The Greek Economy and the Crisis: Challenges and Responses - Essay Example

? INTERNATIONAL BUSINESS: A CASE STUDY OF GREECE BY PRESENTED International Business: A Case Study of Greece In the current global markets, globalization is a force that has gained much power and applicability in explaining how states are interconnected economically, technologically, and socially, resulting in a single borderless global market, which encourages free movement of factors of production. Though may scholars have made emphatic attempts to define what globalization really means, numerous definitions have come up, with economical factors presupposing all the definitions, indicating that globalization is governed and directed by economic factors in the global market. For example, McGrew (1992, 23) defined globalization as “the multiplicity of linkages and other interconnections between states and societies, which make up the modern world system, and as the processes whereby what happens in a particular part of the world can have significant consequences for individuals and communities in quit distant parts of the world.” the interconnectedness described above refers to the creation of a borderless market, whereby factors of production are harmonized explaining the argument that what happens in one part of the world in a globalized world would certainly affect people far away, and not in any way related to such a country. Globalization is mainly driven by the search for low cost factors of production and the need to venture in new prospective markets, especially in developing countries. Since globalization involves integrating different ideologies with a common agenda from different countries, it is prone to effects of cultural, political, and social systems that exist in specific countries as well as the technological advancement in such countries. In most cases, the economic, political, and social cultural factors in a country have divergent effects on how the country fairs in a globalized market, and how the country affects other countries due to the interconnectedness in a globalized market. In this case, Greece will be investigated to determine how the above factors interplay to define Greece as a country today, and its place in a globalized market based on social, political and economic factors. In order to effectively survive in the current competitive global market, firms as well as countries have alike to exploit the available opportunities and utilize their competitive factors in addition to responding accordingly to changes in the foreign and domestic markets as they occur. In order for any country to have a sound economy management, global dynamics in economic developments in other countries, and the country’s internal dynamics regarding the balance of payment and balance of trade are essential to consider. Greece as a country in the current age overlooked some of the above considerations leading to a crisis that the country is facing today, politically, socially and economically; this has affected other Euro zone countries due to the interconnectedness of a globalized market. Similar to a company, a country has to formulate its development and growth strategies based on SWOT analysis. Political Factors Currently, Greece is faced with the worst political crises in the past 30 years (Economides, 2011). Political climate in any country is critical in affecting investments in a country towards growth or decline; it is critical in instilling confidence in potential investors to inject capital in such a country, with heightened political terms reducing the number of investors in such a country, implying a country will sink deeper into social and economic crises. As Wall & Rees (2009) elaborate, in international business, MNEs have to consider the political stability of a country or region before setting investments in such countries. Considering that as Lees and Wall elaborate MNEs are responsible for economic developments in many countries due to large capital base in terms of Foreign Direct Investments, FDI injected in a country, unstable political climate would discourage any injection of FDIs, meaning the country’s economy would either stagnate or grow negatively. An example of effects of FDI is observed in rapid developments in countries such as Brazil, China, India and others that have recorded impressive economic growths in the recent past due to an increase in the number of MNEs in the countries. Such countries are mainly selected due to their political stability and favorable systems. Crookes (2012) argues that Greece is currently facing its worst political instability over decades due to increased political competition and lack of proper policies and strategies to solve the impeding economic crises. This has led to an increasing public aggression, resulting in mass demonstrations, which at times turn violent and discourage investors in the country. For