Flirting with Disaster

Is Greece a failed state?

Take a quick glance at this year's list of the world's most failed states and you'd be forgiven for thinking that, despite the headlines, all's (relatively) well in Europe. But while the vast majority of countries atop the Failed States Index (FSI) are in Africa, Asia, and the Middle East, the West is by no means immune to the risks of state collapse. Case in point: Greece, the cradle of democracy, which has been at the heart of the crisis eating away at the eurozone for the past two years.

Since 2010, the country's FSI score has worsened by 4.5 points and its rank by nine spots, landing Greece at 138th out of 177 states this year -- in the "less stable" category for the first time since the Fund for Peace (FFP) first included the country on the Index, in 2006. Greece also earned worse scores across almost all of FFP's 12 assessment indicators for the second year running, with the country's political and economic scores seeing the largest lapses. And the FSI ranking only takes into account events from 2011, leaving out all the drama in the first six months of this year.

So is Greece a "failed state" -- or on its way to becoming one? It certainly demonstrates some of the hallmarks: a national debt larger than its economy, burgeoning unemployment, a heavy reliance on international actors, and political instability. But with repeated stopgap measures to avoid collapse -- the latest coming with the narrow victory of a pro-bailout party in this past weekend's elections -- the country has managed to hold on, just barely, so far.

Greece's backsliding on the Index comes as no surprise given the events of last year. In 2011, the Greek economy continued to weaken, as the unemployment rate hovered around 20 percent for the year, with an estimated 50 percent of young Greeks out of work. Like in 2010, political crises ensued, and the perceived legitimacy of the Greek government plunged, with more and more Greek citizens questioning the ability of elected officials to drag their country out of the financial morass. Public rage was palpable as tens of thousands of Greek took to the streets last June to protest proposed austerity measures that included significant tax hikes and virtually eroded the Greek safety net. The protests were just one symptom of society's deep anxiety caused by the recession -- which continues to be felt in 2012. Aside from a rise in the rate of violent crime, suicide, prostitution, and drug use, Greece's political parties have become polarized, with the ultranationalist, neo-Nazi Golden Dawn party even receiving 18 seats in the parliamentary elections this past weekend.

Adding to the mayhem, the catastrophe in Greece has brought into question the viability of such lofty ideals as pan-European prosperity and social and economic equality, as the country dragged down its European Union brethren. Greece, which joined the eurozone in 2001 after failing to meet the criteria in 1999, has long been the red-headed stepchild of the monetary union. By mid-2011, after only 10 years of membership, it had racked up a debt load on par with 150 percent of its GDP, unheard of elsewhere in the union. Meanwhile, similar strains spread to other EU countries. Ireland, Italy, and Portugal continued to worsen in 2011, with their economic and political indicators taking the hardest hits. Although Spain held steady throughout most of 2011, it began to show signs of steady decline by the end of the year.

Germany has led a somewhat begrudging charge to protect the financial and political integrity of the eurozone, helping to push through an agreement in October to write-off 50 percent of Greek debt, but forgiveness did not come without repercussions. By late in the year, both the Germans and the European Central Bank were once again leaning heavily on Greece to implement further austerity measures. Caught between an enraged population and a bullying Germany, Prime Minister George Papandreou stepped down in November after multiple attempts to pass a more severe austerity package failed. In his place, the former head of the Bank of Greece, Lucas Papademos, stepped in to try to solve the Greek financial meltdown, but this did little to assuage the general anxiety gripping the country. Pressure to implement austerity continued into 2012, with the Greek parliament finally agreeing to impose harsh austerity measures in exchange for 130 billion euros in February. Far-right parties have been quick to capitalize on the population's disillusionment, using anti-austerity rhetoric to gain significant support in the 2012 elections: The pro-euro New Democracy party, which earned 29.6 percent of the vote this past weekend, only barely edged out the left-wing, anti-bailout SYRIZA party's 26.9 percent.

