Economy, Politics and Governance

PIGS: The Achilles Heel of the EU and lessons for Sri Lanka’s policy makers and corporate sector

First it was the Swine ‘Flu and now it’s the PIGS. The four countries of the European Union; Portugal, Ireland, Greece and Spain, saddled with the current debt crisis, weak economies, and high unemployment; are referred to by the acronym PIGS. Will it be the end of the road for the European Monetary Union (EMU)? The EU “fortress” was meant to withstand such crises and provide protection for it’s member states. However it’s “immortality” has been threatened by its Achilles Heel, the PIGS. Greece started it and so I thought it appropriate to refer to Achilles.

We all know the term “Achilles’ Heel”. However, for those who need to refresh their memories, Achille`s was the son of the Sea Nymph Thetis and King Peleus of Thessaly, in Greek mythology. He was half divine hero, made immortal by his mother when he was a baby, by holding him by his heels and dipping him into the river Styx. Thetis made Achilles’ whole body immortal, except his heels. Achilles became a hero with many battle victories under his belt, but was finally killed by the Trojan prince Paris who, knowing Achilles’ weak spot, shot an arrow at his heel, – the only vulnerable part of his body. To draw a parallel, the most vulnerable of the sixteen EU countries, the PIGS, may even destroy the EU. As an exporter, I hope this worst case scenario does not happen, because the weak Euro is already causing havoc with our export earnings converted to Sri Lanka Rupees.

The crisis, which first surfaced in Greece, blew up quite unexpectedly because according to some analysts the accounting in most Greek Government offices and Ministries is chaotic and the exact situation difficult to assess. Some even suggest that their accounts were knowingly or unknowingly falsified, and some have alleged that even the national accounts have been ‘padded up’ for decades. This is hardly surprising in the country where Aesop’s fables originated! Perhaps that is unfair by Aesop, though, whose fables have tremendous educational and moral value.

Greece’s Achilles Heel: expensive civil servants

While the most vulnerable part of the EU right now is Greece, the most vulnerable part of Greece seems to be the inflated public service. Apparently, public servants there are paid extremely well, receive two bonuses a year, are paid extra allowances for using a computer, for speaking a foreign language and even (hold your breadth) for coming to work on time. They enjoy attractive pensions, and on the demise of a pensioner it passes on to any unmarried (even divorced) daughter. There are many Government committees that recruit additional staff, and all are paid by the Government. It is estimated that there are more than 10,000 employed by these committees, costing 220 million Euros a year. There is a story that there still exists a committee to manage a Greek lake, Lake Kopais. Lake Kopais dried up in 1930!

Estimates are that about 40,000 women benefit from the pension system where the pension of the dead civil servant parent is transferred to them. Civil servants could opt to retire at 40 even though the normal retirement age is 60 for women and 65 for men. The retirement age would be reduced if they work in potentially harmful environments or where their job is physically strenuous. These details have emerged in many articles recently. Their accuracy, I have not verified.

Now, the Greek Government is planning to reduce these benefits and cut salaries. It is a bitter pill, and it’s no surprise that the affected population is marching the streets in protest. These cuts will no doubt be politically unpopular but it is the delay in courageously addressing them that has made things even more difficult.

The lessons for Sri Lanka are obvious. We need to keep the budget deficit within control. What percentage of GDP this should be, is for our policy makers and economic advisors to decide. We should not go overboard and burden the Government budgets with fancy non-contributory pension and other benefit schemes. We should carefully assess the feasibility and economic returns of the projects we undertake, and restructure the loss making state enterprises without delay.

Lessons for our corporate sector

Even privately managed companies which had been very generous in good times are suffering today. They are unable to reduce the benefits that have been given to their employees. When times were good some companies wanted to be model employers and introduced many benefits, but when the recession struck they were no longer competitive. They lost out to producers in countries such as Bangladesh and Indonesia where worker benefits are generally lower. I am not for a moment advocating a poor working environment, but simply stating that whatever we do should be sustainable in difficult times and in the long term. Hundreds of factories have closed recently and thousands have been rendered jobless. Many of the workers have taken loans to build houses, leases to acquire a motor cycle, and embarked on education programmes for their children. They never dreamt that their employer would close down and that their dreams of the future would evaporate so suddenly. Perhaps, it would have been better to have created lower expectations. I have come across several senior persons in companies who complain of the high employee costs of their permanent workers and say that even retrenching is out of the question because Sri Lanka has the fourth most expensive severance payment structure scheme in the world.

Lessons from international giants

There are many international examples of this too. An oft-repeated issue when Ford Motor Company ran into difficulty was the so called “legacy costs”. The high wage and pension benefits made their unit labour costs, and the pension and healthcare cost per vehicle, one of the highest.

Henry Ford never liked unions. He had refused to recognize a union and even vowed to close down the plant rather than recognize unions. He gave in only after the Federal Government intervened and his wife threatened to leave him. Subsequently, the unions fought and obtained many benefits over the years. By 2007, Ford was in deep trouble. The retired employees who enjoyed pension and health care benefits far outnumbered those in employment. Labour historians now argue that Ford and General Motors made a terrible blunder by agreeing to long-term promises such as the health and pension benefits and cost-of-living adjustments.

I have always advocated having unions. It is easier than dealing with a multitude of individuals. However the unions, including the parent unions in Sri Lanka are very ignorant of current international economic trends and have no interest in productivity or competitiveness. A trade union leader once told me that he began losing membership because he was promoting productivity. We need an institution that provides guidance to union leaders. Unions have to understand that we need to be competitive with the rest of the world.

The famous ceramic and crystal company Waterford Wedgwood is now under bankruptcy protection after a glorious history of 250 years. Here too it was partly the “legacy costs” that were to blame. Production facilities are moving to countries where input costs are less. We need to keep inputs under control, or change the entire production structure to higher value-added products. This requires a more educated and skilled workforce which we do not have. When the cost of living rises, Governments tend to increase minimum wages without addressing the fundamental issue of weak skills.

Learning from others’ mistakes

Sri Lankans usually detest being warned. Most believe that what has happened in other countries are either irrelevant or would have no bearing on Sri Lanka. We saw this with the recent Global Economic Crisis. As the crisis unfolded, there was reluctance to admit that the economic woes of other countries would impact our country. When I suggested to a Government committee at the beginning of last year, that we even conduct a series of seminars educating companies on how to handle the crisis and exchange experiences of successful coping strategies adopted by some companies, I was told that it would mean an admission that there is a crisis, and my idea was shot down. The subsequent experience of factories closing down, many more downsizing, and thousands being laid off, was enough proof that we actually did have a crisis, although the nation as a whole did not suffer. Of course, the government servants who received their salaries on time, every month, with no uncertainty, never did experience a crisis.

I will still take a risk and make my point, not only for national policy makers but also to the corporate sector, because what Greece has gone through as nation, and what many international companies have gone through, are cases in point and we could learn many lessons from their mistakes.

In recent times I have noticed several articles and letters warning that a large public sector and high public expenditure would spell doom for our country one day. However, we are still surviving and the economy is still strong. I hope national policy makers would not disregard these warnings and behave like the villagers did in perhaps the most popular tale “The boy who cried wolf” by Aesop, the renown Greek story teller. Nevertheless, I still hope that the wolf would never come.