The Body Economic

by Basu, Sanjay, Stuckler, David

  Health appeared to improve, in part, from a better diet and lower alcohol use. In October 2009, McDonald’s pulled out of the country, blaming Iceland’s “unique operational complexity,” as the price of tomatoes and onions skyrocketed when the krona’s value fell. “For a kilo of onions imported from Germany,” reported one local franchise own er, “I’m paying the equivalent of a bottle of good whisky.” But after McDonald’s left, people increasingly turned to cooking at home with local foods instead of going out for imported fast food, with the result that the consumption of locally caught fish also rose as fast food consumption fell. Indeed, the eventual economic recovery in Iceland was driven by in part by the return of the traditional fishing industry, leading in due course to an export boom.34

  Iceland also upheld its state monopoly on alcohol. It rejected the advice of the IMF to privatize alcohol stores as a means for boosting the economy. In the 1980s and 1990s, it was difficult to find spirits on sale. Iceland’s combination of high alcohol prices and tight regulation, at a time when the imports of spirits became prohibitively expensive because of the falling currency, made alcohol a costly option for coping with stress.35

  So, overall, some of the key factors in the recession actually seemed to keep people healthier during the economic crisis. But what about the democratic referendum—did deficit spending, and delayed payment to IceSave’s investors, critically harm the future economy and public health of Icelanders?

  Iceland took two important steps that protected people’s health and well-being. By first rejecting the IMF’s plan for radical austerity, it protected a modern-day equivalent of the New Deal. In the decades before the recession, Iceland had put in place a strong social protection system. After the public referendum to maintain that system, the government bolstered supports to those in need even further. In 2007, Iceland’s government spending as a fraction of GDP was 42.3 percent. This increased to 57.7 percent in 2008 and has remained about ten percentage points above pre-crisis levels at the time of this writing. This increase didn’t lead to inflation, runaway debt that has been impossible to pay back, or foreign dependency—the predicted disasters that austerity advocates claim will result from stimulus programs.36

  Iceland didn’t balance the budget through massive cuts to its healthcare system. While its currency devaluation meant the National Health Service had less money to import drugs and medicines, the government offset this threat of unaffordable pharmaceutical imports by increasing health budgets between 2007 and 2009—from 380,000 kronas per person to 453,000. The result was that essential services were protected, so that patients did not lose access to care.

  Iceland also maintained its social protection system—programs to help people maintain food, jobs, and housing. It boosted key labor market programs to help people get back to work if they were recently unemployed. It implemented a new policy allowing small and medium firms to apply for debt relief; if they could show positive cash flow in the future, the debt or part of it would be forgiven. As a result, employers were not only able to retain employees but to hire new ones during the crisis. “The government has substantially boosted expenditure on public employment services to offer appropriate job matching and training services,” reported the Paris-based technical economic institute, the Organization for Economic Cooperation and Development (OECD). The OECD had aligned itself with the IMF’s advice for austerity, but strongly recommended it be done with a “human face”—to maintain social protection.37

  Overall Iceland’s social protection spending rose from 280 billion kronas ($2.2 billion) to 379 billion ($3 billion) kronas, from 21 percent of GDP to 25 percent of GDP between 2007 and 2009—a rise that went beyond benefits to the unemployed and healthcare coverage. The additional spending also helped fund a series of newly instated “debt relief” programs. For example, to homeowners who had negative equity, the country wrote off debt that was above 110 percent of the property value, and offered money to those who qualified as poor to help reduce mortgage payments. This was a radical step. Other countries hit by the Great Recession were not so supportive of their citizens. In Spain, for example, even when people were evicted from their homes and declared bankruptcy, they had to continue paying their housing debts and many became homeless. In Iceland, by contrast, the debt relief programs helped people stay in their homes, and there was no significant increase in the number of homeless. The number of houses receiving income support rose from about 4,000 in 2007 to 7,000 in 2010. Thanks to these kinds of supports, the percentage of house holds at risk of poverty was unchanged despite Iceland’s crisis. Had these social protection supports not been maintained, a third of Iceland’s population would likely have been plunged into poverty. Iceland’s Ministry of Welfare also implemented a “Welfare Watch” group, which would publicly respond to the government about how people’s health and well-being were being impacted by the downturn. Many of their recommendations were implemented.38

