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THEODORE PELAGIDIS
Professor of Economics,University of Piraeus and
Senior Fellow, LSE, HO
Greece’s sudden faltering economy:
Falling competitiveness and
institutional weakness in a high GDP
growth rate context (1995-2008)
4 factors led to strong growth during 1995-08
• Greece’s economy accession to the eurozone together
with the creation of competitive credit and capital
markets as well as the macroeconomic stability that
followed the EMU accession.
• The shipping and tourism industry boom (+ the real
estate to a lesser extent)
• the improvement resulting from of productivity enhancing
infrastructure especially in the Athens, ‘Olympic Games’,
greater area that were financed largely by the EU
structural funds but also by private sector partnerships.
• the satisfactory deregulation of the telecommunications
industry and some other infrastructure
Figure 1. Strong growth: Greece clearly outperformed since
1995-96 the benchmark euro zone economy.
Is this about to change?
15%
10%
5%
0%
-5%
-10%
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
Greece. Real gdp % YoY
Euro zone. Real gdp % YoY.AMECO.
Figure 2. The main drivers of the higher performance.
Demand injections. Greece.
Data sources: Bank of Greece, Ministry of Finance, European
Commission, EUROSTAT.
30%
25%
20%
15%
10%
5%
0%
-5%
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
Change in net credit issued by the private banking sector to enterprises and housholds. Change
in the stock of financing over the year as a percentage of GDP.
Net inflows from the E.U. as a % of year end GDP.
Change in General Government debt as a % of GDP. Percentage points. * In 1993 all guarantees
issued by the Government that had been claimed were added to the public debt.
Figure 3a Interbank rates as a reflection of achieving macro stability
Interbank rates
20
18
16
14
12
% 10
8
6
4
2
0
1-10
10
7
4
1-09
10
7
4
1-08
10
7
4
1-07
10
7
4
1-06
10
7
4
1-05
10
7
4
1-04
10
7
4
1-03
10
7
4
1-02
10
7
4
1-01
10
7
4
1-00
10
7
4
1-99
10
7
4
1-98
Euribor(Έως 1-1-01 Athibor) 1m o
Euribor 6m o (Έως 1-1-01 Athibor)
Euribor 12m o (Έως 1-1-01 Athibor)
Euribor 12 m o
Figure 3b. Government bond yields and the possible reversal of the
trend towards macro stability for Greece.
200%
190%
180%
170%
160%
150%
140%
130%
120%
110%
100%
90%
9
8,5
8
7,5
7
6,5
6
5,5
5
4,5
4
3,5
3
2,5
2
1-10
7
1-09
7
1-08
7
1-07
7
1-06
7
1-05
7
1-04
7
1-03
7
1-02
7
1-01
7
1-00
7
1-99
Yield of Greek government 10y bond as % of German comparable bond.
Yield of Greek government 10y bond . %. Data BoG. Data for 12month bond.
10 y German Government Bond Yield (Zinsstrukturkurve (Svensson-Methode) / Boersennotierte
Bundeswertpapiere / 10,0 Jahr(e) RLZ / Monatsendstand. WZ9826. Bundesbank.)
Figure 4 Expansion of household credit and private consumption (GDP
component) as a driver of private consumption and the fading of this
effect.
7
60
6
50
5
40
4
3
30
2
20
1
10
0
0
-1
-2
-10
12-09
Credit to households-housing. % YoY change. BoG.
Credit to households-consumer credit after write-offs. % YoY change. BoG.
Credit to households-consumer credit. % YoY change. BoG.
6
12-08
6
12-07
6
12-06
6
12-05
6
12-04
6
12-03
6
12-02
6
12-01
6
12-00
6
12-99
6
12-98
% YoY change private consumption. Greece. ESYE. Y2000 prices.
Figure 5. Private consumption and investment change. Investment
often complemented consumption growth, especially in the run up to
the 2004 Olympic games.
40
7
6
30
5
4
20
3
2
10
1
0
0
-10
-1
-2
-20
% YoY change investment. Greece. ESYE. Y2000 prices.
12-09
6
12-08
6
12-07
6
12-06
6
12-05
6
12-04
6
12-03
6
12-02
6
12-01
6
12-00
6
12-99
6
12-98
% YoY change private consumption. Greece. ESYE. Y2000 prices.
