Resilience: notes from the Greek crisis

(Keynote address at the annual European Foundation Conference on 20th May 2015)

Thank you to the European Foundation Centre for inviting me to speak at your conference. I feel very honored to be here. I have the deepest respect for those who actually do something about the problems of this world. I know that the room is full of such people.

I was asked to speak on the general topic of “resilience”, so I had to look it up, to see how the term is used in various disciplines. It seems to be common in psychology, in social work, and also, with regards to the organisation of cities. I have no relation to any of those subjects. So why am I here, speaking about this?

I think it is because I live in a country whose resilience has been tested like no other country in the rich world, recently. Also, I am an economist who has observed and written about the crisis on the micro-level, near to the ground, where resilience is tested. And finally, I am an investor in new businesses in an environment where businesses have been wiped out by the thousands.

So I will speak with all three hats, in sequence: first as a Greek, then as an economist, and finally as an investor.

As a Greek, I grew up with the fables of Aesop. Our parents and our teachers would tell them again and again. One these is perhaps the earliest story about resilience: the oak tree and the reeds.

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“A reed got into an argument with an oak tree. The oak tree marvelled at her own strength, boasting that she could stand her own in a battle against the winds. And she condemned the reed for being weak, since he was naturally inclined to yield to every breeze. The wind then began to blow very fiercely. The oak tree was torn up by her roots and toppled over. The reed kept bending to the strong wind, and was left unharmed.” Those who adapt to the times will emerge unbroken.

I am struck by this advice, resonating down the centuries. Those who survive are not the strong, but the supple. Resilience is not about defending your old positions, it is about moving in new directions when the strong wind blows, so that you can keep your roots in the ground.

This is especially true when we consider economic crises, in contrast, say, to a natural catastrophe. After an earthquake, the objective should be, first to survive, and then to rebuild the town, with better materials, but more or less as it used to be. In other words, to go “back to normal”. But after an economic crisis, the new normal very often has to be very different from the previous normal that brought about the crisis.

Let me talk now about the crisis in Greece. As you all know, in 2010 foreign lending to Greece stopped suddenly. This led to tight constraints on government spending and to a dramatic drop in domestic demand. How did people respond to this?

On the level of organised institutions, they did not respond well.

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The welfare system proved to be very rigid. It had always been heavily tilted towards pensions. As a proportion of GDP, spending on pensions was among the highest in Europe, and during the crisis it grew even more, both in absolute terms and as a proportion of GDP — it is now the highest in Europe. Hundreds of thousands benefited from early retirement during the crisis.

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This has put tremendous pressure on the system, and leaves no space for other types of spending. Unemployment benefits are very scarce, so is relief for the poor. Hospitals suffer from lack of personnel and of supplies, and are not able to treat those who have no social insurance and no private money.

A flexible welfare state would deploy its limited resources towards those in greatest need, even when the need appeared suddenly. In Greece, what prevailed was the logic of previous entitlement: if you had a previous right to a benefit (such as a pension) you had priority over those who need help now, but who had no claim to benefits in the previous state of affairs.

The issue was framed on the basis cutting or not cutting what exists, rather than shifting resources from old uses to new ones.

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The business sector was also slow to adapt. In theory, when your local market shrinks, you try to sell your products to new markets, that is you increase exports. In the other crisis countries, Ireland, Spain and Portugal, this did in fact happen to a large extent. In Greece, it did not.

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One of the reasons has to do with the structure of Greek business. You can only shift to exports if your product is “tradable”, as they say. If you own a chain of stores, your customers are only those consumers who live near your stores; you cannot export your services — they are non-tradable But if you are a producer of foods for the stores, then you can also look for clients in other countries, because food can be transported.

Greece had too many businesses in sectors that can only cater to a local market, such as stores. And too few in the type of industry that can sell abroad, such as manufacturing. In good times, being in a non-tradable business meant that you were protected from competition and your margins were safe. But if your one and only market gets into trouble, then this advantage turns into a big problem. You need a lot of time and investment to build new businesses from scratch.

So, our welfare state did not adapt at all, and our organised businesses have been slow to adapt. That is why there are so many poor and so many unemployed five years after the breakout of the crisis.

And yet, at a grassroots level, society has been resilient.

In families we can see the defensive mechanisms that have mitigated the shock, and have helped to avoid disaster.

In personal business initiatives, we can see the creative mechanisms that are shaping a more dynamic future.

Let me put up a slide that shows changes in household income during the crisis. Two types of income have actually grown, while all other sources have plummeted.

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Growth in pensions was driven by early retirement. People in their fifties took the safe option of a steady, even if low, stream of income every month. For many households, pensions are now used to support children or even grandchildren who have no job.

Pooled incomes over two or three generations have always been a characteristic of Greek families. Typically they had a variety of sources such as salaries, some rents, and earnings from a small shop.

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This is a very resilient and flexible institution, and it has underpinned Greece’s high rate of growth over much of the last 60 years. Mass internal migration into cities, mass emigration to Germany, mass inflow into higher education, growth of small tourism businesses, expansion of public sector jobs: all these happened, while families kept together and diversified.

