UPPSALA PAPERS IN ECONOMIC HISTORY
1993
WORKING PAPER NO 10
Foreign Capital and Greek Development in a Historical Perspective
Margarita Dritsas University of Crete
Department of Economic History
ISRN UU-EKHI-WP--1O-SE ISSN 1102-1306 Uppsala universitet Reprocentralen HSC Uppsala 1993
Introduction
Most studies of foreign capita1 in various countries have traditionally em- phasised only the economic aspects of the phenomenon. Whenever the political dimension has been examined, it usually succumbs to the ideo- logital standpoint of the author. In the latter case, most ofien, foreign capita1 is blamed for all sorts of problems that arise in the host coun- triesl.
Theoretical approaches seem over the years to have crystallised in two paradigms: the liberal economic theory and the dependency theory.
Ofien, however, researchers tend to focus their analyses on brief periods, or on certain aspects only of these relations and, consequently, these tend to lack historital depth. On the other hand, stritt adhesion to one or the other theoretical perspective tends to lead to twisting of fatts in order that they may fit particular patterns.
The purpose of this paper is to argue that any analysis of foreign capi- tal relations should on the one hand follow a historital outline, and take into consideration the degree of development of a host country, and on the other, not alienate politital factors. Furthermore, politics is a compli- cated process and when analysing a politital situation or a politital effect various factors should be borne in mind. For instance, the geopolitical strategic considerations of a capita1 exporting country - despite any de- gree of relative autonomy that individual participants, such as investors, on the one hand, or types of govemment (socialist, liberal or otber) on the other, may have - can determine the choice of host areas, the amount of capita1 exports and the terms of investment. It is also important to note that as capita1 flow is not a unified process, antagonisms among between these participants may emerge, which in their tum may neutralise or ac- celerate development.
Furthermore, looking at things from the viewpoint of the capita1 im-
porter country, it should be kept in mind that the participants are just as
important as the amounts of capita1 and areas of investment. The more
that politics is interrelated with the economy, the higher the involvement
is of individual participa_nts - businesses, developers, bureaucrats and so
on. This involvement and the related antagonisms between the various
1 For a notable exception, see Dertilis (1983).
groups often lead to politital crises. The participants - in politics and in the economic field - tend to form complex networks in order to enhance their power. An important aspect of this inter-relation, which is also usually overlooked, has to do with the process and flow of information.
Adequate and correct information that flows from these networks is im- portant because it allows hast govemments to conduct more efficient negotiations. Another important factor is the existence of a consensus on the strategy to be followed for capita1 amaction, and the setting of priori- ties by a plamring authority, i.e. the state, as well as measures to control capita1 imports and their effects.
A brief look at some instances of capita1 penetration in Greece (a country often starved of capita1 but not included in the most favoured areas for capita1 imports) during the last 150 years, may help to elucidate some of the points made above.
Foreign capita1 may take various forms ranging from private or govern- ment loans to direct investment (fdi) ventures either in industry or in other sectors of the economy and the appearance of multinational enter- prises (h4NEs). In the case of Greece, foreign capital tame in all of these forms, althot& never as massively as for other markets, e.g. Latin American countries. Chronologically, loans preceded fdi. In all cases, there were instances of heavier or lighter politital pressure exerted from capita1 investors either to secure economic advantages but also, and most importantly, to inlluence politital and military developments. In many cases powerfitl networks involving both Greek and foreign participants intervened in tbc process of negotiation, inllow, distribution and han- dling.
British Loms in the 19th Century
Greece emerged as an independent nation state in the early 19th century.
In the wake of the French Revolution, it marked the fust expression of
national awakening in Europe. Her polititally pioneering role, however,
was not matched by her ability to quickly form a national central state
structure, or to attract and correctly channel foreign resources. Her ca-
pscity to overcome the distorbons that four centuries of Ottoman rule had
caused in the fibre of her economy and society remained limited and se-
verely constrained the process of modemisation. The declaration of In-
dependence in 1821 and the successive victories of the Greeks against
the Turks until 1824 were based on a deep rooted desire to throw off the
Ottoman yoke. But the effort could not be fully successful without fman-
cial assistance which would also speed up the formation of a modem
regular national arrny and navy. Finantially, so far, most operations were based on private contributions from rich Greeks of the diaspora or ship- owners of certain islands, e.g. Hydra, Spetse, Psara, as well as from extra taxation. This, however, enhanced the power of lotal leaders to the det- riment of any centralising efforts. A modem national forte could only be built with additional resources, non-existent in Greece, and the prospect of obtaining a loan abroad seemed inevitable. The timing of the operation coincided with the particular situation created in Europe whereby large tinancial resources had been accumulated and were now looking for more profitable opporhmities in new areas and markets - not colonies any more, but newly independent states such as Latin America and the Middle East. Moreover, politi4 antagonism between France, Britain and Russia was escalating with an obvious stake in the control of the Eastem Mediterranean, and philhellenism especially in Britain was at its height, advocating support for Greek independence.
Competition for negotiating a loan tame from various couutries. Many bankers became interested including the Rothschild House, Jacques Lafitte and the Behrendos & Co. Finante was also seen as a means of politital influence. Finally, Britain carried the day granting the two loans that tame to be known as the “Independence Loans”. The whole of the 19th century became the age of loans, and bankers competed for the control of new countries like Greece and Latin America. Jacques Lafitte expressed the fatt eloquently, when, at the time of the recognition of Greek Independence by Europe in 1830, he exclaimed “And now bank- ers Will begin their reign”2. The outcome of the negotiations was deter- mined to a large extent not only by the more efficient diplomacy of Brit- ain which was in full harmony with her strategic and economic interests in the areas and by her unquestionable international economic power, but also by the ability of her bankers to form and control networks with Greek fighters and polititians through the philhellenic committees that had sprang up all over Europe. The aim of these committees, inspired by the ideas of Romanticism, was to express solidarity with the tighting Greeks in various ways, including raising funds and sending troops to
2 Quoted by K.Th. Demaras in the preface of Dertilis,G. 7?1e Banking Question 1871-1873, Athens 1980.
3 In 1823, Britain, fearing that Russia might become the protector of Greeks fight- ing against the Turks and thus threaten the integrity of the Ottoman Empire, changed its anti-Greek foreign policy and now sought to control the outcome of the War of Independence and the subsequent politital developments in a way that would not harm the Ottomans.
fight alongside the Greeks”. The first loan went to the bankers Loughman
& O’Brien who maintained close friendly relations with the secretary of the Philhellenic Committee, John Bowring. The setond loan was negoti- ated by the banker Ricardo, a relative of the famous economist and member of the Philhellenic Committee. The two Greeks who negotiated the loans, Andrew Louriotes and John Orlandos, were close fiiends of the important polititian, Alexander Mavrokordatos, and founders of the
“English” party that maintained close relations with English politital and economic circles.