Figure 6. Investment as % of GDP.
The rapid increase of new investment (figure 6) also demonstrates the impact
of the infrastructure investment that was largely financed by the EU structural
funds but also private sector financing.
30%
30%
25%
19,3%
22,5%
22,5%
21,6%
22,6%
23,7%
22,5%
21,6%
21,6%
19,1%
17,9%
17,7%
16,9%
20%
20,1%
25%
20%
Investment/GDP. Current prices, euro-zone 13.
Investment/GDP. Current prices, Greece. Eurostat.
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
10%
1997
10%
1996
15%
1995
15%
Figure 7
The poor performance regarding competitiveness,
is documented by:
- The persistent deficit of the current account in doubledigit numbers (12-14% of GDP),
-The persisting inflation differential with the euro zone
(around 1.5-2.0% during 2008), which is observed for both
goods and services.
-The unattractiveness of Greece to net foreign direct
investments that are practically zero
-The consistent ranking of Greece by all competitiveness,
business environment, administrative cost and
governance surveys at a rank that is disproportionally low
when compared to its per capita GDP and the productivity
that is measures as GDP per worker.
Corruption matches well with this.
Fig. 8, 9. An expository comparison with Ireland, where the inflation of goods is much lower than the
inflation of services and that, thus, emerges as a textbook Balassa-Samuelson case is most revealing
I n f l a t i o n , H IC P , g o o d s .
E U R O S T A T .
In f l a t i o n , H I C P , s e r v i c e s .
E U R O S T A T .
5 %
5 %
4 %
4 %
3 %
1 ,2 %
0 ,6 %
1 ,9 %
2 %
1 %
1 ,3 %
1 ,2 %
1 ,2 %
0 ,6 %
0 ,7 %
1 ,4 %
w rt E A -1 3
8%
7%
7%
6%
6%
5%
4, 4 %
5%
4%
2 ,5 %
0 ,2 %
3%
0 ,9 %
2%
0 ,8 %
2 ,5 %
2 ,3 %
0 ,9 %
1 ,7 %
3%
0 ,6 %
1 ,8 %
2 ,3 %
-0, 7 %
-0 , 8 %
-0 , 6 %
-1 %
1, 0 %
2 , 3%
0,9%
1, 8 %
2,3%
2, 0 %
2%
1%
3, 2 %
2 , 5%
1 , 6%
1,5%
2000
2 ,1 %
4,3%
1999
1 ,8 %
3 , 6%
3 , 4%
4%
2 , 6%
2, 6 %
0%
6%
5%
5%
4%
4%
2%
2,3%
2 ,1%
2 ,3 %
1, 3 %
1 ,2 %
2,2%
1,3%
1,1%
1 ,1 %
2%
1,6%
1 ,5 %
3, 2 %
2 , 6%
2 ,6 %
2,3%
2,0%
2006
2 ,5 %
2000
1%
1 , 6%
1 ,4 %
2005
1,8%
3%
2004
1,8%
1 ,2 %
2003
1, 7 %
1 ,3%
0,7%
1999
0 ,5 %
0 ,9 %
2 ,5 %
2006
7%
6%
1,2%
2005
7%
1, 9 %
2004
8%
1,2%
Ir e la n d
H I C P . S e r v ic e s . E uros t a t .
H IC P . G o o d s . E u ro s t a t .
0 ,6 %
2003
E ur o a re a
Ir e l a n d
8%
3%
2002
2001
2006
2005
2004
2003
2002
2001
2000
1999
E u ro are a
0%
-1 %
E u ro are a
2002
2001
2006
G re e c e
2005
2004
2003
2002
2001
2000
1999
E u ro are a
G re ec e
2007
2006
2005
2004
2003
o f G re e c e
H I C P S e r v i c e s . E u r o s ta t.
H IC P G o o d s . E u ro st at .
0%
2002
2001
2000
1999
I n f la t io n d i f f e r e n c e
E u ro z o n e 1 3
w rt E A -1 3
8%
1%
1 ,2 %
1 ,1 %
0 %
2007
o f G re e c e
2006
2005
2004
2003
2002
2001
2000
1999
I n f l a t io n d if f e r e n c e
E u ro z o n e 1 3
0%
1 ,3 %
1 ,1 %
1 %
0 %
1%
1 ,2 %
2 ,2 %
2 %
0 ,5 %
1 ,6 %
1 ,4 %
3 %
Figure 10. Excessive deficit of the goods trade balance, as a % of GDP
S e rv ic e s b a la n c e a s
% of G D P.
