you think having a budget surplus is the most important goal. Yes, if you think that, maybe it is a success, but when you think about the human misery and poverty and deprivation that Greek people are going through, how can people have the audacity to call this a success? I just don’t understand.

Looking at the economic situation overall, you’ve dismissed the claims that we are now in an economic recovery and have instead argued that we are experiencing another economic “bubble,” one that is about to burst. Why do you believe this to be the case?

Yes, well, let’s look first at this recovery story. People talked about the lost decade of the 1990s in Japan. During that period, per capita income in Japan grew at the rate of 1 percent per year. If Europe is going to achieve that kind of growth over a 10-year period following on from the 2008 financial crisis, the European economy will have to grow at 3 to 4 percent for the next four years. It isn’t going to happen. Even if it is a recovery, and technically, yes, you have fallen to the bottom and are climbing up, so relatively speaking it’s a recovery, but recovery has been very slow and very weak, and you are going to have Europe’s lost decade, which is actually worse than Japan’s lost decade of the 1990s.

Now having said that, yes, there is one segment of the European and indeed global economy that is booming, which is the stock market and especially the leading stock markets of the world, in the United States and the UK: There’s a huge bubble. People agree that in the run-up to the 2008 financial crisis, in 2006 and 2007, you had a huge asset bubble, in the real estate market and also in the stock market. You know, the US stock market is 20 percent bigger than what it was back in 2007, while current per capita income is 1 percent higher than what it was in 2007. We have a bubble that is even bigger than what we had back in 2007 without any fundamental aspects of the economy changing.

The UK is slightly better, but in a similar situation: UK per capita income hasn’t even recovered like in the US to 2007 levels, and the UK stock market is basically at the same level as what it was in the autumn of 2007, when everyone, looking back, admits that there was a huge bubble there. So, yes, these bubbles are going to burst. The unfortunate thing is that we cannot predict the timing very well, and I cannot tell you exactly when this is going to happen, one year later, two years later, who knows? But when this happens, we’ll be in an even bigger mess, because last time, at least the governments could run some debt and kind of counter the downturn in private sector activities. This time around, many governments are not going to be able to do even that, so we are in for big trouble.

We are seeing further rounds of job cuts, cuts to salaries and cuts to vital public services in countries such as Greece, as well as the continued insistence of the EU and the International Monetary Fund for privatizations to push forward. What would the impact of these continued policies be, and can you point to any examples of such austerity policies succeeding in the past in leading an economy back to growth?

The only thing I can tell you in this regard is that this kind of austerity policy has never worked. The African countries [and] the Latin American countries tried the exact same recipe issued to them at the time by the IMF and the World Bank, throughout the 1980s and 1990s. Basically they had 30 years of low growth and stagnation, increasing inequality and deterioration in the quality of public services. In Latin American countries, per capita income used to grow at 3.1 percent between 1960 and 1980 when they had more interventionist policies. In the next 30 years, with all those austerity policies, privatization, free trade, you name it, their growth has fallen to one-quarter of that, 0.8 percent per year. In Africa, it is even worse. The African countries were not doing brilliantly in the ’60s and ’70s, growing at 1.6 percent per year, which is not too bad, but not brilliant, but in the next 30 years they basically have stayed in the same place. During that 30-year period, their average annual growth rate was 0.2 percent. That means that after 30 years, their income is less than 15 percent higher than it was 30 years ago.

This is a huge failure, and basically, when it comes to more historical experiences, you can look at this wonderful book by a British political scientist who teaches in the United States by the name of Mark Blyth. He goes through all these cases, 1920s US, Germany, Sweden and Finland in the 1980s, Latvia in the more recent period, and looks at them very carefully and comes to the conclusion that, yes, the only possible exception to this mold that austerity policies never work comes from Ireland in the 1980s, but it was in very special circumstances, because it just joined the EU and a huge amount of cohesion funds flowed into the country, basically countering a lot of these austerity policies, because even when the government was cutting spending, the EU was spending more; so yes, that’s probably one possible exception, but in every other case . . . look at a country like Latvia. Latvia has been touted as a success story of austerity in the recent period, but the country has managed to survive only by exporting huge numbers of people. The population has been falling at the rate of more than 1 percent per year. Even then, the population is quite poor, so I can tell you, basically, there’s no country that has succeeded with this kind of policy ever.

Do you believe that the euro, as a currency, and the common market were structurally flawed from the start?

Well, I’m afraid it was. The most obvious analogy with the European currency union is the United States. The US is another continental-sized economy with very diverse conditions. Parts of California and Massachusetts are among the richest places in the world; if you go to a place like Mississippi, you could be in a third-world country. Despite that, the US hasn’t experienced a problem like the European Union has when something goes wrong in some part of the economy, and plenty of things have gone bad in different parts of the US economy over the last 200 years, but it hasn’t had the kind of problem that the European Union has with Greece, Italy and Portugal because there’s a very high degree of fiscal integration.