example, in 2009, the Prime minister , Karamalins announced a drastic snap election due to difficulties facing the new democracy government, establishing policies and strategies that would help the country out of its deep economic woes, and due to a series of scandals leading to resignation of several ministers (Gemenis, 2010). According to the Boston Matrix on market growth and strengths, the country could be considered to be at the question mark stage. This is because the strategies adopted by the leadership have led to a low share in a rapid growing European market; the country needs more cash at present than they can possibly generate to keep up with the market. The reason behind the political instability in Greece is due to poor leadership and policies. Jacobides (2012) accents to this assertion by arguing that the underlying issues in Greece are as a result of a crumbling political system and public administration, resulting to a few individuals who benefit from distorted economic flows, leading to massively depleted state resources and a serious stifling development in the country. The social –political structure in Greece as Jacobides explains has led to unworkable and wrong strategies, where the political administration has been spending too much on unnecessary expenses; lavish and unnecessary spending are some of the reasons why the country is in deep crises. This as Ayalp et al (2004) explains resulted in an economy that cannot attract FDIs, and the flight of FDI has denied the country considerable development and expenditure budget. Political developments and climate in a country as Wall, Rees & Minocha (2009) explain have a huge impact in determining the attractiveness of a country to FDIs from potential investors, which in turn helps in growing the economy. A special report by AD & B (2012) explains that in the recent past, political developments have been somehow favorable in Greece due to a tenocrat government that has put in place measures and policies to stabilize the economy and partly due to strict austerity measures forced by EU and other financiers. This implies the problem in Greece was more political and not economical; with a favorable administration, the fortunes seem to be getting better and for Greece. Economic issues Greece economy has been on the down trend in the recent few years. The country’s economy has been wavering in deep recession, to an extent that initiated a spiraling effect that affects other Euro counties Spain included. Greece economic problems have been blamed for the lack of taking advantage in opportunities to invest and unhealthy budgets that have eaten the countries reserves. Greece did not utilize the opportunities created by its entrance in EMU, and the organization of the Athens Olympic Games in 2004. Poor investment policies and reforms prevented the country from benefiting for increasing FDIs in the region (Panteliodis & Nikolopoulos, 2008). Generally, the country lacked in competitive, product, and institutional strategies as the country had great opportunities as explained above, but did not have any strategies to capitalize on such opportunities to ensure economic growth, coupled with a government that was ailing from poor administration (Jacobides, 2012). Panteliodis & Nikolopoulos, (2008, 95-96) present a comparison between Greece and Turkey on weights based on macroeconomic conditions, political environment, and public governance, labor among others to portray how Greece economic woes are a result of poor strategies and planning. This is because; Greece and turkey share similar terms related to attractiveness to FDI, and have similar advantages and disadvantages imposed by their geographical positions, and the challenges in transportation of goods to external markets (Loewendahl, 2001). However despite these similarities, Turkey’s economy is on the growing trend. The economic problems in Greece therefore partly portray to lack of ethics as the social contract theory illustrates (Donaldson and Dunfee, 1999); some officials as described above used their positions not to honor contracts, treating both people and organization unfairly. This led to more abuses on human rights; poverty has increased drastically as a result of the crises. Currently, Greece is facing the worst economic climate; borrowing costs are skyrocketing, credit is becoming tight, new projects as well as expansion plans have been put on hold, and the public sector is still facing more surgery, which will still drive more people to unemployment, increasing the poverty level in the country (Dody, 2010). This as many observers including the UN argue will finally result to a healthier economy, though it will be a stringent and painful process to many Greeks. Largely, the current economic crisis in Greece has been blamed on cheap credits, EU funds, and an economic largesse, which necessitated an EU bailout (Economides, 2011). Strict