The two loans negotiated in 1824 and 1825 were advanced in ex- change for the Greek authorities’ approval that Greece be placed under the protection of England. Both loans also carried extremely onerous terms. In addition to high interest rates, tommissions and purchasing of English goods, they involved the pledging of Greek fertile lands and revenues and the appointment of particular agents for the handling of their flow. These agents were none other than polititians who acted as negotiators and were the beneficiaries of tommissions and orders and who a little later founded the “English” politital party (Mavrokordatos, Orlandos, Louriotis, and others). Needless to say no national army was formed. Most analysts agree that both loans were squandered either in Greece to satisfy the particularistic regional demands of leaders of the revolution, hence resulting in civil war strife, or abroad for controversial orders.
The first loan was negotiated for the amount of £SOO,OOO but was is- sued at 59 per cent with a 5 per cent ammal interest on its nominal amour@. The setond loan of £2,000,000 was issued at 55 112 per cent6.
4 The most famous case is perhaps that of Lord Byron and Messolonghi but there were many others from various countries. [Sweden seemed to have important re- cruits in Greece, usually serving as offtcers in the artillery. Most of them had fought in Finland, or Germany or Naples. They were mercenaries looking for new opportu- nities, e.g. Major C.F. Aschling of the Artillety. cf. Simopoulos,K. (1984)
Pos eidan oi xenoi ten Hellada tou‘21, (How foreigners saw Greece in 1821) Vol. B. Athens, p. 344-349 Some were disillusioned with their country’s offtcial policy. Sweden maintained friendly relations with the Ottoman Empire sinte the era of Charles X11 and viewed Russia as the tommon enemy].
5 National land was pledged for its repayment as well as all duties from customs, and the salt and fisheries taxes. P.S. 60,000 were further deducted for comissions and expenses.
6 The amount of £64,000 was paid immediately as a comission fee to the banker Ri-
cardo for mediating his own loan! According to the London Times (5.9.1826) this
sum was twice the total amount of funds contributed by all European Philhellenic or-
ganisations - Committees, associations, schools, universities etc. Another £407,000
In the end, Greece only received 314 of the first loan and 20 per cent of the setond. The rest of the funds remained in England7. Only £392,000 were used to cover orders for six steam boats to be manufactured in England and two tiigates from America (the order for the engines of the boats was given to the same contractor (Alexander Galloway) that sup- plied Mohamed Ali, ruler of Egypt, and the Ottoman fleet with the result that they became subjett to interminable delays, causing irreversible damage to the outcome of the fighting in Greece. The corvette “Karteria”, initially plamted to be delivered in August 1825 when she would have been able to relieve the siege of Mesolonghi, finally sailed to Greece in September 1826, after the disastrous fall of the town to the Turks. The other boats proved totally unseaworthy and soon sunk or ran aground).
Compared with other developing parts of the world, Greece seemed to get a much worse deal. Loans were given to Latin American countries for instance, during the same period with better terms. In the case of Mex- ico, the issue of a loan was fixed at over 89 per cent, in Peru at 88 per cent, in Colombia at 84 per cent, and in Chile at 70 per cent. A loan to Russia, a developed European country, was fixed at 81 per cent.
The explanation for Greece’s weakness probably had to do not only with the fatt that Greece did not have much to offer as a potential eco- nomic partner (she lacked raw materials or other valuable resources and she was less interesting as a new independent market than as part of the vast Ottoman Empire), but with political instability too. In 1825, the Greek struggle had taken a negative tum and its outcome was uncertain.
Her strategic importante was still doubtful as her sovereignty was not yet fully recognised abroad and, internally, no central govemment en- joyed undisputed recognition*. Her fmancial status, therefore, appealed only to hard speculators. When in 1827, a default on payment of these loans was proclaimed, the reputation of the new nation phuneted and Greece was excluded from the international capita1 markets. All efforts for a compromise with the creditors subsequently made by Greek gov- emments were frustrated by the Great Powers until the late 187OV’.
Until the installationof King Otto in 1832 no more loans were given to
was deducted for prepaid interest for two years and an amount of £212,000 was used for bond repurchasing (bonds were repurchased allegedly to keep their value low) rather than for the purchase of arms and war boats.
7 Andreades, (1939) &gu, Vol.11, p. 306.
8 Petropoulos (1968).
9 For details ofthese toans, Petropoulos(l968) pp. 144-46, 175, 344.
Greecelo. In tontrast, the European Powers advanced various donations rather at whim or as an instrument of htrther intervention. When finally a loan of 64,000,OOO drs. was granted in 1832, it was negotiated by the Powers and by Bavaria in the absente of Greece and at 94 per cent. In the 1832 Treaty of Recognition of the Greek state, a clause was included giving to the representatives of the Powers the right to ensure that the loan dues would be promptly paid by the Greek treasuryii was included.
This clause anticipated the system of International Finantial Control which was imposed at the end of the century. It also legitimised the right of the Powers to intervene polititally.
Be this as it may, most of this loani2 was squandered by the Bavarian court and solved none of the urgent problems facing Greece. In 1843, the govemment once more defaulted on its payments. This debt became the justification for many a foreign political/military intervention in Greece, everytime there was a new development in the Eastem Question resulting from territorial claims by Greece in the Balkansis. Foreign influence was exercised with regard to the creation in 1841 of the National Bank of Greece. For ten years English circles were battling with the Austrians, the Swiss and the Dutch for control of the banking sector.14 From 1844 until 1879 no foreign loans tame into Greece. Until the last quarter of the 19th century, the country’s economy remained quite undeveloped, with a backward and fragmented agricultural system and an undifferenti- ated export structure. It relied on internal resources - taxation, internal
10 As early as 1830, the possibility of a loan amounting 60,000,OOO drs. bearing the guarantee of the Great Powers was proposed by the pretender to the Greek throne, Prince Leopold and the Govemor, 1. Capodistria. It would have solved the military and administrative problems of the country but it was also frustrated by Europe.The Powers insisted that only 37,000,OOO should be granted and should be used exclu- sively for the military. This was not accepted and the Prince renounced the throne which went to the setond pretender and favourite of the Powers, Prince Otto of Bavaria, still a minor in 1832.
