9/8/2014 How A Chinese Economic Policy Could Save Club Med Countries - Forbes

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How A Chinese Economic Policy
Could Save Club Med Countries
This story appears in the December 24, 2012 issue of Forbes.
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By Mohnish Pabrai, managing partner of Pabrai Investment Funds, and Guy
Spier, managing principal of Zurich-based Aquamarine Funds.
Jutting into the Adriatic Sea is a highly coveted spit of land that houses the
Astir Palace Resort. The Astir has played host to the likes of Jackie Kennedy
Onassis, Jane Fonda and Nelson Mandela for well over half a century. The
property is a gem, and now is not a good time to sell. But that is what the
Greek government, as a partial owner, is about to do as part of the EU-IMF
bailout package. They wont raise much. There has to be a better way than
this, and there is.
The Club Med countries have an endless supply of prime assets sitting idle,
virtually all of which could be rented out in short order. They are vastly more
valuable than Astir and will benefit the social fabric.
They are the 90% of the more than 12 million Club Med unemployed youth.
Putting them to work would generate $38 billion in annual government
revenues, not to mention the $380 billion of extra economic stimulus when
the newly employed flex their purchasing power. Not exactly chump change.
The answer to getting them gainfully employed lies in creating special
economic zones in the blighted hinterlands of Greece, Spain and Italy.
Call it the Shenzhen Way, a trail first blazed three decades ago by Chinas
great economic reformer, Deng Xiaoping. Special economic zones like
Shenzhen were the dynamos that started the now unstoppable Chinese
economic renaissance.
Consider the case of the 137-year-old Pallini liquors based in Rome. Brands
like Pallinis Limoncello and Sambuca sit on bar shelves worldwide, and the
company recently explored doubling production through a joint venture. But
Mohnish Pabrai Contributor
I write about art and science of giving away a fortune.
Opinions expressed by Forbes Contributors are their own.
9/8/2014 How A Chinese Economic Policy Could Save Club Med Countries - Forbes
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we didnt pursue it, CEO Micaela Pallini told the New York Times. If the
venture failed, Italian laws make it almost impossible to cut our workforce to
adjust costs. It was a risk Pallini could not afford to take.
These draconian labor laws have made the crisis countries uncompetitive.
Restrictive labor practices mean that employers avoid growth and hiring, even
when it is a no-brainer.
Creating economic zones in areas of high unemployment would allow the
crisis Club Med countries to ease such labor restrictions and, like Shenzhen,
generate an economic boom.
The zones would need these simple characteristics: a minimum wage of $6.50
per hour, no unions, the right to terminate any employee with or without cause
with two weeks severance, and all of the above guaranteed for at least 20
years.
If you dont believe this will work, consider the experience of Kaesong
Industrial Park, just north of the DMZ on the Korean peninsula. There,
Hyundai chaebol founder Chung Ju Yung sold the Shenzhen idea to the North
Korean government. Today, in spite of a great many difficulties in dealing with
the North Korean government goons, Kaesong provides employment for what
would otherwise be 50,000 impoverished and unemployed North Korean serfs
and generates much needed foreign exchange. Best of all, it provides the
North Koreans with a lesson in the joys of freedom and capitalism.
If Deng Xiaopings Shenzhen idea can work in dysfunctional North Korea,
would it not work in Europe? Does anyone doubt the explosion of
employment, manufacturing and wealth that would spring from such a
project on European soil? Boeing, Caterpillar, Toyota Motor and countless
others would have a deep interest in setting up operations, gaining access to
the largest free trade zone in the world.
If the freedoms and social benefits that Europeans have won since the creation
of the EU must come at the expense of mass idleness, then the project has
already failed. If we start now with European free zones, we could save the
euro zone and return some much needed free market liberalism and optimism
to that moribund continent.