The story in Greece is a result of intertwining plots. One major plot concerns economic populism. It is a reminder that populist measures tend to ignore scarcity. It highlights that the policy of spend, spend and spend and then hoping someone else will take care of it, is risky.
With a brick wall up ahead, the Greek government is frantically trying to change its course. It plans to raise taxes, combat tax evasion and cut the salary as well as bonuses of its bloated civil services. Massive cuts are in order. It has to do this urgently because not only Greece is on a collision course, but also because the International Monetary Fund and European governments have told the Greek government that if the country expects others to save Greece, Greece has to be serious about saving itself.
The policy as demanded by the IMF and EU is harsh, but Greece would not have reached this juncture if it had not spent to please Greek voters with impunity. At so many points, there were so many opportunities for the Greek government to stop indulging in immediate gratification. There were so many chances to cease appealing to crass populism.
But no. They wanted to keep the voters happy. Political expediency was more important than responsible fiscal policy. To finance its spending, Greece even misreported its statistics. Oh, what was that about government as the guarantor of transparency in the markets?
It is all too late now. Only hard choices are on the table. The party is no more.
Greece is in so great a wreck that the possibility of bankruptcy is very real. Funny that even in times of great distress, certain fractions within the Greek society are protesting against plans to address structural fiscal deficit suffered by the Greek government. Shockingly, they want the clearly unsustainable status quo to remain.
The Greek Communist Party for instance staged a protest against the austere fiscal policy, which the IMF and the EU demand in exchange for bailing Greece out. Perhaps, it is unfair to single out the Communist Party in such a manner. The outrage in Greece appears to be one shared by many outside of the Communist Party. It is popular outrage after all.
That popular outrage is a little amusing. Where was the outrage when outrageous demands were made and met? It was this populism that brought Greece to where it is today. Due to that, there is some sadistic value to the whole episode.
The Greek government has shown political will to see through reform that the country needs so far. It has no choice. A capitulation to populism at this point will prove to be more costly than the cost austere fiscal measures. The fact that a left-leaning government — typically a leading proponent of government spending — has now become the leading proponent of the austere measures is telling. They finally realize that their freewheeling spending programs invite disasters. It invited disasters.
Greece is so far away from Malaysia but the story of populism is relevant. Perhaps, a comparison between Greece and Malaysia is an overkill, especially as the memory of the Asian Financial Crisis — which is more or less thirteen years old — fades. Yet, the pressure of populism is present in Malaysia. It is not hard to name these populist pressures.
Expansion of the civil service, demand for special treatments, pork-barreling during election times, opposition to subsidy removal, opposition to introduction of goods and services tax to replace existing sales and services tax, call to nationalize highways and effort to provide water free of charge are among many examples that will surely increase government expenditure without raising the necessary revenue to fund it.
In fact, at least three of the pressures that exist in Malaysia contributed to the Greek fiscal mess.
We are not done with 2010 yet but at the rate Malaysia is going, 2011 is likely to be the 14th consecutive year that the government is running a fiscal deficit. Clearly, Malaysia is suffering from a structural deficit. Needless to say, cyclical spending, which is largely unavoidable, exacerbates the situation.
The size of government in Malaysia is wildly big. Its scope is maddeningly wide. Its cost is incredibly huge. Malaysia needs to address this. This is why the story of Greece is a compulsory reading for all public office holders. Beware: populist measures will not address this concern, even up to the very end.
First published in The Malaysian Insider on May 11 2010.
n/b — there are multiple grammatical problems at the TMI article. That is entirely my bad. I was rushing the article through. I know, I look stupid now.