“As early as 1830, the possibility of a loan in the amount of 60,000,OOO drs. bearing the guarantee of the Great Powers was proposed by the pretender to the Greek throne, Prince Leopold and the Govemor, 1. Capodistria. It would have solved the military and administrative problems of the country but it was also frustrated by Europe. The Powers insisted that only 37,000,OOO should be granted and should be used exclusively for the militaty.
12 For details of the loan guaranteed by the Powers, Andreades (1939), p. 332-8.
l3 An example is fumished by King Otto’s irredentist policy after the Crimean War which provoked the naval blockade of Piraeus in 1856-57.
14 For details of the diplomacy involved Loukos (1986)
loans, forced loans - and, from 1867, on a monetary policy based mostly on forced circulation (suspension of convertibility) of the Greek cur- rency. Meanwhile the territorial question was by no means solved and several military campaigus were undertaken before Thessaly, Epirus and Crete were annexed. The ability of the Greek governments to finante these campaigns and to meet other urgent needs of the country were severely restricted leaving no alternative than to seek another external loan. This became possible only after a compromise on the old debt was reached with Greece’s creditors which coincided with changes in the international politital arena.
More Foreign Loans - The French Connection
A setond phase of capita1 imports began. It spanned the period from 1879 to 1893-7 and ended with another default more painhtl than the previous one, involving the imposition of foreign finantial and diplomatic control on Greece. Characteristically, before Thessaly could be annexed in 1881, Bismark forced Greece to compromise on the question of the old debt towards Bavaria dating back to1843. More pressure was yet on the way.
During the setond half of the 19th century, the control of the Mediter- ranean basin continued to be the object of intense antagonism between the European powers. Commerce and banking had entered a new phase of intemationalisation and technology was further advanced. It was the era of large publit works, mainly in transport and communications epit- omised by the building of railways and canals which were financed by harge specialised banks (banques d’affaires). The accumulation of savings and the railway boom in the first half of the century pushed investors for a while towards entrepreneurial activity rather than state bonds. Mean- while interest rates began to fall in Europeis. Many banks, especially in France in the 1880’s went bankrupt and capita1 began to look for new markets. Sinte Russia, Brazil and the Ottoman Empire were, however, still little known to the average capita1 holder and the investment risk was considered too big, special terms were devised to attract and safeguard the investors’s interests.
In 1879, Greece joined this group of countries and capita1 began to flow in again. It was basically revenue borrowing. Until 1890, seven loans - of which live after 1884 - amounting to 630,000,OOO drs.
(nominal capital) yielded a real capita1 of only 458,622,OOO drs. Interest
i5 In the late 1880’s interest on English bonds was reduced to 2 1/2 per cent
rates varied between 4 and 6 per cent. Greece’s return to the European capita1 markets coincided with the premiership of Charilaos Trikoupis, a liberal leader of great esteem who also encouraged the advent of protec- tionism. A new monetary policy of free convertibility was introduced, import tariffs were revised and new taxes were raised to cover budget deficits. Trade agreements were signed with 25 countries. Greece was on the way to achieving stabilny and some measure of prosperity in spite of foreign intervention and finantial problems. During the two decades until 1897, the territory grew by 35 per cent after the integration of the Ionian Islands in1864 and Thessaly and Epirus in1881; the population more than doubled from 1,096,810 in 1862 to 2,500,OOO in 1896; commerce grew from 83.4 million drachmae in 1862 to over 198 million in 1897 with exports increasing sixfold in thirty years; publit revenues had also in- creased sixfold sinte the 1860’s.
Yet severe strnctural weaknesses had not disappeared. Greek agricul- ture was fragmented and antiquated, industry barely present, the civil service already inflated with an inefficient bureaucracy, exports were undifferentiated, and the budget chronically in deficit; illiteracy was high and technical skills low. Furthermore, the country was developing at a time when the rest of Europe was stagnating (1873-1896). This contra- diction seriously affected the character of foreign investment. Character- istically, between 1887 and 1889, when the country was already on the verge of bankruptcy, loan terms for borrowing were better than at the begimring of the period. Speculation on Greek bonds was rampant: They were bought at low prices and tommission charges were exhorbitant. In 1887, a loan from the Comptoir d’ Escompte was granted by this bank mainly because it would be used for the construction of two destroyers manufactured by a firm in which the same bank had a harge stake. Other bankers, knowing that new loans would be used for the repayment of older ones, bought bonds of the latter at prices below paris. Borrowing terms were still hard: two English loans of a tota1 nomina1 capita1 of
&6,200,000 were issued at between 68.5 per cent and 72.75 per cent at interests varying from 4 per cent to 6 per cent. The French loan (by the Comptoir d’ Escompte) of 135,000,OOO l?. only fetched 90,990,OOO fr.
They were used to repay older loans but had no strings attached. Britain, in tompetition with France, and having realised the strategic importante of Greece was using its financial might to outmanoeuvre her rival.
If a harge part of the responsibility for the unproductive nature of foreign loans lay with the foreign powers, the Greek state cannot be ex-
l6 Andreades (1939) p. 432-3. For a general overview of such investment, cf Born (1983) p.30-46).
onerated of the blame for not trying or not being able to control the proc- ess by setting priorities and by following a coherent plan for develop- ment. Apart from a general view that Greece should develop and acquire a certain itiastructure, the Trikoupis government, eager to attract foreign and diaspora capital, was unable to make foreign investment fit the needs of the country. For instance, a large portion of the loans was used to cover the chronic state deficit while little effort was made to reduce it by other means. In one instance (in 1890) a loan negotiated expressly for the construction of railways was used for other purposes, bringing down further the already poor reputation of Greecel’. Very little was done for the improvement of productive sectors. Agriculture remained antiquated and the system of monoculture (turrants) was intensified, rendering the country and her exports more vulnerable to external fluctuations.