austerity measure programs and reduced public wage bill as well as reduction in pension has resulted in unemployment rate of about 16%, while tax evasions laws have been put in place to ensure the country collects as much tax as possible to aid in the bailout. The aim is to stimulate the economy towards increased production and favorable government policies that would facilitate and improve demand of products and services locally and at international markets; in addition to supporting industries to ensure increased employment to reduce the unemployment and poverty rate. Despite the attempts by Greece to redeem itself from the economic abyss, the country still observes poor policies that might discourage any potential investor willing to invest in the country. According to an article in wall street Journal, in 2010, starting a business in Greece was much more difficult than starting a business in U.S, though the former is in urgent need of FDIs to improve its economy. The country having a debt of 124.9% of GDP scored position 109 out of 183 countries in easiness of doing business in 2010 (Anonymous, 2010). In the country , one requires 140 days to start a business, 50 days to deal with construction permits, 107 to register property, 80 to trade across borders including other stringent financial regulations (Anonymous, 2010), while in U.S, it only takes six days and six steps to start a business. This is in addition to high macro-political and political risks which are a discouragement to investors in a market economy as (Wall, Minocha & Rees, 2010) explain. Trimmer et al., (2003) notes that Greece has a high potential and competitive advantage in the construction sectors averaging about 82% of the total, and in low technology equipment at about 10% of the total; these industries were responsible for supporting Greece economic development at higher rates than the average EU 27 members’ growth rate before the crises. In savings, the county scores worst among all EU countries in all years partly blamed on its lavish characteristics of individuals (Petrakis, 2012). Therefore, as Wall, Minocha, and Rees (2010) argue, with the right strategies and focus, the country can achieve competiveness and attract FDIs again, which will boost the economic developments again and reinvent fortunes of the country. Social issues Despite the problems faced by the Greeks, the Greeks portray peculiar characteristics. UNESCO (2002) Defines culture as set of distinctive spiritual, material, intellectual and emotional features of a social group, or a society; it encompasses ways of living together ,value systems, beliefs and traditions in addition to art and literature. Greeks observe a high context culture where personalities are defined more in terms of groups, and have a low space in terms of personal space. In other words, they enjoy a collectivism approach compared to most westernized people. Katz (2008) explains that it is of paramount importance to build trusting personal relationships among the Greeks, and people establish strong bonds before doing any business. Moreover as Katz (2008) argues, the Greeks have a high esteemed value for ‘saving face.’ Due to the strong networks they establish and strong bonds that result in high esteem, Greeks are wary of any embarrassment, and will terminate any negotiations if embarrassed. Diplomatic restraint is therefore advocated when dealing with the Greeks. Moreover, katz (2008) argues that Greeks are assertive people and will speak forcefully, with conversations getting loud and passionate. As Hostede (1980) explains, longtime orientation people would tend to focus more on the future and delay immediate gratification through persistence and thriftiness. The Greeks portray no regard for long term orientation in that as Petrakis (2012) elaborates, the consumption rate of the country is 70% of the GDP. This portrays a rate that is too high similar to other Balkan countries. Moreover, Jacobides argues that despite the economic crises and its stints, most Greeks could be observed in expensive shops buying gifts and other luxurious things, which indicate they have no regard for savings. Moreover, the economic factors facing them as explained earlier was as a result of cheap credits that they could borrow to finance a lavish life, and were considered the highest paid people in the region, especially in the public sector. Finance in the lavish lifestyle was therefore responsible for their economic troubles in addition to unethical malpractices as explained above. This portrays Greeks are weak uncertainty avoidance people. According to Hofstede (2008) Greece is ranked 60 in power distance index, 57 in masculinity index, 35 in individualism, and 112 in uncertainty avoidance. Moreover, Greeks are extroverts and lovely people, known for the hospitality and a relaxed way in which they approach the daily issues (Scuro, 2010). Solving Greece Woes The