E u r o s t a t.
10%
8%
8%
6%
5%
4%
5%
7%
6%
6%
8%
7%
6%
6%
0%
-5 %
-4 %
-5 %
-6 %
-7 %
-7 %
-8 %
-1 0 %
-7 %
-8 %
-8 %
-1 1 %
-1 1 %
-1 3 %
-1 5 %
2006
2005
2004
2003
G o o d s b a la n c e a s %
2002
2001
2000
1999
1998
1997
1996
1995
I r e la n d
G ree c e
o f G D P . E u r o s ta t .
3 5%
26%
2 5%
2 0%
19 %
18%
28 %
26 %
2 4%
23%
2 0%
2 2%
18%
15%
1 5%
5%
-5%
-1 1 %
-1 4 %
-15 %
-1 5%
-1 6 %
-1 5 %
-1 6 %
2006
-1 7 %
2005
-1 4 %
2004
-1 3 %
2003
-1 2%
2002
-12 %
2001
-1 5%
-2 5%
2000
1999
1998
1997
1996
1995
Ir e l a n d
G re ec e
Figure 11. This persistent deterioration of the goods balance has been financed, besides from the
surplus of the services account (figure 4), through foreign inflows in both Greek government bonds as
well as into the stocks of Greece companies, at least until the present financial turmoil made its
appearance
10%
5%
0%
-5%
-10%
-15%
-20%
External balance - Services. % GDP. EUROSTAT, Annual National Accounts.
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
Greece. External balance - Goods
FIGURE 12
Direct Investment (FDI Inward). FDI inward flows for Greece as a
percentage of GDP are very low for almost all years something that is in line with
the link between the attractiveness of the business environment and FDI
2.0%
1.8%
Percentage of GDP
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
Figure 13 Indices of competitiveness
D o ing B us in es s in 2 01 0
Ran k
1
2
3
4
5
6
7
8
9
10
16
18
22
25
28
30
31
44
48
55
62
64
73
74
78
82
10 7
10 8
10 9
11 0
11 1
18 1
18 2
18 3
W E F , G lob al
C o m e p t iti v e n e s s In d e x
20 09 -2 01 0
R an k
S ing ap o re
1 S w i tz e r la n d
N e w Z e a la n d
2 U n i te d S ta t e s
H on g K on g, C hina
3 S ing ap o re
U n i te d S ta t e s
4 S w e d en
U n i te d K in g d o m
5 D e n m a rk
D en m a rk
6 F i n la n d
Ire l a n d
7 G e rm a ny
C an ad a
8 J a pa n
A u s tr a l i a
9 C an a da
N o rw a y
1 0 N e t h e r la n d s
…
…
F i n la n d
1 3 U n i te d K in g d o m
S w e d en
1 4 N orw ay
B e lg iu m
1 6 F ra n c e
G e rm a ny
1 7 A u s tr i a
A u s tr ia
1 8 B e lg iu m
N e t h e r la n d s
2 1 L ux e m b ou rg
F ra n c e
2 5 Ir e l a n d
B u lg a r i a
3 1 C ze c h R e p u b l ic
P o rtu g a l
3 3 S p ain
R o m a n ia
3 4 C yp r u s
S p ain
4 3 P o r tu g a l
L u x e m b o u rg
4 6 P o la n d
T urk e y
4 8 It a l y
C ze c h R e p u b l ic
5 8 H un g ary
It a l y
6 1 T u rk e y
A lba nia
6 4 R o m a n ia
…
…
E th io p ia
6 9 C olo m bia
L eb an o n
7 0 E g yp t
G r e ec e
7 1 G r e ec e
G u a te m a l a
7 2 C r o a ti a
S e yc h e l l e s
7 3 M o ro c c o
…
…
G u ine a-B is s a u
13 1 C ha d
C on go , D e m . R e p.