  In addition to keeping the safety net, the other critical factor in Iceland’s response to the crisis was national solidarity. Despite early tensions between wealthy debtors and the rest of the population, the national referendum sparked a new period of unity. The people of Iceland felt that they were all experiencing the crisis together. Iceland maintained its position as having some the highest rates of “social capital” in Western Europe: meaning that it’s common for people to have strong groups of friends in their neighborhood, at work, and at church. Unlike the Russian situation where people were left in isolation and desolation in mono-towns from the Soviet era, the Icelanders had strong community networks. When we arrived at the country’s airport, we were surprised that practically everyone knew each other on a first-name basis. People regularly went to saunas and steambaths with their families after work—not only making it easier to relax and alleviate stress, but building a sense of community and togetherness (if also a bit of indecent exposure)—all which may have contributed to a heightened spirit of democracy in a time of crisis. And Iceland’s level of inequality, which had jumped prior to the crisis, fell sharply after the economic collapse to levels on par with its Nordic peers.39

  The collapse of the Icelandic economy, then, did not lead to much of a health crisis—in fact, the impact of the crisis as a whole didn’t even make for an exciting movie. When the reviews rolled in for Helgi Felixson’s documentary God Bless Iceland, critics carped; one complained that there was “not enough mustard” for the movie to build much drama. The film’s problem, from a theatrical standpoint, was that Iceland hadn’t fallen apart as predicted.40

  The response of Iceland’s government to the crisis reminds us how important it is to safeguard democracy, even at a time when extraordinary responses are needed. Even if hard decisions need to be made, a bitter pill is easier to swallow if you administer it yourself.

  It was Iceland’s heavy “financialization” of its economy during the 1990s and early 2000s—relying on high-risk investments by banks, rather than on industries that actually produced real, useful goods and services, or developed new technologies—that put its people at risk in the first place. But when managed with care, the crisis became an opportunity for the Icelandic people to rediscover their values, enabling the nation to rebuild an economy that is now thriving on its fundamentals. In 2012, Iceland’s economy grew 3 percent and unemployment fell below 5 percent, while the UK’s economy, under the Conservatives’ austerity programs, continued to sink. In June of that year, Iceland made repayments on loans, ahead of schedule. Fitch Ratings—one of the big three ratings agencies, along with Standard and Poor’s and Moody’s—had initially called Iceland’s economic choices an “un-orthodox crisis policy response,” but in early 2012 it restored the country’s high investment status, rating Iceland as “safe to invest.”41

  Even the IMF later admitted that the unique Icelandic approach led to a “surprisingly” strong recovery. The IMF’s reform proposals, followed by a retreat on its previous position, was history repeating itself. This tim
e, in its ex-post evaluation, it concluded that one key lesson was that “social benefits were safeguarded in line with the authorities’ post crisis objective of maintaining the key elements of the Icelandic welfare state. This was achieved by designing the fiscal consolidation in a way that sought to protect vulnerable groups by having expenditure cuts that did not compromise welfare benefits and raising revenue by placing greater tax burden on higher income groups.” While couched in bureaucratic language, the admission that social protection programs were vital to economic recovery and well-being was a revolutionary statement for the IMF.42

  While these reports emphatically validated Iceland’s approach, not everyone was pleased. The UK and Netherlands ramped up their pressure for Iceland’s people to pay back IceSave’s private investors with public tax dollars and implement strict austerity in Iceland. In April 2011, the Icelandic people turned out for another vote. This time, 60 percent of the population rejected a deal between Iceland and its main creditors, the Netherlands and UK, under which the IceSave investors would be immediately paid back. As the Financial Times reported, Icelanders had “put citizens before banks.” Larus Welding, the former bank chief of Glitnir, was later convicted of fraud as part of national reconciliation. Iceland’s president, Ólafur Ragnar Grímsson, said, “The government bailed out the people and imprisoned the banksters—the opposite of what North America and the rest of Europe did.” Iceland’s banks had been deemed “too big to fail,” and the government let them fail. The consequences were clear in the data showing Iceland’s successful recovery while most of the rest of Europe continued to suffer.43