insurmountable troubles facing Greece in the last three years will live scars to the country and its population in general. However, despite these problems, many exerts are of the view that the Greece problem can in fact be solved; it was lack of strategy and poor polices on the part of Greek administration that such problem spiraled out of control as discussed earlier. Porters’ generic strategy outlines three approaches in which a firm or a country in this case can apply to take advantage of an opportunity and the market. These are: the overall cost leadership strategy that requires a country to be the lowest cost provider, implementing a differentiation strategy by creating unique services and products that competitors may not match, and finally, the focus strategy that requires a country to focus on its competitive segment and ensure they set benchmarks (Wall, Minocha & Rees, 2010); for example, Japan has set benchmarks in electronic goods. Greece productivity in its strategic industries had obviously underperformed, making the country to produce less; the country had to depend more on debts other than from such production sectors. This was the basic problem that the country was ailing from. Antzoulatos (2011) elaborates that the country’s main problem was erosion of international competitiveness over the last three decades and de-industrialization of the country. In other words, as Antzoulos (2011) explains, when a country creates conditions towards sustainable long term growth, they have to ensure coherent and medium term strategies that are enhanced by social consensus aimed at improving competitiveness, and movement of the factors of production to the tradable sectors. The country has therefore to stimulate its medium term investments in offering incentives, and ensuring more factors of production are directed towards this sector, which will increase production activities, boosted by a society that is willing to invest more on production rather than consumption. Such increasing production activities will improve the balance of trade, which will slowly heal the troubled economy. This is because; as Rajan (2010) argues rising credit, which is particularly obtained easily is the easiest way for governments to support consumption at levels that are not consistent with the real incomes of such a country. Therefore, encouraging more production rather than consumption would be the surest way to lift the country out of its credit abyss. As Porter’s Diamond model indicates, the country has to be ready to support its related and supporting industries to improve its financial balance (Wall, Minocha & Rees, 2010). Waignall (2011) describes various ways in which the Greece problem can be solved. These include: fiscal consolidation, involving fiscal rules, deficits, and debt burdens, which will lead to debt reduction, in addition to improvement of its affordability; this will improve the credibility of Euro. The second policy suggested would be allowing the government to issue Eurobonds, which will reduce the cost for problem countries, but will increase the costs for sound countries. The government has to put in place policies to put a firm lid on bond rates, or the QE policies, which will check the debt dynamics from going out of control, and supporting of growth strategies in such a country. Waignall (2011) further suggests that periphery countries may be forced to leave, or the large countries may choose to leave Euro in extreme cases, which will transform the sovereign credit risk in to an inflation risk; inflation risk is more manageable and would act as a competitive channel. Moreover, the country can implement structural growth policies involving labor, product markets and pension. Such a move will lead to reduced cost of fiscal consolidation and improve competitiveness through labor markets. On the other hand, Casey (2010) says that Greece authorities had portrayed effectiveness of implementing austerity measures in reducing the country’s debt level. In other words, the country has to dig deep and reduce the wage burden through massive layoffs in its public sector, and doing away with unnecessary duplication in departments, though this resulted to mass actions by civil servants. Such layoffs and targeting pensions would free the government from considerable debt in public spending, which might be redeployed t the growth and development sector, improving the country’s productivity, and employment in competitive sectors. On the other hand, Gelina (2010) suggests the Greek problem requires a Greek, and not a European one. In other words, the best Greece could do is to default its debts by pulling out of the Euro, and carry out an emphatic hunt for the old drachmas, which will allow the country to export goods and services with a cheap currency. Such a cheap currency will in turn spur drastic economic growth. However, such a move will be disastrous to