13 2 Z im b ab w e
C e n tra l A fri c a n R e p u b l ic
13 3 B u run di
T I , C o rr u p ti o n
P e r c e p t io n s In d e x 2 0 0 8
Ra n k
U N , Κα τ ά κ ε φα λ ή Α Ε Π σ ε $,
2 00 7
R an k
1
1
1
4
5
5
7
7
9
9
11
12
14
14
16
16
18
18
18
23
26
28
31
32
45
47
55
55
57
58
58
1 78
1 78
1 80
D e nm a rk
N e w Z e a la n d
S w ed en
S ing a po re
F in la n d
S w it ze r la n d
I c elan d
N e th e r l a n d s
A u s tr a li a
C a na da
…
L u x e m b o u rg
A u s tr i a
G erm a n y
N o rw a y
I relan d
U n ite d K in g d o m
B e lg i u m
J a p an
USA
F ran c e
S lov e nia
S p ain
C y pru s
P o rtu g a l
C z e c h R e p u b l ic
H u ng ary
…
I ta ly
S e yc h e ll e s
G re e c e
L it h u a n i a
P o la n d
…
I raq
M y an m a r
S o m a li a
1
2
3
4
5
6
7
8
9
10
L i e c h te n s te i n
Lu x em bo urg
B e rm u d a
N o rw a y
Q a ta r
Ic e la n d
Ir e la n d
D e nm ark
C a ym a n Is l a n d s
S w i tz e r l a n d
…
13
14
15
16
17
18
19
22
23
24
26
30
31
32
34
S w e de n
N e th e r l a n d s
F inlan d
A u s tra l ia
U n it e d K i n g d o m
U n it e d S ta te s
A u s tri a
B elgium
C a na d a
G e rm an y
F ra n c e
S in g a p o r e
Ita ly
J ap an
S p a in
…
T u rk s a n d C a ic o s
H o ng K o ng
G r ee ce
C y p ru s
B ah rain
…
Z im ba b w e
C on go
B u ru n d i
37
38
39
40
41
2 11
2 12
2 13
In Greece the administrative burden is exceptionally high (figure 14)
Figure 15 Professional markets
Figure 16
Corruption and Regulation
10
Denmark
Sweden
9
Netherlands
Norway
UK
TI corruprion perception index 2007
8
Germany
Ireland
Belgium
7
Spain
Uruguay
Portugal
Estonia
6
Ιtaly
5
Bahrein
Mauritius
Cambodje
Cuba
4
3
Guinea
Filippines
Zibabue
2
Τουρκµενιστάν
Somalia
Myanmar
Greece
Malaui
Bulgaria
Slovakia
Letland
Iraq
1
0
-3
-2
-1
0
1
WB Regulatory Quality, 2006 Governance Data.
2
3
Figure 17. The result of the strong demand growth that is not driven by an
increase in domestic supply (because of the low competitiveness) is the lack of
an increase in employment in spite of the rapid GDP growth
Employment ratio for the population over 15 years of age.
65
60
55
50
45
40
35
30
France
United Kingdom
Finland
2006
Spain
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
Employment rate of population over 15 years of age. Greece. Source OECD.
Figure 18. The paradox as an outlier. High GDP to employment growth and low
competitiveness because of extreme product market regulation.
(0=less restrictive, 6= more restrictive)
Figure 19 Product market regulation. Degree of restrictiveness of
regulation having an impact on economic behaviour.
(0=less restrictive, 5= more restrictive)
2003
5,0
OECD average
4,5
4,0
3,5
HUN
3,0
ESP
2,5
2,0
NOR
OECD average
GBR
SWE
CAN
USA
1,0
0,5
EU15
FIN
IRL
BEL
GRC
ITA
PRT
TUR
CZE
DEU
JPN
NLD
NZL
1,5
CHE FRA
POL
AUT
MEX
KOR
DNK
ISL
AUS
0,0
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
1998
5,0
Figure 20 Restrictiveness of regulatory burden on business
procedures (0=less restrictive, 6= more restrictive)
2003
6
OECD average
5
4
GRC
POL
3
HUN
2
BEL
ESP
IRL
CHE JPN ITA
PRT
CZE
EU15 FRA
AUT NOR
GBR
SWE CAN
KOR
MEX FIN DEU
NLD
USA
OECD average
1
TUR
DNK
NZL
ISL
AUS
0
0
1
2
3
4
5
1998
6
Figure 21 shows Greece among OECD countries with the highest EPL.