  At the time of this writing, the terms of austerity plans to pay back Ice-Save’s creditors are making their way to international courts. Prosecutors in the UK and Netherlands sued the Icelandic government to speed up debt repayment. In the meantime, it appears that avoiding a deep austerity program, and making smart investment choices in critically important social protection programs, has spared lives. So even though Iceland had allowed its bankers to engage in reckless betting with people’s money, citizens stepped in to determine how to clean up their mess. They chose wisely, protecting people from further harm, while simultaneously restoring the economy to growth.

  The people of Iceland are also learning lessons from the IceSave disaster—taking proactive steps to ensure another crash never happens again. In July 2011, twenty-five of the country’s citizens put together a crowd-sourced constitution designed to give the people greater control over their natural resources and break up cronyism between the banks and political elites. Using social media applications, all Icelanders could respond to six questions about constitutional changes. On October 2012, two-thirds of Iceland’s population voted to replace the Icelandic constitution with a new one based on this crowd-sourced constitution.44

  FIGURE 4.1 Rapid Economic Recovery in Iceland but Slow Meltdown in Greece45

  Iceland’s social benefits were safeguarded because its political leaders made democracy a priority, and its people voted for social protection programs, which in turn bolstered a strong society. As then Prime Minister Geir said in 2009, “No responsible government takes risks with the future of its people, even when the banking system itself is at stake.” Rather than pursuing a path of deep fiscal austerity, Iceland supported key social programs that were vital to maintaining public health, including housing assistance, job re-entry programs, and healthcare coverage.46

  We would love to be able to claim that the people of Iceland had heeded our advice, but it was they themselves who read the public health data and chose to put in place clear and necessary safeguards to protect health in hard times. God didn’t save Iceland, its people did. By contrast, as shown in Figure 4.1, one of Iceland’s distant European neighbors did not do so well. In the next chapter, we will see what happened to Greece when the European Central Bank (Europe’s central bank for the euro) and IMF suspended Greek democracy—imposing radical austerity, with completely different results.

  5

  GREEK TRAGEDY

  A handsome former Air Force officer in his fifties, Andreas Loverdos was looking for prostitutes—but not for himself.

  On the morning of May 1, 2012, Loverdos, a medical doctor and the Greek Minister for Health, joined a squad of officers from the Greek Police Enforcement and Justice Department on the streets of Athens’ downtown Omonia neighborhood. Ten days before a very tense Greek general election, Loverdos had decided to take action.

  In April 2012, the Greek government had passed a law allowing Loverdos’s Health Department to test anyone for sexually transmitted diseases—with or without their consent. The new law came in response to STD reports from hospitals and clinics all over Greece. New cases of HIV infection had jumped 52 percent between January and May 2011 alone. This was an astounding increase. HIV, often thought of as a disease most prevalent in developing countries, had been stable in Greece since the turn of the century. It hadn’t risen so drastically in any Western European country in over ten years.1

  The news of Greece’s HIV epidemic made international headlines, and was taken as a sign that the country was falling behind the rest of Europe. Loverdos was in an awkward position—running for re-election just as the news of Greece’s failing public health system drew the world’s attention.