the Euro zone; more and more countries might follow suit crumbling the entire Euro block, which most Euro countries especially Germany and France seem wary of. A weaker currency will greatly benefit a country in tourism and injection of FDIs as more investors stand to gain from such low currencies compared to their local currency or the Euro. Moreover, Greeks have to reconsider their consumption rates, and their low future orientation, which makes the country more focused on consumption rather than investing on production. This as explained has been the trend in the last 30 years, and is responsible for the country’s predicaments today. Greece in the recent past has been grumbling with a serious financial crisis that has made the country almost to default on its debts in the Euro region, creating spiraling effects of economic downturns in the region. However, many scholars have argued that the problem in Greece is a political and not an economical one; the country’s administrators have been involved in massive corruption cases, poor policies and strategies, or lack of any strategy particularly towards increasing production. The country has one of the highest consumption rates globally, and a low future orientation rate, and are known for a lavish lifestyle that has failed to be supported by their incomes, forcing the country to depend more on the cheap loans form Euro to support such lifestyle. To solve the problem, the country may float Euro bonds, undertake strict fiscal consolidation, and encourage structural growth in labor and product markets, among other approaches. On the extreme, the country may decide to default and leave Euro to have a new start with a low currency that is more likely to spur rapid growth and attract FDIs. References List Anonymous, 2010.The Greek Economy Explained. Wall Street Journal May, 7. http://online.wsj.com/article/SB10001424052748703961104575226651125226596.html [Accessed 9th Dec. 2012] Antzoulatos, A.A., 2011. Greece in 2010: A Tragedy Without (?) Catharsis, Int Adv Econ Res 17, 241–257 Ayalp, T., et al, 2004. FDI Attractiveness of Turkey. A Comparative Analysis, The Turkish Industrialists and Businessmen’s Association (TUSIAD) and the Foreign Investors Association of Turkey (YASED). Casey, M., 2010. No Need for Greek Bailout Now, France’s Lagarde Says, Wall Street Journal , March 13 http://online.wsj.com/article/SB10001424052748704131404575117963361743800.html [Accessed 9th Dec. 2012] Doddy, T., 2010. Greece’s Math Problem, Economic Policy, 175(9), 1-4. Donaldson T., Dunfee T. W. 1999., Ties That Bind: A Social Contracts Approach to Business Ethics, Harvard Business School Press, Boston. Economindes, S., 2011. Viewpoint: the Politics of Greece’s Final Crisis, BBC News, June, 17. http://www.bbc.co.uk/news/world-europe-13805391 [Accessed 9th Dec. 2012] Gelinas, N., 2010. A Greek Solution for A Greek Problem, Forbes Magazine, 16th Feb. http://www.forbes.com/2010/02/16/greece-financial-crisis-ecb-opinions-contributors-nicole-gelinas.html Gemenis, K., 2012. The 2010 regional elections in Greece: voting for regional governance or protesting the IMF? Regional and Federal Studies, 22, 107–115 Hofstede, G (2008). Geert Hofstede Cultural Dimensions. International Web site: http://www.geert-hofstede.com/hofstede_greece.shtml [Accessed 9th Dec. 2012] Hofstede, G., Culture’s Consequences: International Differences in Work-related Values, Sage, Newbury Park, California, 1980. Jacobides, M.G., 2012. The Real Problem with Greece. Business Strategy Review, 23(2), 64-67 Katz, L., 2008.Negotiating International Business BookSurge Publishing. Kuger, M. , 2012, The Business Impact of A Greek Euro Zone Exit. Dun & Bradstreet Limited Loewendahl, H., & Ertugal-Loewendahl, E. 2001., Turkey’s Performance in Attracting Foreign Direct Investment: Implications of EU Enlargement. European Network of Economic Policy Research Institutes, Working Paper No. 8. McGrew, Anthony. 1992. “Conceptualizing Global Politics.” A. McGrew, P.G. Lewis, et al., eds., Global Politics: Globalization and the Nation-State. Cambridge: Pantelidis,P., and Nikolopoulos,E., 2008. FDI Attractiveness in Greece, International Atlantic Economic Society, 14; 90-100. Petrakis, P., 2012. The Greek Economy and the Crisis: Challenges and Responses, Athens: Greece. Rajan, R. (2010). Fault Lines: How Hidden Fractures Still Threaten the World Economy. Princeton: Princeton University Press. Scuro, E., 2008. Public Relations in Greece. http://www.prssa.org/prsic/files/greece.pdf [Accessed 9th Dec. 2012] UNESCO, 2002. Universal Declaration of Cultural Diversity, A document for the World Summit on Sustainable Development, Johannesburg, 26 August – 4 September 2002 Wall, S., Rees B., & Minocha S., 2009. International Business. Montreal: Pearson Education Canada. Wignall, A.B., 2012., Solving the Financial and Sovereign Debt Crisis in Europe, OECD Journal Financial Market Trends, 2 Read More