Greece's economic woes have also given rise to another worrying trend reflected its scores on the Index: xenophobia. Reports surfaced last year that immigrants were increasingly being targeted for attack. Frustrated by the combined austerity measures and lack of employment opportunities, a rising number of young Greeks turned their support to the far-right party, Chrysi Avgi. Throughout 2011 and 2012, the party has held large anti-immigrant rallies that often precipitated attacks on the country's growing population of Afghan, Iraqi, and Pakistani immigrants. In several instances, homes and shops owned by foreign nationals were burnt to the ground or looted, and the owners were physically attacked. Hate-speech and racist rhetoric, including labeling various immigrant groups as "dogs" and "vermin," were ugly punctuation marks at political rallies. There has been a spike in immigrant attacks in 2012, since Chrysi Avgi increased its share of the vote. Victims are now fearful of reporting attacks to the police, after it was revealed that as much as 50 percent of the force voted for Chrysi Avgi in the last elections.

The anger did not stop with immigrants. Germany, which took the lead in negotiating the Greek bailout and simultaneously strong-arming the government to make more severe cuts to salaries and social services, also came under attack. Harkening back to World War II, when Germany occupied Greece, images appeared in the press depicting German Chancellor Angela Merkel as Adolph Hitler and other German politicians as Nazis. These images, and the sentiments they stirred, were quickly seized upon by Greek political figures from both sides of the spectrum. As the economic crisis continued to boil, and Papandreou tried to balance the demands of Greece's paymasters with the very real needs of his country, he came under attack from all sides for bowing to the Europeans. Although there was a temporary lull in protests and attacks following his resignation, by the close of the year it had become apparent that the dual economic and political crises gripping the country were not amenable to quick fixes. Although Greece was able to halve its massive debt in 2012 by securing a debt swap, political instability continued with the three top-ranking parties unable to form a government in May. Renewed efforts to agree on coalition arrangement are now underway.

The tragedy of Greece, and the slow swan dive of other EU countries on the FSI, calls into question the overall viability of the great European experiment. Critics of the economic union have long warned that the euro was only as strong as its weakest link. If 2011 was any indication, trying to impose a monetary union on 17 countries with widely disparate political and social cultures can quickly come apart at the seams. If Greece does indeed drop out of the euro -- as has seemed increasingly more likely in 2012 -- others might too. Thus, an economic union meant to bring stability, peace, and affluence to all its members, while detoxifying the poisonous history of the continent, may go the way of many tragedies, with the hero falling on his own sword.

As the events of the past two years and Greece's worsened performance on the FSI show, the country could be described as sliding toward state failure -- though it is not quite there yet. While other states have certainly experienced their own effects from the financial crisis, Greece has been hit particularly hard; the country now has a dysfunctional government that is unable to provide adequate public services to its citizens, a flailing economy heavily reliant on foreign aid packages, and thousands of businesses that have closed, racking up unemployment figures. Still, while the Greek government doesn't carry out its functions particularly well, it provides basic services and the rule of law generally prevails.

However, Greece has lacked the capacity to bounce back like some other Western countries. Iceland, for example, which was one of the first victims of the financial crisis in 2008 when its banks defaulted on $85 billion, saw its FSI economic indicator score soar to 6.2 (out of 10) in 2011, higher than Greece's current 5.9. (A high score denotes worse performance.) But Iceland's leaders responded quickly and efficiently to the crisis. Although long-term economic recovery remains a concern, the OECD's latest estimate sees Iceland's economy expanding 2.4 percent in 2012. The country once again ranks in the FSI's "sustainable" range, the best-performing bracket.

Greece, meanwhile, has been let down by its weak institutions -- namely, a corrupt government and inefficient spending. The Greek government took far too long deciding how best to handle the crisis, reflected in the country's high score of 5.4 in the "state legitimacy" category of this year's FSI. Greek politicians have so far been unable to pull together, prolonging the time it took to receive the EU's bailout package.

The entry of extremist parties into Greece's parliament will surely make consensus more difficult. Nonetheless, the new government is a step in the right direction. But while European leaders may be taking a breath today following the weekend's positive results, it's still a bit too soon to relax. In order for Greece to step back from the precipice of implosion, its government will need to create a legitimate, functional state that can earn back the trust of the public.