  When in late 2011 the BBC began describing Greece as the “sick man of Europe,” Loverdos felt compelled to respond. The Greek government had made radical cuts to the public health budget, under pressure from the IMF and European Central Bank. HIV prevention programs were among the first to be axed. So Loverdos called a meeting with his top campaign strategists. The group came up with a plan that has, historically, worked in almost all countries in which sexually-transmitted disease rates have spiked: scapegoat the most vulnerable people.2

  Casting himself as the new protector of “unsuspecting family men,” Loverdos appeared on national television pledging to restore morals and virtue to a Greek society that had lost its way in the recession. He vowed to arrest prostitutes, calling them a “menace to society” and an “unsanitary bomb.” His Department of Health fed the Greek media a stream of photos of HIV-positive prostitutes, branding them a “death trap for hundreds of people.”3

  As the prostitution sting continued in Athens’s seedier neighborhoods, the police also surrounded the elite five-star Hotel Grande Bretagne in Constitution Square, in the heart of Athens close to the Parliament. They were shielding the hotel’s guests from the crackdown, and from the rising numbers of homeless people—beggars, drug users, and street children—who had taken up residence in the alcoves of abandoned shops, subway grates, and doorways surrounding the square. Homelessness had jumped by 25 percent between 2009 and 2011, as a spike in foreclosures and a shattered social protection system left people with nowhere to go. Meanwhile, homicides doubled in Greece between 2010 and 2011, with a marked rise in Athens’ downtown area surrounding the Hotel Grande Bretagne.

  The police were also protecting the Bretagne’s guests from the angry protesters camped outside its doors. The hotel was one of the unofficial residences for the “troika,” the foreign technocrats from the European Central Bank, European Commission (the executive body of the European Union), and the IMF, who were locked in heated discussions about Greece’s future. In May 2010, as the negotiations about a potential bailout dragged on, protesters gathered in the square. A few turned into a hundred, then a few thousand, starting skirmishes with the Athens police, who met the protesters’ calls for democracy with tear gas, police dogs, and riot tanks.

  The narrative of this Greek tragedy was essentially the opposite of the story of Iceland. At the behest of the troika, Greece’s democracy was suspended. A brutal dose of austerity, unlike any seen in Europe since rationings during World War II, threatened the lives of the poorest and most vulnerable, who were now paying for errors made by the government and banking sectors. As more and more news of public health crises came in, government officials repeatedly met the evidence w
ith open denial, failing to acknowledge, let alone respond to, what was a growing catastrophe.

  Greece alas served as an unwitting laboratory for testing how austerity impacts health. The roots of this extreme case of disaster can be traced to a tsunami of financial failures, corruption, tax evasion, and ultimately a lack of democracy. The popular will was not able to express itself in Greece as it had in Iceland.

  To understand how Greece got into such a mess, we need to go back at least four decades. At the fall of the country’s military junta in 1974, which seized power in 1967, Greece’s economy was among the poorest in Europe. After Greece transitioned to democracy, the economy was rebuilt on tourism, shipping, and agriculture. Tourists flocked to white sand beaches on Greek party islands like Mykonos and Santorini, and Greek farmers supplied Europe with cotton, fruit, vegetables, and olive oil. Overall, Greece’s economy grew slowly, but steadily, at less than 1.5 percent each year on average in the 1980s and 1990s.

  Then, Greece’s admission to the European Union in January 2001 set the country on course for an economic boom. EU capital began flooding into Greece, fueling a construction bonanza. Over the next five years, European Structural Funds provided $24 billion for infrastructure projects. The Greek government matched the EU funds with heavy borrowing, supporting large-scale construction projects such as new ports for shipping and sport facilities to host the 2004 Olympics in Athens. The government even built a large museum in order to reclaim the Parthenon Marbles, which had been snatched by an English aristocrat and installed in the British Museum. The Greek museum was one of the biggest cultural projects in Europe, at a cost of $200 million.4

  Thanks to a combination of EU funds, foreign investments, and low tax and interest rates, by the mid-2000s Greece’s economy was red hot. In February 2006, George Alogoskoufis, Greece’s minister of finance, said, “We are in a position to achieve an economic miracle.” That June, the Greek economy hit a peak of 7.6 percent GDP growth. (Portugal and Spain, the other EU countries that had started in similar economic positions to Greece, continued growing at less than 2 percent per year.5)