So in the EU, if income falls by one euro in one of the countries for whatever reason, roughly five cents go back to that region through EU-level transfers. In the case of the United States, something like 50 percent goes back if income falls in one of the states through the Federal transfer system, so there’s a high degree of fiscal integration. Also, you cannot really compare the extent of labor mobility in the two economies, because, okay, in Europe you also have this freedom of labor movement, but the truth is that because of the language barrier and cultural barrier and differences in the structure of the housing markets and so on, actual mobility is very limited, whereas in America, lots of people move. For example, in the 1980s when all the heavy industries went into decline in the Midwestern states, a lot of people moved to the Southwest, like Arizona and New Mexico, and also California.

The point that I’m trying to make is, if you want a currency union, you need at least the US level of integration through labor market policy and fiscal integration and so on, and unfortunately, the euro was launched when these conditions were not there. So yes, I’m afraid that it might have worked had they introduced the common currency among the core five to six countries with similar levels of income and low language barriers and so on. Unfortunately this project was pushed when conditions were not ready due to political reasons, and we are living through the consequences of this ill-judged decision to launch the common currency then.

Would a departure from the eurozone and a return to a national, independent currency be a viable option for Greece, and how could Greece accomplish this and rebuild its economy under such circumstances?

Whether Greece should stay in the eurozone or not is a matter of relative cost and benefit. There’s no God-given reason why it should or shouldn’t. But yes, my view is if the European Union is going to maintain the current policy stance, it is better for Greece to exit the common currency and devalue its own currency and reflate the economy. Of course, the biggest trouble is that in the decade or so of currency union, a lot of Greek industries have been destroyed; so basically you have much weaker productive capacity to rebuild the economy even after you devalue, so it will be a tough struggle.

But when you look at examples like Argentina, which basically had a unilateral currency union with the US dollar in the 1990s, and when that didn’t work out it delinked its currency with the US dollar and defaulted on many of its loans, it became the fastest-growing economy in Latin America between 2003 and 2011. When you look at a case like that, you begin to think that maybe Greece will be better off outside the eurozone. My view is that frankly, unless you are really ready to leave the euro, the rest of the eurozone countries, especially Germany and so on, they are not going to give you many concessions, so I think it is also strategically better if you think about a future outside the eurozone in a more serious way.

Lots of Greek people are migrating or thinking of migrating, particularly the young and educated. However, you have written that economies such as that of the United Kingdom are facing a jobs crisis, and in particular, a crisis in terms of the quality of the jobs being created in these economies. What should these young people know about the state of the economies of countries such as the United Kingdom and others?

Yes, not to exaggerate, but the UK has become a very polarized economy. There are a lot of well-paid, too well-paid investment bankers; there are a lot of well-paid high-tech researchers and marketing agents and so on, but then there are increasingly fewer stable jobs for skilled workers as there used to be, and the rest of the population is now working very low-quality, low-paid and very unstable jobs in supermarkets and call centers and so on; so yes, I mean unfortunately when young people from Greece move to Britain, unless they are extremely highly qualified and have a Ph.D. or something, they’ll usually end up in very low-paid, unstable jobs like waitressing and cleaning and so on.

I mean, if the situation continues in the way it has in Greece, even those jobs might be better than staying in Greece because if you’re a young person, the chance of you being unemployed is higher than 50 percent. So yes, unfortunately even with such poor conditions in the UK and other countries, young people from Greece might still want to move, but yes, they have to realize that the situation in these countries, especially in Britain, is not very good, and that this has made the local population very hostile to people from other EU countries coming and working in Britain, so they have to bear that in mind.

You’ve argued that neoliberal economic policies do not work. What alternative economic system do you propose? Do you believe, for instance, that we should move toward a post-capitalist system?

Well, I don’t think that we are ready for post-capitalism. No one has provided a convincing vision of what a post-capitalist economy could be, especially after the fall of the Soviet model. The point I want to emphasize is that neoliberal capitalism is not the only form of capitalism. Actually, if you look around, capitalism has enormous varieties. American capitalism is very different from the Japanese one, which is very different from the Swedish one, which is very different from the Italian one, which is quite different from the French one and so on. There is a huge variety of capitalism, and don’t forget, even the US and Britain, the two centers of neoliberalism, even they were not neoliberal until the 1970s.

In the 1950s, under the Republican President Eisenhower, the top income tax rate in the United States was 92 percent. Even in those countries, this neoliberal capitalism is something quite new, and I think we have a lot of possibilities of modifying capitalism. We may take it for granted, but if you try to tell about today’s Sweden or Finland to a 19th century capitalist or a 19th century free-market economist, they would call those countries socialist, with the government taking more than 50 percent of output in taxes and spending more than 30 percent of GDP for social welfare, and a lot of regulations of what business can and cannot do, and in countries like Finland, quite a lot of state-owned enterprises.

Depending on who you are, you may actually call those countries socialist, and if you consider that, yeah, maybe we have already some element of a post-capitalist system, but even accepting that these countries are fundamentally capitalist, which I believe they are, there are many different ways of running capitalism. This neoliberal capitalism that has dominated the world in the last three decades is one of the worst forms.