Democracy Lab

Asia's Next Tiger

President Aquino's anti-corruption program is just what the Philippines economy needs.

Once considered the most promising economy in Asia after Japan, the Philippines has fallen far behind Southeast Asia's nimble, export-led economies. But things are finally looking up. Tired of being scorned as "the sick man of Asia," President Benigno Aquino III asserts: The Philippines is now "open for real business."

Judging by some very visible changes, Aquino, who has been in office for two years, isn't engaging in wishful thinking. Manila's luxury hotels are crawling with Asian, American, and European investors in search of opportunity. And the city's skyline, a symbol of its past as a home to slow-moving domestic oligarchs, is now dotted with cranes. Foreign direct investment is on track to triple this year, while GDP growth is expected to rise from 3.7 percent last year to a respectable 5 percent in 2012. Karen Ward, a London-based analyst for HSBC bank, speculates that the Philippines, now the world's 43rd largest economy, could be the 16th largest by 2050.

Such optimism is hardly a consensus view. For one thing, the Philippines has yet to deliver an economic performance worthy of an Asian tiger. The IMF forecasts that, while up considerably, Philippine GDP growth will still lag behind that of the other Asian tiger wannabes -- Indonesia and Vietnam -- in 2012. And while foreign investment is rising rapidly, it's from a dismally modest base: Indonesia is expecting to attract some $27 billion this year, compared to roughly $3 billion for the Philippines.

Indeed, the standard indictment of the economy still seems daunting. For one thing, the Philippines is startlingly dependent on alms from abroad. Roughly 11 million Philippine citizens (12 percent of the population) work in a great diaspora, running from Hong Kong to New York and Kuwait, sending home about $20 billion annually to support their families. Nearly one-fifth of all Pinoys, as Filipinos call themselves, still live in deep poverty, which is defined by the World Bank as a purchasing power of less than $1.25 a day. Meanwhile, the WTO reports that "key sectors" of the Philippine economy remain "effectively controlled" by uncompetitive domestic elites.

So why am I optimistic? President Aquino -- nicknamed P-Noy -- is apparently that rare Philippines leader who is both incorruptible and competent. And his administration seems determined to change the environment of crony capitalism where who you know in government, and how much you're willing to pay for privileges, has always mattered more than what you make or how well you make it. John Forbes, a former U.S. diplomat and business consultant, whose Philippine experience goes back more than 40 years, says Aquino's anti-corruption moves are "unprecedented."

Now, the very idea that one leader or one government administration can reverse a long history of institutional sleaze makes economists and political scientists uneasy. Successful economic reform is a complex, organic process that requires support at every level of society. And the recent past is littered with economic reform plans that succumbed to cronyism -- think Yeltsin's Russia or Suharto's Indonesia or Mubarak's Egypt. But change is afoot in the Philippines, and Aquino may just be able to nudge the economy into a virtuous circle in which reform sparks economic growth, and growth, in turn, gives outsiders the clout to contest the power of the country's crony capitalists.

Aquino's immediate predecessor, Gloria Arroyo, earned her PhD in economics. By contrast, the laid-back P-Noy would never claim to be an economic savant (though he did manage to earn a B.A. in the dismal science, and one of his professors was Ms. Arroyo). President Aquino, by the way, is prosecuting Ms. Arroyo, alleging that she raked in millions of dollars in bribes. However the criminal charges are eventually resolved -- or perhaps not, considering the notoriously glacial pace of justice in Manila courts -- this much is clear: On Ms. Arroyo's watch, rampant corruption held the Philippine economy back, while in P-Noy's few years in office, honesty is producing tangible results in terms of growth.