Nor were productive areas systematically served by the transport sys- tem for which the Trikoupis era is mostly known. Road projects, for example, instead of being decided as part of a development scheme, were determined rather by the need to secure politital party support.
Greek talent was alienated. In 1882, the Greek govemment appealed to the French govemment to send a mission of engineers from the Corps des Ponts et Chaussées to design and carry out various projects - roads, railways, canals, ports etc. Projects were designed with the prime pur- pose of yielding quick and high profits. Railways were built using two different widths of track and linked mainly toastal cities, leaving the heart of the country where most of the exporting products were produced - turrants, tereal etc. - untouched. Their multiplier effect was even more restricted as they did not lead to the creation of any related industry.
Technology, parts, rolling stock, and expert engineering staff were all
imported. No integrated transport network was ever created. The most
striking case was the construction of the line linking Piraeus with Larissa
(almost a border town then). In 1889 a loan was negotiated for
89,500,OOO f?. of which only 60,000,OOO were covered. Of those only
22,000,OOO were dedicated to the construction of the line. The English
contractor firm Eccersley & Co. which undertook the project, started
from the finantially less demanding sections of the line because there
was a state subsidy for each kilometer constructed. At the end, there
were only dispersed sections of tracks finished. The Company was sub-
sequently wound up without ever finishing the project. Finally, in 1902,
the state intervened with a new loan. The cost per km of track reached
226,960 fr., almost a hundred times higher than the average cost of
26,500 fi./km of track for the lines constructed in the 1880’s. In other
1’ Loan of P S. 3,595,OOO for the construction of the Piraeus-Frontier line.
cases, negligence andlor haste on the part of the contractors resulted in mistakes in the calculations; the state again intervened to finante the completion of the projects. The consequence was invariably a rise in the cost. Railway companies, mainly foreign, meanwhile benefited from ex- propriated land granted to them for exploitation, exemption from duties on imported machinery and state subsidies. According to contemporary analysts, the railway policy based on loan capita1 and foreign investment devised by the Trikoupis govemment was wrong and resulted in losses for the courmyrs.
Equally ineficient was the use of loans for road projects. Roads built did not complement toastal lines. The recently (in 1881) annexed region of Thessaly was not linked to the old kingdom. As a result, in 1886, at the time of the crisis in relations with Bulgariats, the Greek army faced serious problems when its supply lines were tut off due to a sea blockade imposed by the Powers. Politital interference was also responsible for these wrong choices20. Other reforms plamred by the State and designed by foreign missions, such as the Belgian for the postal services and the French for publit works and military modemisation, were no more suc- cessful. The plans were often unrealistic and the salaries and other benefits of the foreign tonsultants disproportionately high for the possi- bilities of the country2t.
What was happening in Greece was not different from the situation prevailing in other Meditetmnean or generally in recently bom nations, such as Egypt and Serbia, and Latin American countries. Loans were negotiated for the construction of sumptuous projects that involved the application of new methods and techniques. The same engineers - usu- ally French - were involved in most of these large infrastructure projects.
Suez was not very different from Corinth or Panama where canals for instance were opened. The proposal for the opening of the Corinth Canal submitted in 1869 was seen as the materialisation of the dream to be in- tegrated into Europe; it was used to secure a generous toncession to the
“Société d’ Etudes du Canal Maritime de Corinthe” for 99 years. The state would offer vast lands (over 5,000 hettares) that were not only
l8 Andreades (1939) p. 373-9. cf also Papagiannakis (1982) passim, Dertilis (1985) p. 95-97.
l9 At that time Bulgaria annexed Eastern Rumelie and presented more claims on Greek territories.
2o On government wrong choices, cf Dertilis(l985) p.98).
21 The French mission dealing with the road project cost 70,000 gold francs per
month, Andreades (1939) p. 385
required for the opening of the canal but included arable, mining, quarry and forest land to be exploited extending to 30 km on either side of the canal as guarantee for the capita1 invested. What was even more impor- tant, the engineer G. Pia@2 and the banker M. Chollet, founders of the firm and beneficiaries of the agreement, secured priority in railway con- struction for important lines. The total cost for the work was estimated at 20,000,OOO fr. and the interest was tixed at 7 per cent for the whole du- ration of the construction. The agreement was never activated. Another proposal was made a few years later and the final agreement was con- cluded in 1881. General Ttirr, assisted by the Comptoir d’ Escompte de Paris, founded in Paris the “Societe Intemationale du Canal Maritime de Corinthe” with a capita1 of 30,000,OOO fr. contributed by French capita1 holders. The Comptoir d’Escompte de Paris became involved and through a Franco-Greek network managed to crystallise its interest in Greece.
Capita1 proved insufflcient23. A. Syngros, a diaspora Greek who at the time showed great interest in various investment projects in Greece, tame to the aid of the French fum24. As with many railway lines, the usefulness of the canal also proved inferior to expectations; so did its profitability, and most maritime lines as late as 19 10 avoided sailing their boats through it. The labour forte was imported. Only a minority was Greek, as most of the manual labourers were immigrant Italians, Turks and Armenians. The same labour forte moved from Suez to Corinth, 22 In 1869, Piat remained in Athens and became involved in the construction of prominent residential buildings such as the Vouros residence and the Skouloudes mansion in Athens. In 1876, he was again found in Athens as an entrepreneur who submitted a proposal to the Athens Lotal Authority to undertake the completion of the National Theatre building. He was also responsible for the construction of several other large bourgeois residences. For more details, see Biris (1966) Vol A. p. 178.
23 New contributions were demanded. The cost of the operation was estimated at 24,000,OOO fr. and a contract was signed with the “Société des constructions et des travaux maritimes”. Difficulties, however, soon arose: mistakes made in the calcula- tions of the work and expensive machinety imported caused a rise in the cost. In 1889, 42,000,OOO fr. was expended and the project was far from completed. After a new unsuccessful appeal for more capita], the project was interrupted and the firm went bankrupt. AAer the dissolution of the French Company, the contractor acquired an extension for the completion of the works through A. Syngros.
