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.