Greece’s North Korean Solution

Greece has a plan. A good plan. And it’s from the playbook of ... North Korea.

Say what?

It’s no secret Greece’s reform efforts have floundered. Policymakers fumble most every attempt at privatization, and lawmakers haven’t done much to help the private sector be more competitive—the World Bank ranked Greece 100^th in its 2012 Ease of Doing Business report, only one spot higher than in 2011. This puts Greece in a rather precarious position, considering it needs sustained economic growth to break out of its fiscal funk. And to get that economic growth, it needs heavy private investment—both from Greeks and foreigners.

But with high taxes and an unnavigable maze of bureaucratic red tape, Greece has had trouble attracting investors—capital tends to flow where commerce is easiest and profits most likely, and after five years of recession, Greek industry probably looks like a veritable sinkhole compared to other nations. New Prime Minster Antonis Samaras seems genuinely to want to make Greece’s business environment much more attractive, understanding low taxes and light regulation attract the most private investment. But nationwide tax cuts and deregulation may prove tough with Parliament (and his ruling coalition) so fragmented—and even if these measures could sail through Parliament, Greece’s creditors would likely deem tax cuts inconsistent with deficit reduction, ignoring their long-term economic benefits (like higher growth, a bigger tax base and, thus, higher revenue).

Hence, Greece is now targeting a more incremental approach: Establishing special economic zones with less bureaucracy, easier permitting processes and special tax breaks for businesses and entrepreneurs. Developing nations have long used special economic zones to introduce pro-market reforms and attract foreign investors. China has several—most notably, Shenzhen and Wenzhou—where local governments have relatively high autonomy over economic policy. Their financial systems, international trade policies and tax regimes tend to be more liberalized than the rest of the country, and they’re lightning rods for private industry and foreign investment.

North Korea recently began pursuing special economic zones in earnest. The Rason Economic and Trade Zone and Hwanggumphyong and Wihya Islands Economic Zone are key to its development plans—in these areas, private enterprise and profit-taking are legal, and foreign entry restrictions are relaxed. All seek to take advantage of North Korea’s geographic advantages and vast natural resources, eventually becoming manufacturing, tourism and export hubs. And the historically isolationist, communist regime in Pyongyang seems to understand that while private commerce doesn’t mesh with its traditional values, it probably is necessary to bring an end to years of famine and poverty and bring its people out of (literal) darkness. (Whether they follow through, of course, is another matter.)

Obviously, Greece’s issues are nowhere near North Korea’s—it doesn’t have a starving population of subsistence farmers or a freedom-hating, international pariah communist government—but it does have pretty glaring economic competitiveness issues. It also has key geographic advantages, like its coveted harbors and positioning as the sole link between Europe and Turkey (a potentially huge trade advantage if Greece and Turkey ever resolve longstanding differences). If special economic zones can help third-world nations exploit their advantages and find paths to prosperity, they can likely give Greece a shot in the arm.

That is, if Greece even gets to establish them. According to development minister Kostis Hatzidakis, Greece is encountering some resistance to this plan at the European Commission. Not because commissioners think it’s too small a change and wouldn’t pull Greece out of recession fast enough. No, it’s because “the creation of such zones would give the country a comparative advantage.”

Sigh.

I’m not sure which is more nonsensical: That Greece’s using a third-world economic stratagem to boost its (at best) second-world economy somehow gives it a leg up over vibrant, dynamic core Europe—or that, if this were the case, it would be a sin. Moreover, Greece owes the European Commission billions and billions of euros. You’d think they’d want it to grow as quickly as possible, however possible. And with many European nations’ central banks’ Target2 claims against Greece mounting, you’d think they’d champion any scheme that would attract a much-needed foreign capital influx.

Alas, however, it seems Greece is only permitted to better itself if it abides by the EU’s rather funny definition of competition. At every turn, Brussels has called synchronization competition, and true competition uncompetitive, and some European leaders have regularly tried to force more competitive member states to handicap themselves for the sake of supposed fairness. My favorite example is Ireland, whose decidedly competitive 12.5% corporate tax rate is an anathema to the rest of the union. Rather than actually lower their own rates to compete for business, some in Europe would prefer to forcibly level the playing field and make Ireland “harmonize” its rate with everyone else’s. And now, it seems, rather than actually compete with poor Greece, some would rather see it continue floundering.

My sincere hope is that Greece pushes through—reminds Brussels it’s a sovereign nation that can do what it darn well pleases, points out that special economic zones are fully compatible with EU treaties, and goes about its merry way. I’d suggest shoving Article 174 of the Lisbon Treaty in every naysayer’s face and arguing special economic zones could be a great way to accomplish the EU’s aim of “reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions.” I think it goes without saying that if Greece has resorted to taking tips from North Korea, its economy is rather, well, backward.

And if some European leaders think Greece’s proposed solution might work a bit too well, maybe they should quit complaining, adopt it in their own countries, and reap the benefits.