24 The works were undertaken by a Greek engineer, A. Matsas, whose payment was given in shares of a newly founded Greek Company. In it the old French shareholders also participated. The whole operation was guaranteed by Syngros’ bank, the Privi- leged Bank of Epirus-Thessaly and the National Bank of Greece. Matsas’ share was soon transferred to A. Vlastos, an executive of the Comptoir d’ Escompte. In 1890, the new ftrm launched a loan for 46,667 bonds of nominal value, 500 fr each issued at 470 fr. and 6 per cent annual interest, and a 75 year duration
13
possibly also to Panama25. The Company, unable to produce profits, gave up and in 1906 the canal, having absorbed 60,000,OOO fr., was sold in auction for 430,000 drs.!! It was bought by the National Bank of Greece which founded a new Greek firm for its exploitation, in which, however, the French shareholders maintained their interest. Under the pressure of these bondholders (and their govemment) the Greek govemment ensured that no maritime fmn acquired it. The new policy included generous re- ductions in the crossing duties for boats of large European maritime lines and other benefits. The main avenue of achieving influence was to grant loans to foreign governments for the construction of large works for which French companies were used as contractors and suppliers. The Comptoir d’Escompte de Paris also had a very harge stake in Egypt and was involved in the construction of the Ottoman, Serbian and Russian railways. In Greece three loans, those of 1879, 1881 and 1884, were negotiated by it and were used for army mobilisation purposes. A. Vlas- tos, a diaspora Greek, was its vice-chairman and the involvement in Greece was based on the close contact he maintained with other diaspora bankers interested in Greece, such as A. Syngros, Baltatzis and others.
The bank entered into serious antagonism with British capita1 over Greece. Capita1 flows had other dimensions too. Dependency was estab- lished not orrly in terms of amounts of capita1 inflow but also in terms of technology used.
The gathering of intelligente, usually ignored by historians, was impor- tant too. French engineers and technicians of the mission were collecting all sorts ofinformation on many aspects of the economic and politital life of the country which they passed to their govemment. The importarme of intelligente and information was to be painfully realised at the time of the subsequent default on foreign payments in 1893 and the politital pressure exerted by bondholders represented by foreign circles, especially the German govemment. A large part of loan bonds were owned by diaspora and resident Greeks holding accounts with foreign banks, but this was unknown to the Greek state which negotiated only with foreign bank officials and diplomats acting as representatives of bond holders. Such banks were the merchant bank of Hambros of London and several others, such as the Comptoir d’ Escompte de Paris, the Banque Franco-Egyp- tietre, the Zarifis-Zafiropoulos in Constantinople, the Arrglo-Egyptian Bank in Alexandria, the Synadinos, Rallis and Co. in Alexandria and the Société de Credit Suisse in Zurich. All these banks floated Greek loans in
25 Details about
the toncessions accompanying the agreement to open the Corinth Ganal are given by Papagiannopoulou, (1989), passim.European capitals as well as in Constantinople, Alexandria, and else- where.
ln conclusion, it could be said that French interests appeared in Greece at a time of European crisis and recession, they were of a particularly speculative character and were furthermore determined by transnational antagonism for the spoils of new areas. All these factors minimised whatever positive effects they might have had for the development of new areas.
Foreign loans concluded after 1884 (especially the 135 million franc loan in 1887) involved for the first time direct manipulation by represen- tatives of the creditors of publit revenues from state monopolies pledged as guarantee for the loans. This toncession implied that any alteration in the legislation regarding these revenues would be subjett to the agree- ment of the creditors, reducing thus the sovereign right of the Greek state to make law. This fatt acquired enormous importante when, afier long years of rising state budget deficit and military campaigns, in Decem- ber1893, the Greek state defaulted on its foreign payments. Negotiations for a compromise started immediately and lasted for four years (1893- 1897). Representatives of the foreign bond holders went to Athens and then to Paris (1895). Germany, representing a minority of bond holders, claimed that the 40 per cent honouring of commitments by Greece was unsatisfactory and boycotted the agreement. The imposition of a naval blockade against Greece was demanded26. The foreign press in general stigmatised Greece’s behaviour and also suggested the use of forte. Ger- many went even further by inducing Turkey to declare war on Greece and by introducing the idea of foreign direct diplomatic control. Greece was defeated in the war, and Germany insisted that reparations should be paid to Turkey for damages caused. Sinte no capita1 was available, it was suggested that a big foreign loan be negotiated, the payment of which warranted the imposition of direct international diplomatic control, in addition to economic control. When in 1897, afier this unfortunate episode, a treaty was signed in Constantinople, Britain and France acqui- esced to a clause being included in the Greco-Turkish treaty providing for the payment of reparations, subjett to an agreement reached with the Foreign Powers and not affecting in any way the rights of Greece’s older creditors. For the first time in international law, a clause was included in a bilateral treaty specifically favouring European creditors by imposing direct control on a country. Germany had managed to use the Greek debt as a weapon that allowed her to further her interests in the Near East and especially in Turkey with which she remained an ally for a long time. In 26
Andreades(1939), p.
456-7.15
spite of protests (after the event) by prominent European statesmen such as G. Clémenceau, who denounced the arrangement as “dishonest”, or of E. Law, who considered it “savouring of servitude”, the law of “Control”
was voted by the Greek Parliament in 1898. An International Finantial (Control) Conmrission was fornred (IFC) whose members - diplomatic representatives - were nominated by the Powers (Germany, France, Britain, Russia, Austria and Italy) and the jurisdiction of which far ex- ceeded the purpose of safeguarding the bondholders’ interests. The Commission was to supervise a special organisation fornred to handle the revenues - monopolies, customs, taxes etc. from salt, petrol, matthes, playing cards, cigarette paper and emery from Naxos - assigned for the repayment of the debt, which now included a new loan of 170 million fr.
isstred in 1898 under the guarantee of Britain, France and Russia27. The IFC was also to supervise the monetary policy and stabilise the drachma2s. Greek monetary foreign control was not lifted even during or after tbc First World War and the IFC guaranteed the service of subse- quent loans. Despite the negative aspects of control, it must be said that apart from effectively stabilising the currency for a while, it also con- tributed to a certain administrative reorganisation and rationalisation of publit finantes. Its positive impact might have been greater had the First World War and the subsequent Asia Minor Disaster not intervened to upset the balarme that had so painfully been reached.