Philippine investigative reporter Roel Landingin (and FT Manila correspondent) recently dug into contracts issued by the Department of Public Works, which has a well-earned reputation for bid-rigging, collusion, and non-transparency. In a classic man-bites-dog story, Landingin found that P-Noy's people working in the belly of the crony-capitalist beast have actually been awarding contracts honestly. Aquino calls his anti-corruption campaign "daang matuwid," Tagalog for "straight path." And that path has cut costs for roads and flood-control projects by about one-third. By contrast, civil-works contracts during Ms. Arroyo's tenure were marked by "systemic corruption and bid rigging," dominated by a shadowy institutionalized cartel that "may enjoy support at the highest levels" of the Philippine government, a leaked 2009 internal World Bank report noted.

Actually, P-Noy has been walking his anti-corruption walk since the day he took office (June 30, 2010).  In spite of its tropical climate and low-cost labor, the Philippines has long been a major importer of rice. How is this possible? First, rice production is very inefficient in the Philippines, thanks in large part to underinvestment in infrastructure. Adding to its woes, the Philippines tolerates a domestic shipping cartel that charges more to deliver rice from southern Mindanao to Manila than wholesalers in Manila pay for transit from California.

On occasion, this has created domestic shortages. But Philippine leaders have never seemed to mind, since shortages create opportunities for the National Food Authority to award import licenses to cronies. It's a simple scam, really. The more tax dollars those cronies spend on rice imports, the more opportunities for commissions, kickbacks and such. In the last years of the Arroyo presidency, the government cheerfully paid as much as $125 per ton over the world market price for rice. Indeed, the Arroyo administration bought so much rice so quickly, and for such high prices, that it contributed to temporary global shortages in 2008 -- and to food riots from Cameroon to Haiti.

But thanks largely to investment in irrigation improvements, domestic crop yields are rising. The Philippines may, in fact, soon cease to import rice.

Anyone who doubts the Philippines' potential to become the next Asian tiger might visit the former U.S. military bases at Clark Field and Subic Bay, about 50 miles northwest of Manila, which were left empty when the Americans departed in 1991. Now, they are far from empty; the Clark-Subic corridor is booming as an industrial park; Yokohama built a huge tire-manufacturing plant; Texas Instruments has a $1.5 billion electronics operation; Samsung is making semiconductors; Hanjin has created one of the world's largest shipyards at Subic. What's more, a booming beach resort/theme park is drawing tourists by the hundreds of thousands. "This is what an Asian tiger economy looks like," says Dennis Wright, a former U.S. Navy officer who is developing a $3 billion industrial park for a group of Kuwaiti investors.

The former U.S. air base at Clark is now poised to become the Philippines' next major international airport. Clark, which only had about 50,000 passengers in 2004, had more than 750,000 last year, and is projecting to have one million in 2012.

While the Clark-Subic boom began when Ms. Arroyo was president, she nearly derailed it after feeling the heat from Philippine airline oligarchs who did not welcome the foreign competition. Mr. Aquino, by contrast, has not let domestic protectionist politics trump the economic progress.

Still, there are lingering doubts as to how far P-Noy's anti-corruption/anti-cronyism campaign can take the country. For one thing, Philippine growth remains burdened by regulations on foreigners, who aren't allowed to own land and are restricted to 40 percent minority shares in key sectors like agriculture, mining, telecommunications, and transportation. And here, Aquino may not be much help. He has admitted to a domestic audience that he still has "a nationalistic trait" that favors "majority control in Filipino hands because, at the end of the day, if something happens, there is a Filipino who will care for this country."

Come again? The Philippines' dismal long-term economic performance is traceable to its domestic elite, the dynasties that have dominated since the country was a Spanish colony (and do just fine, thank you, when they face no foreign competition). The more recent decades of Philippine decline were fueled by Filipino-first policies dating to the 1950s -- and the recent renaissance has depended heavily on foreign capital.

It's fair to say, then, that the game has yet to be won or lost. Aquino has four years left in office to demonstrate that he can deliver on essential economic reforms. Equally to the point, new economic actors (foreign and domestic) who gain from these reforms must prove themselves willing to contest the power of the old guard -- and thereby make it difficult for a less-well-intended successor to P-Noy to reverse course.