Learning lessons from Greece

For the last few weeks the newly-elected government in Greece could not get money to meet their debt obligation to IMF and other EU countries as it failed to produce an acceptable budget plan reflecting austerity measures. Yield on long-term Greece bonds jumped to over 23 per cent a year. Greece borrowed heavily from international markets to meet fiscal deficits in the past few years.  Greece's creditors in EU, mostly the German government and banks, are pressing hard for more austerity plans before rescheduling loans. EU has a policy target of fiscal deficits of 2 per cent of GDP (Gross Domestic Product).  
Greece is now suffering from high unemployment (over 25 per cent) and further cuts in public expenditure will cause that rate to go even higher.  The new socialist government came to power on the anti-austerity platform and they are resisting changing their stand against more austerity. It seems Greece is paying the price of profligacy for a long time.
Last week, May 09-15, The Economist published a letter from an Australian where he quoted an American adviser's assessment of Greece in 1946: It was virtually bankrupt. The government spent half the national income on non-productive uses. Corruption was rampant and the civil service was a farce…the wealthy escaped taxes….. The writer noted these comments still apply, except that Greece is now "truly bankrupt."
The Economist also published a story, titled, "The sorry saga of Syriza (the party in power now)". The article confirmed  what the letter from Australia concluded.  The report said, "Syriza has brought the opposite of what it promised. It vowed an end to depression in Greece. Instead growth has slummed. ….It promised to jettison the bad habits of old parties (cronyism), and seems instead to have acquired them".  
No wonder, the western creditors have taken a hard line despite plethora of cash in their vaults.  A Dhaka  English-language  daily published a paper from Sushovan  Dhar, titled, 'What can we learn from Greece?'  Mr. Dhar, a Kolkata-based activist, was critical of the bailout packages so far received by Greece from its major creditors as being insufficient to spur growth in the economy and suggested the Greece government to look into the Ecuadorian experience of setting up a debt audit commission to assess use of earlier debts as being illegal, illegitimate and unjust. He rightly suggested that governments in our region look to Greece for inspiration. As the Economist reported there is lot to learn about cronyism and corruption not to mention of misuse of debts.         
Against that kind of liquidity crisis in Greece there is glut of money in Germany and the USA. About a month back it was reported in the New York Times that interest rate in Germany  had become negative, that is depositors are keeping money now in banks  and expect to receive less than the amount deposited. A detailed chart was published in the NY Times about three weeks back. It also showed yield on 10-year Treasury bill was just 1.47 per cent, lowest in recent history. What does it indicate that there are serious financial imbalances amongst the countries in the world.  There is also lack of demand for funds in the surplus countries due to slow growth of investment by the private sector in their own countries. They are also reluctant to invest outside of their own countries, in particular, in the emerging market economies.  Known as FDI (foreign direct investment), its flow is lower now than before.
Some economists are suggesting that  the current level of high inequality in income distribution all over the world might have been playing a dampening role for the capitalist system to  create more incentives for the investors to invest more where the marginal productivity of capital is higher (Thomas Picketty).  Higher returns are available in emerging market economies. But many of these countries need political and economic reforms before more FDIs flow.  This is a paradox as over 2.0 billion people in the world are living below poverty level income, mostly in the developing world of Africa, Asia and South America. With so much of technological progress and so much of financial balances lying unused that hunger and deprivation shall continue to prolong human suffering is not justifiable on moral grounds. What are lacking in the present financial order are lack of better risk management models at macro and micro levels (Shriller) and more public investment in infrastructure  and human development.  
ASIAN INFRASTRUCTURE AND INVESTMENT FUND (AIIF): The recent proposal to set up an Asian Infrastructure Investment Bank (AIIB) by China is a timely initiative and many countries, including Bangladesh, have agreed to join.  It is expected  to  increase investment  in infrastructure that will help to meet the infrastructure deficits in Asia and increase mobility of people and goods and create more employment.
The human development deficits in these countries  are also quite large and should be addressed in the similar manner, by setting up  human development banks to support higher education and better health services. So far physical infrastructure development got priorities in public investment and human development functions have been left to a chaotic stage of mixed public and private sector that was never comprehensive. South Asia perhaps lacks mostly in human development investment and it would be great help if a South Asian Human Development Bank is set up to support students and institutions to offer more and better services.
It may be mentioned here that the US government funds huge amount to provide loans to students to study in colleges and universities. A report last year indicated that over $1.20 trillion as outstanding loans to students. We know the USA occupies a leading position in science and technology by the performance of major institutions of higher learning such as Harvard, MIT, Stanford, Yale, and UCLA.. HRD (human resource development) deficits must also get priority alongside physical infrastructure.
The writer is a professor of finance at Northern University, Bangladesh (NUB).