The participation of Greece in World War 1 as well as the type of the regime established during the Interwar years became issues closely linked with economic arrangements, and pressure was again applied from foreign powers. Sinte 1909, Greece had been undergoing deep politital and social restructuring and liberalism appeared as the new forte, as demonstrated in the politics of the charismatic leader E. Venizelos. The new fortes tame into direct conflict with the old regime of King Con- stantine (related to the Kaiser by his wife, Sophia) on all fronts, including tbc question of Greece’s participation in the War. Greece became a di- vided nation. On the question of foreign policy, the King favoured a neu- tral stand which was essentially pro-German, while Venizelos was for Greece’s immediately entering the war on the side of the Allies. Finally, Greece declared war on the Central powers, rather late in 1917, after the King was forced to step down from his throne in favour of his setond z7 The impact of such an arrangement was somewhat attenuated when it was de- cided that these fimctions would be undertaken by the older Greek Monopoly Com- pany which had been responsible for the administration and control of the revenues assigned for the repayment of the Monopoly Loan in 1887.
28 For details cf Dritsas (1994).
son, Alexander. Soon afierwards, in 1918, an agreement was signed in Paris with the Allies stipulating that Greece would be given a credit of 750,000,OOO f?. (raised to 850,000,OOO in 1919) from Britain, France and the USA for the support of the military campa@. However, the Agree- ment also subjected all fi&ure external loans to the assent of the Allied Powers. But in 1920 the tables were turned: Alexander died of a monkey bite, Venizelos lost the election to the royalist People’s party and Con- stantine retumed after a plebiscite was held. A finantial embargo was immediately imposed on Greece and the allied credits were blocked. The impact on Greece’s economy could not have been worse, as it cancelled all previous restraints imposed by the IFC and caused a derailing of the monetary circulation which deteriorated further because of the Asia Mi- nor military campa@. In the aftermath of the terrible Greek military dis- aster of 1922 the monarchy was abolished, but the embargo was main- tained until 1924, apparently in an effort to prevent this, as Britain per- ceived it, unacceptable development. Meanwhile the Treaty of Lausanne was signed in 1923 stipulating the compulsory exchange of populations between Turkey and Greece. The issue of the allied credits remained in abeyance until 1927 and was used as a weapon in the finantial negotia- tions of Greece with Britain and the USA, for urgently needed resources.
The Interwar Period
Capita1 Inflow - New Avenues of Foreign
The year 1924 marked the begirming of another phase of foreign borrow- ing guaranteed by the League of Nations. By 1940, Greece borrowed 732,250,OOO fr. The loans were granted for the settlement of the 1.5 million refugees from Asia Minor, for agricultural development and for more general economic stabilisation. The period was also marked by the influence exercised by the League of Nations, an institution essentially controlled by Britain29. Because these loans were used also for develop- ment purposes, other organisations besides the League of Nations tame into play, especially where utilities were concemed, and powefil net- works were created. In fatt, an unmistakable characteristic of the era was the increasing importante of British capita1 and the increasing influence exercised by particular agencies such as the Bank of England, the Treas- my and Hambros Bank of London.
29 For details of the negotiation and use of the Refugee Loans cf Dritsas (1990) and Minoglou (1993).
17
Utilities were not exactly new to Greece. By the end of the 19th century, whereas there was very little foreign direct investment in Greece, some utilities had been established. The new century dawned with the realisation that infiastructure was still insufficient and inefi- cient, especially as regarded big urban centres, on the one hand, and the main productive sector, agriculture, on the other. Govemments tried to raise capita1 for development purposes. A limited number of utilities, e.g.
the telegraph service (Eastem Telegraph Co.), the electric trams of Ath- ens and the Gas Company, had been established in Greece not long be- fore but many of the older railway projects undertaken in the 1880’s and 1890’s were still awaiting completion. The awful state of agriculture de- manded inI?astructural improvement works. A most important land rec- lanration project, the Lake Copais Scheme, which involved the reclama- tion of 14,000 hettares of land (5,600 acres) was for the first time under- taken by British capital. The project involved the establishment of a new Iirm, the Lake Copais Co., which was to manage the toncession. The fimctioning of the tirm, however, did not always prove to be smooth, as tension developed in its relations with the peasants and the state. An- tagonism continued well into the 20th century and the toncession was finally taken away by tbc Greek State in the late 1930’s.
Foreign capita1 inflow linked to harge state and private loans and ac- companied by the installation of utility fnms in Greece intensified afier the Balkan Wars (1912-1913) and especially after World War 1. It took place within the framework of the new Greek liberal govemment policy of autarchy through land reform and distribution of land to peasants and refugees, and fm-thermore, within that of an increasing American pres- ence on the European scene.
On the whole, it can be said that the pattem of foreign tompetition during this period had changed. For one thing, partners were different.
France was no longer considered a serious competitor and Germany was using alternative paths of penetration and domination through trade agreements. Intense tompetition was now taking place between the Brit- ish and the Americans for the new developing markets. The means to penetrate were not only loans but agencies too, such as contractors and engineering firms. Britain, however, and more particularly for the case of Greece, Hambros Bank, were determined not to cede any ground to the newcomers. The stakes involved much more than just quick profits. The type of development, geopolitical considerations and the long term aspi- rations of Britain were central issues. Publit works, considered by the Greek govemments to be of the utmost importante for the future of the nation, became the core of this process as indeed they still are today.
They also constituted a field in which powerful entrepreneurial networks
were formed and business was increasingly politicised. Not only the treasury and the Foreign Office and the Bank of England, but also private agencies were aggressively involved in every step of the way in which capital tame into Greece, especially where state loans were concemed.
This practice talled for an equivalent structure of negotiation on the Greek side and was at the heart of the powerful business-bank-govem- ment links that appeared during this time. On the other hand, as far as the USA was concemed, despite the reputed efficiency of American multi- nationals (usually engineering flrms), which appeared on the Greek stage, no coherent American foreign commercial and tinancial policy had ap- parently yet been devised, with the result that the American Govemment left business to itselP.