(0=less restrictive, 6= more restrictive)
2003
6
OECD average
TUR
5
MEX
4
FRA
PRT
GRC
3
NOR
BEL
2
FIN
ESP
NZL
1
AUT
POL
CHE
0
KOR
SWE
JPN
NLD
AUS
CZE
SVK
CAN USA
0
OECD average
ITA
DNK
HUN
IRL
GBR
DEU
EU15
1
2
3
4
5
6
1998
Figure 22. In spite of the rapid growth of the past years, the total
profitability of the Greek corporations seems not to be high, with the
exception of a spike around 1999 and 2000 (Figure 22).
8%
40%
35%
7%
30%
6%
25%
5%
20%
15%
4%
10%
3%
5%
2%
0%
2008
Manufacturing. Net profit before taxes to sales. Greece. ICAP.
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Manufacturing. Gross profit to sales.
Figure 23. Also, corporate profitability seems to be below
euro zone averages. So besides employment, also
corporate profits remain low in spite of the rapid GDP
growth and high inflation.
Profits before tax and extraordinaries to sales, non-financial companies.
Sectors NACE Α to Κ and Μ, Ν,Ο. Germany C-I only. Italy except Μ,Ν. All companies of sample for each year (BACH
definition ofr Variable Sample). Data for all countries except Greece BACH, data for Greece from ICAP, yearly edition of
Guide to the Greek Company. Full yearly sample, comparable to BACH Variable Sample and same NACE sectors and
definition for profit before tax and extraordinaries.
Weighted average all
countries except
Greece Greece
Belgium Germany Spain
France Italy
Netherlands Austria Portugal
4,45%
5,54%
3,43%
7,67% 4,00% 3,28%
6,72%
5,08%
6,47%
2003
5,43%
2004
4,97%
5,38%
5,84%
3,42%
7,66% 5,41% 5,05%
8,39%
5,62%
6,85%
2005
3,86%
6,01%
8,25%
3,73%
9,10% 5,58% 4,28%
12,93%
6,37%
7,79%
2006
5,04%
6,53%
7,58%
4,07% 10,11% 6,97% 4,66%
12,43%
5,29%
7,01%
2007
5,68%
7,17%
9,57%
5,98% 10,28% 7,51% 4,74%
7,84%
9,49%
2008
3,06%
Summary of the paradox
•
•
•
•
•
•
•
•
High growth rates were mainly due to ‘irrespectable of competitiveness’ demand injections
(cheap credit, money from tourism and shipping boom, EU structural funds, the boost from the
Olympic Games and Athens area infrastructure, extensive public borrowing) and some reforms
(banking, telecoms, some Private-Public Partnerships but that is it more or less).
High Productivity index during that period is a combination of an artificially ballooning GDP
(nominator) and low labour force participation rate (denominator). (Closed markets + low
competitiveness being the culprit for that).
Very few unregulated and tax evading self employed (over)work and few salaried employees work
in Greece as product, service and as a consequence, labour markets are extremely close and
rigid. So, unemployment and non-employed rates are very high, especially among unconnected
young.
The, at the same time, “high productivity- ‘high (and of bad quality) market regulation’ ” puzzle is
explained very well in the above context. High productivity is rather a deception, extensive market
regulation and low competitiveness (in a high demand growth environment financed by borrowing
and ‘subsidies’ indeed)- is true.
Persisting inflation differentials and double-digit current account deficits and budget deficits + zero
FDIs are only phenomena / consequences of falling competitiveness.
The consistent ranking of Greece by all competitiveness, business environment, administrative
cost and governance surveys at a rank that is disproportionally low when compared to its per
capita GDP (Even compared to the productivity that is measured as GDP per worker, that we said
we believe is to some or to a large extent, a deception).
Corruption and institutional weaknesses characterized mainly by rent-seeking match well with this.
Policy: Open markets, reduce unnecessary regulation, encourage reform in education and job
creation (through any kind of tax credits), fix public finances by cutting public waste and taxing the
untaxed privileged so as not to hit domestic demand. Create incentives for the black economy to
incorporate to the official one. And build well working, independent institutions and an
administration that is not corrupted by the rents closed market create now.