Now pensions have become a defensive cushion for families. But many are also drawing on family resources to get into new productive activity. The table shows that income from agriculture has also grown. This has happened rather quickly, because families that move to the cities twenty years ago never sold their little plots of farmland.

Now some are moving back to the land. They may be the fifty-five year olds who have retired from civil service, and are just supplementing their pension. Or they may be twenty-five year olds with mathematics degrees, who have read about new techniques and have identified new niche products, to be sold to specialist stores in Vienna and London.

New agriculture shows up in statistics already. Other activities don’t, yet, but they are even more promising. In my business, we invest in technology startups.

Five years ago, as the Greek bail-out began, you could not find more than ten teams in Athens that were writing software with a view to the global market. When we started our fund in late 2012, we had set a target to invest in about twenty startups within three years. We had doubts that we would find that number. But the number and the quality of the teams that applied surprised us. We reached our target within two years, and we had to increase the size of our fund to be able to invest in more.

Five years ago, almost every parent would disapprove if a young science graduate tried to found a startup, rather than seek a job as a teacher. Today, most parents realise starting your own company, or going to work for a young company, is a legitimate option.

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The technology ecosystem is booming in Athens. Thousands of people and hundreds of teams are designing or launching products. Workshops happen every day, and competitions every week. Angel investors and collaborative spaces are multiplying. There is a sense of community. People exchange information, teach and learn and network. There is true meritocracy: nobody will reject a good developer because they don’t know their family. Many Greeks who live in Britain, the Netherlands or the US join the teams as advisors or co-founders.

Perhaps this sudden boom would have happened anyway, but it was accelerated by the crisis, as other types of career path closed down. As a critical mass of talented people began to think about startups.

A new public narrative emerged, one of self-reliance, and innovation and openness. The first few success stories are encouraging more people to try.

The number of real businesses in this ecosystem is still small, and some of the narrative is exaggerated. But the phenomenon is real, and like the new trend to agriculture, it has happened quickly. Why quickly?

Both stories are about hidden assets, or neglected assets. In the case of agriculture, it was the family fields that had been neglected but never sold, as the family moved to other things. The decision to move “back to the farm” did not require much new capital investment.

In the case of startups, it was education. Someone studying to be an architect was hoping to design buildings, and never imagined they would be using their skills for a service in the cloud. But they had learned how to solve design problems, how to analyse other peoples’ aesthetics, how to work on projects. These skills are useful for a wide range of jobs, which we never think about when we study for a specific degree. They are hidden, until opportunity and necessity bring them to the surface.

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I wish I could could talk about a similar boom in social entrepreneurship among the poor and the socially excluded. Destitute people do find ways to survive, by trading scrap materials or by helping each other. But there is, as yet, no ecosystem to take these individual efforts and create a virtuous cycle.

Some admirable efforts exist, and they are supported by Foundations present in this Conference. But as yet they are not making much impact.

This is in contrast with other offerings, where the Foundations and the voluntary sector have had a great impact. They provide food, clothes, medicines and medical care to very many poor. But they have not been able to foster an economy of self-help in this depressing landscape of unemployment.

I think there are two big obstacles, that we have not been able to overcome.

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One is the issue of informal work and informal trade. The state, for obvious reasons, has regulations about work time, insurance, taxes, food safety, and so on, that impose costs and make it impossible for poor entrepreneurs to work legally, especially if they are immigrant or Roma.

I will not expand on this, but I note that this is an area for intensive and creative advocacy. Informal and invisible entrepreneurs must be enabled and encouraged to become visible.

The other problem is that of hidden assets.

To address this let me put on my third and final hat, as an investor in start-ups.

People think that venture capital invests in new ideas, but that is not true. We invest in people who have some new ideas.

We give, say, 100 thousand euro to a team of three, whose idea has not been really tested, and we know that within a few months, the original concept will have changed. Users will indicate that they want something different, or the technology may not be appropriate. If the team is good, eventually they will produce something successful, but very different from what they had described in their proposal to us.

So, how can we pick the teams, if we do not take the ideas very seriously?

We try to assess their skills and their grasp of reality. Do they know the real needs of the target market? Can they build a product that is easy to use and robust? Are they honest, and do they work hard? If they have those qualities, we will tolerate any changes that they propose, and any failure to deliver on specific targets. As long as they keep showing progress.

I think that grassroots entrepreneurship among the poor and the socially excluded has to be as creative as entrepreneurship in technology. It relies on hidden assets and on opportunities that are not visible before you actually go down into the community and try to mobilise people.

Poor and marginal immigrants, for example, may have skills as music teachers, as carpenters, as story tellers and as bakers. Only a dedicated entrepreneur can discover these, and devise ways to make them useful.

So I suggest that philanthropic Foundations try to work a bit like early-stage venture capital investors. Give some small teams of good people the opportunity to experiment with an initial idea, but let them change it and re-shape it, rather than deliver specific targets.

People who become suddenly poor, as in an economic crash, or suddenly refugees, as right now in Syria, are probably the biggest unutilized asset in any society in crisis. Let us be smart investors into this asset.

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