Until the early 193O’s, several karge projects, such as the reclamation of the Vardar Valley in Macedonia, or the Athens Water Works or the electrification of Atbens, were given to foreign firms with or without the inflow of specific foreign loans. The first two projects illustrate well the pattem of antagonism between British and American capital. The Vardar Valley F’roject was given to the American tirm “Foundation Co”., which, though American in nationalny, had strong British connections with Hambros Bank and had a subsidiary in London. Through them, it was also comiected to the National Bank of Greece (NBG) which played an active part in the negotiations. (Diomedes, the Govemor of the National Bank and a personal fiiend of the Hambros, was introduced to the presi- dent of the Foundation Co. by the Hambros farmly in London)31. No American capita1 was supplied directly as the contractor did not provide financial backing, there was no exclusive loan and no management firm was established. The project ran into trouble however, and twelve years later, in 1937, the state directly took over its completion.
The Athens Water Scheme went to the American firm Ulen and Co.
and was the only project for which American capita1 was used, althougb Greek capital was also invested. Thus, even if the nationalny of the lirms was American, the capita1 they used as we have seen was British or mixed.
The major Greek partner in securing capital for the Water Project was the Bank of Athens, originally an agent of French capital and an old competitor of the biggest Greek bank, the National Bank of Greece, which, during this period, had almost become a formal representative of British capital. It was the last major project that the Bank of Athens
3o Minoglou (1993), p.229.
31 Minoglou (1993), p.274.
19
managed to secure during this time. In tontrast, the NBG maintained very close relations with Hambros Bank. Because of its long history of financing the Greek state, it acted as an official intermediary between the Greek and foreign govemments or other agents, such as bankers and entrepreneurs, for the attraction of foreign capita1 and for the negotiation of all foreign loar+. It did not, however, become a real development agency for the country. With the exception of the Athens Water Works loan, all other loans of tbc interwar period were negotiated by the Na- tional Bank. It would not be an exaggeration to say that both tbc National Bank and the Hambros wanted to monopolise loan capita1 and publit work business in Greece. Large networks linking various entrepreneurs were created and on several occasions Hambros pushed their favourite contractors for deals33.
Publit work projects gave rise to a new type of large firm, as special companies were set up for the management of the water works, as well as for electricity. They grew into large concems employing several thou- sands of workers, at a time when the rest of the economy was marked by extreme fiagmentation. They thus strengthened the dual character of tbc Greek economy. They became the subjett of party politics, they pro- voked hot parliamentary debates and aroused much hostility f?om the publit. This was especially true in the case of the only real fdi project, the General Hellenic Electricity Company. It was founded by the British Power and Traction Co. which was considered to have been granted scandalous terms for the exploitation of electric energy, including the exploitation of electric trams in Athens. A consortium was set up by the British firm Power and Traction Co. in which naturally Hambros and the NBG were the prime movers. Competition tame from the Belgian and the French side, represented by the Bank of Athens, but proved totally ineffective. The British side offered a complete study for electrification and transport and the Treasury guaranteed the necessary bond loan of
£2,000,000. Total cost was estimated at £3,270,000. The lion’s share,
£2,000,000 was used for the purchase from Britian of equipment for the
32 For the importante of the National Bank and of its relations with Hambros, Dritsas (1991).
33 The example of the road works is a case in point. This deal is not examined in de- tail here for lack of space. Charles Hambro offered to provide a substantial overdr&
for the project on the condition that the project would be awarded to P.G. Makris.
Makris was also the favourite of the Americans, being the dealer of Shell Petroleum
products in Greece. The road scheme which his Company was awarded fitted well
with his main interest which was monopolising the import of petroleum products in
the country.
central station of St. George. The proposal was drawn up by technical advisors &the British Treasury, and the British Ambassador had offi- cially stated to the Greek Ministers of National Economy that the project had the full technical and finantial support of the British govemment.
Despite opposition from across the whole politital spectrmu and tiom the Ministry of Transport, the deal went through with the help of the NBG.
The terms of the 60-year toncession were literally of a “colonial” type, giving the Company complete freedom and full autonomy korn any state control over prices, administrative practices, supplies, quality control, deadlines for the completion of the works, majority share ownership transfers to foreigners, salary strncture of its executives (salaries were colossal) etc. The deal was denounced as anti-constitutional and pro- voked serious social unrest on several occasions, threatening politital stabilny. In 1930, several rallies were organised by trade unions and pro- fessional organisations demanding the annuhnent of the contract, while popular outbreaks of violence were not avoided34. When the publit be- tame intolerant towards it, politital pressure was once again used (the British fleet sailed into the port of Piraeus). In the case of the Athens water works, it took some work before the basic agreement was am- mended so that the govemment would have a say in purchases of mate- rials or subcontracts given to Greek firms. Other scandalous toncessions concemed, in 1926, the Belgian firm New Antwerp Electrical for the country’s telephone network which, however, was never put into opera- tion and finally talled off altogether in 1930 when the toncession was granted to Siemens-Halske. The cable telegraph toncession of the British tirm Eastem Telegraph Co., established earlier, for communication was renewed for 50 years and was extended to include wireless telegraph.
Most British deals were preceded or accompanied by politital pres- sure. Sir Eric Hambro used his connections to exert influence directly on the Greek govemment. Hambros Bank was not particularly popular in Greece and polititians in general wished to reduce its influence. Perhaps the choice of American firms gave, in a simplistic way, that hope of real- isation. However, the Hambros managed to circumvent Greek resistance by using American firms financed by them.
Alongside the quantative importante of these deals there was a quali- tative aspect which was just as significant. Projects financed by foreign capita1 strengthened the technological dependence of the country. Quali- fied stti usually consisted of foreigners, while the majority of the 34 There is an abundante ofinformation on this deal mainly in contemporary press reports. For a detailed study of the negotiation process and the whole issue of elec- tric energy in Greece, Pantelakis, (1991), passim.
21
“unskilled” labour employed were Greeks. In the case of the Water Works, despite the Greek government’s efforts, tbe contractor purchased expensive machinery and material in the USA. The Greek state did not prove particularly efficient in controlling such deals. Weakness was also shown by the Greek state over the control of a railway project under- taken by the Sociéte Génerale de Belgique. The Company was allowed to supply virtually all materials at its own prices which tumed out to be 80 per cent above the world market prices. This deal went through during the dictatorial rule of general Pangalos (1925-1926) who, eager to secure international recognition and to further his militaristic aspirations, nego- tiated loans in exchange for monopolies.
Between 1930 and 1945 no more foreign loans tame into Greece. Af- ter the constraints applied by the League’s stabilisation programme under tbc influence of the British Treasuty and tbc Foreign Office, foreign loans for Greece had to be approved by the Finantial Commission of the League of Nations and Britain and America had to be asked before any such loan was negotiated. After 1932, another embargo was imposed.
Foreign direct investment in industy was another avenue of foreign capita1 during the interwar years. It was part of the more general efforts made by the NBG to attract foreign capital and again it took place with the help of the British. An Anglo-Hellenic Trust was founded for that purpose, under the intluence of Hambros Bank, but, even tbough the establishment of the Trust meant new practices and modem organisa- tional methods for Greek industry, the actual capital channeled to the secondary sector was not very significant. Furthermore, it went only to the already large, stable and well established firms in a few sectors. Ce- ment, distilleries, wine, electricity and textiles received 61 per cent of the loans. Cement and construction materials alone received 27.5 per cent.
The impact of these loans was limited for Greek industry. Nevertheless, it prepared the ground for the subsequent domination of industrial credit by the National Bank of Greece. The Hambros were not particularly keen on letting Greek industry develop, as they considered that Greece should really be a market for British manufactured goods. The NBG was unable to circumvent Hambros’ policy in that respect, nor had the Greek state devised any coherent industrial policy yet which would alter the basic orientation of British investment35.
Although German capita1 inflow is not analysed here in detail, it is per-
haps worth mentioning that it followed alternative methods of penetration
based on the clearing agreements and involving the establishment of sub-
sidiaries using already existing business networks. The construction and
35
Dritsas (1990).engineering finn, A. Zachariou S.A., for instance, which at the beginning of the period operated as an agent of several German exporters - includ- ing Siemens - after 1930 became a Siemens’ subsidiary. A. Zachariou had for a long time maintained close and fiiendly relations with German businessmen and was considered by Siemens their “man in Athens”s6.
Post-War Investment Patterns and the Appearance of Multinationals
After World War II foreign capita1 played a very important part in the evolution of the Greek economy, albeit not always positive. It is uncer- tain whether it contributed to the modernisation of Greek industry. The USA became Greece’s major partner after the war, and the articulation with politics cannot be disputed37. Capita1 inflow was channeled through Marshall aid and it is estimated that between 1945 and 1952, two billion dollars were transferred to Greece. However, half of this amount was dedicated to military expenditure in support of the Greek govemment fighting a Civil War against the Democratic Army after 1945. More than 25 per cent was spent on imports of consumption goods while a very small part only was channeled to industry. Infrastruttural projects were also undertaken (road network, electric energy etc.). The debate about the decisive factors of this policy is still ongoing. It is certain, however, that a shift in the strategic considerations of the USA occurred and that Greek institutions, before achieving minimum efficiency levels during the interwar period, were once again utterly disarticulated during the war and occupation years and proved therefore incapable of posing any barrier against foreign intervention. The sheer presence of a good number of American politital, diplomatic, military and cultural agencies in Greece bears witness to the heavy involvement of this country in the post-war fortunes of Greece.
During the next twenty years from 1952 to 1973 the main attitude of politital and economic circles in Greece concerning development re- mained unchanged. Foreign capital was still seen as “deus ex machina”
for development. The differente was that govemments were now willing to go further in attrracting it. This was a period of growth for Greece although strucutral problems remained. GNP grew at 5.5 per cent annu- ally, but the pace was faster between 196 1 - 1970 (7.1 per cent). Industry
36 Dritsas ( 1992) in Cottrell, Lindgren & Teichova ( 1992) 37 Stathakis (1991).
23
grew at an average annual rate of 9 per cent and production rose sixfold.
Services also grew at 6 per cent, the primary sector (basically agricul- ture) enly grew at 4 per cent, while production doubled. Imports contin- ued to outgrow exports by far while budgets continued to be iu deficit.
During this period, the state iutervened deeper in the economy and a large publit sector began to operate. On the other hand, in the private sector, there was a shift towards fdi which took place in new areas such as oil refineries and heavy iudustry. Big industrial conglomerates were createdJ*. Strategic iudustries such as both the Thessaloniki refinery and the steel industry were afflliated to large American multinational+‘.
Greek overseas shipping capital, having benefited from conjunctural cri- ses such as the Korean war, the Suez crisis, etc. and having managed to extratt favourable incentives from the Greek govemments, was leading the process of investing in joint ventures40.
The new intemationalisation was greatly facilitated by liberal legisla- tion for the attraction of foreign capital in the early 1950’s. Capita1 in- flow, whether in the form of share capita1 or loan capital, was equally protected. It concemed imports of machinery and equipment, raw mate- rial, foreign currency, patents, know-how, trade marks and technology transfers that could be invested in wholly foreign or mixed companies.
Tax incentives were also introduced, as well as the right to repatriate both the initial capita1 (at a rate of 10 per cent ammally) and a substantial part of any eventual profits. Property belonging to a foreign firm could not be expropriated. For loan capital, 10 per cent of ammal interest could be transferred abroad. There were special arrangements for the transfer of accumulated profits and interest. These already quite favourable terms were extended Mer during the period of the military dictatorship (1967-1973) when additional incentives - exemption from duties and other taxes for ofice equipment imported by foreign firms, exemption from income tax for their expatiate staffs revenues, and so on - were offered to foreign investors. Indeed, it was explicitly stated in the Five- Year Economic Development Plan for 1968-1972 that foreign capita1 and private initiative were the determining factors for the success of the plan.
38
Forexample, the Andreadis group which controlled five banks, several insurance companies, various industries, tourist facilities and holding companies.
39 Standard Oil Corporation controlled
Greek refineries in Thessaloniki and the American Republic Steel the Greek steel industry; Aluminium of Greece S.A. was owned by the French Pechiney.4o These issues have not interested economic historians much yet. Most existing studies are matro-economic analyses of Greek industry. For a concise and clear out- line see Babanasis-Soulas (1976), Giannitsis (1988).
